Transcript

Breadcrumbs. · ANGLES.

0:01
SPEAKER_00: Breadcrumbs, my weekly market review June 23, 2024.
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SPEAKER_00: Stocks moved cautiously higher in a bifurcated week,
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SPEAKER_00: with the S&P 500 achieving its eighth weekly advance from the last nine and ending
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SPEAKER_00: up just south of all-time record levels.
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SPEAKER_00: But tech stocks started slumping later in the week, particularly AI-related ones.
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SPEAKER_00: With a jam-packed week coming up in terms of important economic data releases,
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SPEAKER_00: there are some concerns that any disappointments could trigger something of a
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SPEAKER_00: sell-off from these stratospheric levels.
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SPEAKER_00: The S&P 500 and NASDAQ indexes both closed at record highs yet again on Monday.
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SPEAKER_00: That was the 30th record day this year for the S&P 500 and the sixth record day in
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SPEAKER_00: a row for the NASDAQ,
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SPEAKER_00: driven by another powerful rally,
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SPEAKER_00: although notably on relatively low volume,
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SPEAKER_00: in several AI-related big tech names,
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SPEAKER_00: after Morgan Stanley called rising concerns about the possible overvaluation of
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SPEAKER_00: AI-related stock prices misguided.
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SPEAKER_00: There was something of a rebound in European markets,
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SPEAKER_00: recently battered by political turmoil across the continent.
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SPEAKER_00: Treasury interest rates stayed muted, which is helping a lot.
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SPEAKER_00: Wall Street seems to be doing the Fed's job for it,
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SPEAKER_00: pushing market rates lower and lower over the last couple of weeks.
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SPEAKER_00: On Tuesday morning,
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SPEAKER_00: we learned that retail sales barely budged in May,
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SPEAKER_00: rising just 0.1%,
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SPEAKER_00: and the prior months were revised lower.
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SPEAKER_00: This pointed to a notable downshift in consumer spending after stronger readings earlier in the year.
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SPEAKER_00: Wall Street seemed unable to decide whether this was a welcome pullback that allows
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SPEAKER_00: the economy to call just enough to tame inflation and facilitate imminent Fed
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SPEAKER_00: interest rate cuts,
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SPEAKER_00: or was a more ominous trend that hinted at deepening economic weakness.
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SPEAKER_00: With the day feeling a bit like a synthetic Friday ahead of the midweek market
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SPEAKER_00: closure due to the Juneteenth holiday,
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SPEAKER_00: the result was a low trading volume lackluster session with no real conviction
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SPEAKER_00: either way.
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SPEAKER_00: But,
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SPEAKER_00: Nvidia did manage to end Apple's brief one week stint as the world's biggest
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SPEAKER_00: company by catapulting into the number one spot with a 3.3 trillion plus valuation.
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SPEAKER_00: After a day off on Wednesday, traders put their game faces back on again on Thursday.
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SPEAKER_00: Before the U.S.
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SPEAKER_00: markets opened,
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SPEAKER_00: the Bank of England kept local interest rates unchanged,
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SPEAKER_00: unsurprising in the midst of a general election campaign.
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SPEAKER_00: But the Swiss National Bank raised some eyebrows with another rate cut.
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SPEAKER_00: Stock prices pull back a little,
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SPEAKER_00: particularly in some of the AI tech names that have soared recently,
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SPEAKER_00: resulting in Nvidia's spell of the biggest company in the world coming to an end
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SPEAKER_00: after just one trading day,
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SPEAKER_00: seeding the spot as top dog to Microsoft.
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SPEAKER_00: Friday was a triple witching day on the futures and options exchanges,
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SPEAKER_00: with about $5.5 trillion worth of contracts in indexes,
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SPEAKER_00: single stocks and ETFs expiring,
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SPEAKER_00: along with multiple index rebalances.
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SPEAKER_00: Triple witching days are often characterized by prodigious amounts of hedging
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SPEAKER_00: trades in mostly big name stocks,
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SPEAKER_00: often in the last few minutes of the trading day,
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SPEAKER_00: as institutional traders roll over existing positions or start new ones.
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SPEAKER_00: And the rebalancing of indexes can require significant purchases and sales of
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SPEAKER_00: particular stocks that are respectively entering or exiting the index.
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SPEAKER_00: Stock prices sank further at the open,
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SPEAKER_00: again pushed lower by AI names dropping further,
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SPEAKER_00: but then stayed pretty stagnant the rest of the day.
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SPEAKER_00: The triple witching volatility kept within a narrow range and fears of related wild
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SPEAKER_00: price swings never materialized.
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SPEAKER_00: I'm not a huge fan of technical analysis,
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SPEAKER_00: but certain data points can be valuable in assessing where we stand,
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SPEAKER_00: particularly at possible specific turning points.
