Mental Health (excerpt)
Well, I’m an axe grinder
Piledriver
Mama says that I never, never mind her
Got no brains
I’m insane
The teacher says that I’m one big pain
I’m like a laser
Six-string razor
I got a mouth like an alligator
I want it louder
More power
I’m gonna rock it till it strikes the hour
– Banali, T. Cavazo, C. Cavazo, Dubrow (Quiet Riot), 1983
Bang Your Head?
Wake the dead? What a week. Every day. Every week, I try to slow the action down to a pace that my brain can process, interpret, and then determine output, which is fancy talk for saying that I try to be decisive, either through sheer aggression, or intentional passivity. Oh, we will make our decisions. Some will make us look wicked smart. Others not so much. Most will fall somewhere between the two.
That said, good luck. Good luck with slowing down the action or the “input”, and good luck with then processing it all as you and I make our way into and through the mosh pit that our marketplace can be. Long live Rock.
Our equity markets took a moderate to mild beating last week, suffering through three red daily candlesticks over the past four sessions, and that one (pick your favorite color) candle that did not turn red? That one (Thursday) closed on weakness after having created index level highs for the week early on. Truth is, for the S&P 500… the last three sessions sold off hard, rallied only to then sell off again, and then sold off rather softly closing out the week. The last sale for our gloriously broad, but really not so very broad at all S&P 500 closed at 4467, 4468, and 4464 over the past three sessions.
What Now?
Can this dip be bought? Should this dip be scaled into on the way down even at the cost of increasing net basis? Is it time to take what still probably looks like some fairly significant profits and claim our victory?
“As the saying goes, what do we do now?”… Clint Eastwood (Where Eagles Dare), 1968
“If you want a guarantee, buy a toaster.” … Clint Eastwood (The Rookie), 1990)
“Improvise, Adapt, Overcome”… old military adage used by Clint Eastwood in Heartbreak Ridge, 1986.
So, let’s improvise. Then we’ll adapt. Then, we’ll overcome… because that’s how we roll. Why? Because winning beats the living snot out of losing, and because for many of us, there are folks who do not understand that making a living requires a pound of flesh. They do not understand that making that living requires the hunter to do the work, no guarantees, and then when a plan works, feed his or her family.
The hunter must also find ways to feed that family when the plan fails. No net. No safety wires. Hence, the hunter must harden the spirit, harden the soul, and seek out what must be won, even when it hurts. So, when the question is “why?”, the answer is because little “so and so” does not understand the nature of only eating if one can kill, and by golly, little “so and so” is not on his or her own. Little “so and so” has got me. I will not fail. So, Now, let’s Slow This Party Down.
Inflation
Last week was about inflation. Mixed signals? You bet. On Thursday, July CPI hit the tape. Month over month growth of 0.2% at both the headline and the core (ex-food, ex-energy). The year over year rate rebounded to a below expectations 3.2% at the headline and a below expectations 4.7% at the core. Take shelter out of the data (For some ridiculous reason, the BLS still used dated information for shelter.), and one is left with a month over month headline rate of 0.0% and core rate of -0.1%. Huzzah… inflation has been defeated. Not.
Fact is that every single one of us knows that energy prices took off in late July and have kept on keeping on ever since. Crude, gasoline, electricity, natural gas. Through the roof. The headline rate for August is probably going to leave a dent in that progress we’ve been celebrating. Oh, the core rate may still come in. Services were up 0.4% in July, Core goods were knocked for a loop (-0.3%). That’s splendid. Unfortunately, where I come from, the stuff not included in the core? That’s the stuff we really need.
On Friday, the BLS was at it again, posting its results for July PPI. Though not a teeth shattering left cross that came out of nowhere, not exactly a knee-slapping good time either. July PPI printed slightly above expectations both at the headline and the core as well as both on a month over month and year over year basis. Just one month. Nothing to get all flustered up about. Still, producer prices led consumer prices for months as inflation slowed. This probably at a minimum, requires that we pay the kind of attention that it “might” merit. Interesting that a “dovish” Fed official such as San Francisco Fed Pres. Mary Daly looked at that CPI data on Thursday and spat out a “hawkish” sounding reaction.
Interest Rates/Yields
Want some more mixed signals? No? Tough. The US Treasury Department came into last week knowing that billions more in additional debt securities would have to be issued to satisfy the cash needs and the ability to run the federal government. It’s okay. You can say it. Nice going (not), Congress. Fiscal irresponsibility at the legislative level had led the US to an embarrassing Fitch downgrade two weeks ago, that despite what you may have heard from those with a bridge to sell you, was not only well-deserved, but way overdue.