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SPEAKER_00: I know a lot of readers just read or listen to the first part of my weekly reports
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SPEAKER_00: without looking too hard at the second part where all the numbers lie.
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SPEAKER_00: But there are definitely some technical breadcrumbs out there when it comes to
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SPEAKER_00: getting a picture of the situation in financial markets right now.
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SPEAKER_00: While the S&P and NASDAQ are relentlessly reaching new highs,
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SPEAKER_00: one,
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SPEAKER_00: we would expect at least a majority of the 11 sectors to be in a technical uptrend,
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SPEAKER_00: but just two,
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SPEAKER_00: technology and utilities,
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SPEAKER_00: are,
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SPEAKER_00: based on their setups,
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SPEAKER_00: momentum reading,
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SPEAKER_00: and relative performance to the broader market.
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SPEAKER_00: Interestingly,
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SPEAKER_00: these two sectors are one,
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SPEAKER_00: the traditionally most volatile,
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SPEAKER_00: and two,
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SPEAKER_00: the traditionally least volatile.
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SPEAKER_00: This is unusual and underscores the extremely thin leadership in the market right now.
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SPEAKER_00: Two, the number of S&P 500 stocks trading above their 200-day moving averages fell to a new 2024 low.
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SPEAKER_00: This is a significant and potentially meaningful divergence with the performance of
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SPEAKER_00: the index itself,
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SPEAKER_00: which continues to make record highs over and over again.
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SPEAKER_00: That doesn't happen often.
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SPEAKER_00: The takeaway is that the average stock is actually struggling despite what is
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SPEAKER_00: happening in mega cap world.
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SPEAKER_00: Three,
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SPEAKER_00: the fear and greed index from CNN takes into account a multitude of factors and the measures,
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SPEAKER_00: the mood and confidence of market participants.
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SPEAKER_00: Typically,
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SPEAKER_00: when markets are moving higher,
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SPEAKER_00: and certainly when multiple new highs are continually being recorded,
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SPEAKER_00: you would expect the reading to head quickly into the greed zone,
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SPEAKER_00: and then eventually into the extreme greed zone,
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SPEAKER_00: where the danger of the acute risk-on sentiment causing a swift,
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SPEAKER_00: sharp reversal in prices becomes more elevated,
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SPEAKER_00: with a crowded trade and all bets being one way.
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SPEAKER_00: This is how markets cycle.
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SPEAKER_00: However,
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SPEAKER_00: we ended last week stuck in the fear zone,
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SPEAKER_00: indicating that many professionals seem to feel concerned that the current
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SPEAKER_00: exuberance may be misplaced when applied to all of the S&P 500 stocks.
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SPEAKER_00: As I alluded to in last week's report, a microscopic number of stocks are driving everything right now.
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SPEAKER_00: For example,
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SPEAKER_00: just one stock,
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SPEAKER_00: Nvidia,
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SPEAKER_00: is responsible for more than a third of the S&P 500's 14% plus gain so far this year,
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SPEAKER_00: which is historically unheard of outside of the tech bubble in the early 2000s.
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SPEAKER_00: For my younger readers, that ain't badly.
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SPEAKER_00: The data from the stock exchanges and options market are showing that frothy retail
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SPEAKER_00: investors and underperforming institutional traders are chasing gains in a FOMO
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SPEAKER_00: frenzy only in this tiny subset of names instead of fishing in the overall broad market.
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SPEAKER_00: The vitality brought about by AI mania better not subside anytime soon because
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SPEAKER_00: there have been weeks recently when it was literally the only reason that the
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SPEAKER_00: indexes moved higher.
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SPEAKER_00: That is why Thursday and Friday's negative price action in AI is troubling.
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SPEAKER_00: Any continued backsliding in AI stocks would mean that the market will have seen
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SPEAKER_00: some damage to two of the four pillars of the rally,
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SPEAKER_00: stable growth,
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SPEAKER_00: falling inflation,
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SPEAKER_00: sooner rather than later rate cuts,
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SPEAKER_00: and AI enthusiasm,
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SPEAKER_00: which would mean that the outlook for stock markets in general would worsen,
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SPEAKER_00: not strengthen.
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SPEAKER_00: This is especially true since the market now assumes that the two other pillars,
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SPEAKER_00: falling inflation and imminent rate cuts,
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SPEAKER_00: are happening anyway,
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SPEAKER_00: which means that they are less substantial influences on how markets move now.
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SPEAKER_00: While risks to this rally continue to build in the distance,
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SPEAKER_00: mostly in the form of potential economic slowdown,
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SPEAKER_00: the path of least resistance in the medium term remains higher for stocks,
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SPEAKER_00: with mega cap tech poised to continue leading the bullish charge higher.
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SPEAKER_00: Until it doesn't.
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SPEAKER_00: In the words of the late great David Bowie, take your protein pills and put your helmet on.