The Treasury would have to auction off $42B in Three Year Notes, $38B in Ten Year Notes and $23B in Thirty Year Bonds. Traders watched with anticipation. With increased supply, would the demand be there? Would the demand from abroad be there? Funny thing happened on the way to the auctions. Moody’s, the one agency that still grades the US at AAA, downgraded several small and mid-sized banks while placing six larger banks on review for a potential downgrade.
Uh oh. This might get ugly. Tuesday afternoon, the auction of three year paper sold extremely well. Foreign accounts tripped over themselves trying to purchase this debt as if it were being sold by Mister Softee and his truck just rolled down the block with the music blaring on a hot day. “Take ’em” yelled bond traders. Wednesday afternoon? It was a miracle. They wanted ten year paper too. Indirects, Directs, you name it. Heck, the dealers were probably unhappy with their share. Once again, bond traders did their best to suppress yields. “Take ’em.”
Then it happened. The Thirty Year Bond did not sell nearly as well as what we had seen the two days prior. It was not a terrible auction, but if I was grading these auctions, I would give Tuesday’s auction an A+, Wednesday’s auction a solid A, but Thursday’s auction…. maybe a C, maybe a C-. “Sold to you” was the cry heard among bond traders. Up, up and away went (not my beautiful balloon) Treasury Yields.
The US Ten Year Note paid 4.16% by day’s end on Friday after paying just 4% at the close of business on Wednesday. All, while the Mortgage Bankers Association of America reported that for the first week of August, the average 30 year fixed rate mortgage in the US increased from 6.93% to 7.09%, as mortgage applications dropped 3.1%, on the heels of 3% and 1.8% decreases for the two weeks prior to that.
China
Recent macroeconomic data released by Beijing has been anything but encouraging, not to mention the shifting of “hidden” local debt to the provinces and Chinese real estate developer Country Garden warning of an approximate $7.6B loss over half a year. In short, China has its hands full and will not be the economic engine for global growth that it once was anytime soon.
Much of that growth was created through unnecessary infrastructure building and done through the use of debt that must be considered should thoughts of a large stimulus package dance in investors heads. Beijing, maybe can’t afford to go large. Not soon anyway.
Last week, China reported double digit drops in both exports and imports for July. The next day, we found out that the Chinese economy had slipped into deflation, which is a major problem for any badly over-indebted economy. We already know that youth unemployment in China has soared to over 20%.
In addition, President Biden signed an executive order last week regulating certain investments by Americans and American interests in China or Chinese interests starting in 2024. In particular, anything to do with high-end semiconductors, quantum computing and generative AI appear to be what is being targeted.
Energy
Even with the Chinese economy sputtering, energy prices moved higher last week. Yes, most other commodities did react poorly to potentially weaker Chinese demand going forward. Not oil though. Crude prices benefited from a reiteration out of Saudi Arabia that their voluntary production cut would continue as the war between Russia and Ukraine threatens to choke off even more supplies that may “leak” out of Russia and Kazakhstan through the Black Sea.
Still, we really can not say yet that WTI Crude has taken out resistance in place since last November, though that level has been pierced. This market may be precisely where the action is this week. Additionally, crude has been hot while dealing with a strong US dollar. Soften the greenback and watch crude really boil.
Equity Markets
Equity markets had another tough week last week. Monday was strong, and really with the exception of a Thursday morning rally, markets weakened from there.
As mentioned last week, the Nasdaq Composite appears now to have successfully formed that double top reversal (with a 13,997 pivot).
More importantly, by week’s end, the Nasdaq Composite actually broke contact with its 50 day SMA (simple moving average) as Relative Strength weakened and the daily MACD (moving average convergence/divergence) truly spit the bit. Just look at the 12 day SMA relative to the 26 day SMA with the histogram of the nine day EMA at its worst level since March.
The S&P 500 had already given up its 21 day EMA (exponential moving average) going into last week. Now, traders must decide if this index will make an effort to hang on to its 50 day SMA, even as the Nasdaq Composite has already failed here.
Additionally, the S&P 500 has now lost the lower trend line of the price channel that had contained market volatility since that March low.
Losing that trend line is significant as the price channel was the offspring (breakout) of the October 2022 through early June 2023 giant ascending triangle. Given the size of the pattern, the potential for this breakout in my opinion, was 4830. The index never got close, peaking at 4607. Unless, the 50 day SMA saves the day. If not, the lower trend line of that ascending triangle may come into play. If not then, we could be looking at 4200, but that is getting ahead of ourselves and perhaps unnecessarily pessimistic.
The small-caps also had another “down” week. Though the iShares Russell 2000 ETF (IWM) has also lost its 21 day EMA, but like the S&P 500, can still potentially make a stand at its 50 day SMA. Here, too… we have a broken trendline to deal with.
Market Results
For the past week, the S&P 500 gave up just 0.31%, after losing a mere 0.11% on Friday. The S&P 500 closed last week up 16.27% year to date.
The Nasdaq Composite was hit harder than the S&P 500 again this past week and was hit for 1.9% over the five day period. This came after surrendering 0.68% on Friday. This puts the Nasdaq Composite up 30.37% for 2023. The higher tech, more narrowly focused Nasdaq 100 closed down 1.62% last week. The Nasdaq 100 is still up a “less incredible than it was” 37.37% year to date.
The Philadelphia Semiconductor Index led again, but this time it got ugly for the third week in four, ceding a nasty 4.99% for the week, after a 2.29% beat-down on Friday. The “SOX” still stands up 38.8% for the year, which is both nice and also significantly down from the 46.09% it was up just one week ago.
That leaves us with the Russell 2000. The small-cap index actually gained 0.13% on Friday, but gave up 1.65% for the week. The Russell now stands up 9.3% for 2023. The KBW Bank Index backed up 1.4% last week, and now has a two week losing streak. The KBW is now off 14.06% this year, which is truly impressive considering where it has been. That said, it is currently moving in the wrong direction.
Eight of the eleven S&P sector-select SPDR ETFs shaded red this past Friday, with four in the green. For the week, nine of the eleven finished in the red, as the Energy sector (XLE) led to the upside (+3.43%) once again. Technology (XLK) easily took the worst beating for the week, among sector SPDRs (-2.49%).
The Week Ahead
It’s still earnings season, and we do have some significant names reporting this week. As the season winds down, the focus moves on to the retailers, as well as a scattering of names across other industries. There are some key macroeconomic events on the way as well, but not of the magnitude of interest rate impacting events such as direct reports on inflation and Treasury security auctions like we saw last week.
– The Fed
For the third week in a row, the docket is really light for Fed speakers. We do have a speech midday this Tuesday by Minneapolis Fed Pres. Neel Kashkari, but I do not see any other announcements at this time. As always, there will be a couple of appearances made this week that are not yet on my radar, but I do think it’s quite obvious that the Fed as a group has made an effort to be rather quiet ahead of Jackson Hole. The symposium kicks off on August 24th.
At last glance, Fed Funds Futures are pricing in an 89% probability of there being no rate changes made at the next FOMC policy decision, set to wrap up on September 20th. There are currently no changes being priced into the model until May 1st and that change would be a cut (80% probability).
On top of all of this, the Fed Minutes of the meeting that culminated with a 25 basis point rate hike on July 26th are due this Wednesday afternoon.
– Macro Attack
There is some headline level macro headed your way this week, and though not directly impactful on interest rates, this data certainly is reflective of consumer and economic health and part of the mosaic that is all that policy makers must consider.
On Tuesday, we’ll get July Retail Sales from the Census Bureau. The Census Bureau will be back at it on Wednesday with July data for Housing Starts and Building Permits. The Fed will also hit us on Wednesday with July Industrial Production. Lastly, on Thursday, the index of Leading Indicators for July will be published by the Conference Board.
As far as regional manufacturing surveys are concerned, the New York Fed will post the Empire State Manufacturing Index on Tuesday, to be followed up by the key Philadelphia Fed Manufacturing Index on Thursday.
– Corporate
There really is not anything of significance that I see in the way of corporate events scheduled for this week. As for earnings, we will not heat up until Tuesday. That morning, we’ll hear from Home Depot (HD) . On Wednesday, Target (TGT) , TJX (TJX) , Cisco (CSCO) and Wolfspeed (WOLF) all will report.
Thursday will roll in with financial results from the likes of Tapestry (TPR) , Walmart (WMT) and Applied Materials (AMAT) . This week, unlike last week, Friday will bear an active slate of earnings reports. That day, we’ll hear from Deere (DE) , Estee Lauder (EL) and Palo Alto Networks (PANW) .
Economics (All Times Eastern)
No significant domestic macroeconomic data schedules for release.
The Fed (All Times Eastern)
No public appearances scheduled.
Today’s Earnings Highlights (Consensus EPS Expectations)
Before the Open: (RETA) (-1.65)
After the Close: (ALC) (-1.35)
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