Correction or Rotation? Nvidia Fire Sale, The Economy Is (Not) Fine
I reduced my long-side exposure to NVDA on Monday by roughly a third. Simple risk management. I remain long the name.
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Correction! Not for everyone, though.
If Nvidia NVDA and perhaps a very narrow swath of others were the market on the way up, at least for right now, it appears that the market is the market and Nvidia is Nvidia on the way down. That is if the broader market were on the way down, which is not clear at all. Perhaps we should simply have labeled this section... Rotation!
High-flying AI-capable chip designer Nvidia gave up 6.68% on Monday, closing at $118.11. This marked a third consecutive red candle session for the stock after apexing at $140.76 just after the opening bell last Thursday morning. NVDA closed on Monday down 16.1% from that Thursday high and down 13% from last Wednesday's high closing price of $135.58.
That's a market cap haircut of $430 billion over three days, which according to Bloomberg News, is the largest three-day loss in market cap for any publicly traded corporation in the history of publicly traded corporations. As I work my way through the zero-dark hours, I see NVDA trading with a $119 handle through the after/pre hours after bottoming with a $115 handle overnight.
The S&P 500 has also posted three successive losing regular sessions yet closed down on Monday just 1.1% from its intraday high last Thursday morning. The Nasdaq Composite is now down 2.5% from Thursday's peak after putting together a three-day losing streak as well.
Markets
Not a lot changed on the surface. The long-term trend remains unchanged.
Treasuries, for the most part, went out on Monday where they went out on Friday. The yield for the U.S. 10-Year Note dropped one basis point during the regular session but appears to have given back two basis points overnight.
There was just one slice of macro on Monday. The Dallas Fed Manufacturing Index printed in a headline state of contraction for an incredible 26th consecutive month. The economy is fine. Sure, it is.
Away from the S&P 500 (-0.31%) and Nasdaq Composite (-1.09%), most of the rest of the market rallied. The KBW Bank Index rallied yet again, up 1.65% on Monday and up four of the past five sessions with the Fed's Stress Test results looming this Wednesday evening. The Dow Transports gained 0.8% on Monday, rallying for a third consecutive day, while the small-to mid-cap indexes also gained for the day. The notable exception was the Philadelphia Semiconductor Index. That index gave up 3.02% on Monday, again outperforming the Dow Jones U.S. Semiconductor Index that was down 4.83%.
Not only are we seeing a divergence in performance across the U.S. equity landscape, but a significant divergence in performance between the two indexes that I follow that isolate the semiconductors as a group. While NVDA led the fire sale across the group, Arm Holdings ARM, Marvell Technology MRVL, Qualcomm QCOM, and Broadcom AVGO all gave up between 5.76% and 3.7% on Monday.
I will admit to having reduced my long-side exposure to NVDA on Monday by roughly a third as the crucial (as I see it) $120 level cracked. Simple risk management. I remain long the name and would rather pay up to tack those shares back on than take a discount.
Breadth
Nine of the 11 S&P sector-select SPDR ETFs closed in the green on Monday, led by the Energy XLE, which was up 2.52%, as four of these funds closed up at least 1%. Technology XLK obviously led the way lower, at -2.45%, as Discretionaries XLY also closed in the red (-0.43%).
Winners beat losers at both of our equity exchanges, by a decisive 9 to 4 margin at the NYSE and by a narrower 5 to 4 margin at the Nasdaq. Advancing volume took a commanding 70.1% share of composite NYSE-listed trade on Monday, and thanks to the semis, just a 48.5% share of composite Nasdaq-listed trade. Aggregate trading volume was down about 40% across listings of both exchanges on a day-over-day basis, coming off of Friday's 'triple witching" and re-balancing, which made a meaningful comparison impossible.
The Economy Is Fine...
According to layoffs dot fyi, more than 340 tech companies have laid off 99,672 year to date in addition to the 260,000 tech positions that were cut in 2023.
The list of companies that have reduced staffing levels includes bellwether tech names such as Microsoft MSFT, Apple AAPL and Meta Platforms META.
The Economy Is Fine...
Late last week, U.S. regulators authorized a coming pilot program that would allow Freddie Mac to purchase second mortgages. The Federal Housing Finance Agency released a statement announcing the authorization of up to $2.5 billion worth of such purchases over an 18-month trial period. Freddie Mac had made the proposal in April, as "cash-out" financing that allowed homeowners to take out a new mortgage loan larger than their original mortgage no longer makes sense for most in the era of higher rates.
I mean if one is going to tap the equity in one's home, who wants to pay up to do so? According to estimates made by Bank of America BAC, U.S. households have more than $32 trillion of home equity as prices for housing have soared roughly 60% since 2020. BAC also estimates that approximately $18 trillion of that $32 trillion could potentially be available for extraction.
Why not raid the last morsel of wealth/retirement savings many households have? I guess everyone has to eat.
The Economy Is Fine...
Ahead of those bank stress test results, according to Bloomberg News, the Federal Reserve Bank is showing a three-page document to other regulators covering potential changes to the expected bank-capital overhaul that probably would not be as tough on these lenders as what was originally proposed. Never mind that many of these lenders likely hold a portfolio of "hold to maturity" debt securities that would test solvency if marked to market. Do we even get started on commercial real estate land?
The document supposedly does not have an updated estimate for what kind of increase in capital large banks would be required to hold against the possibility (probability) of any coming economic issues, but it is being said that this increase could be as small as 5%. The original proposal had been for an increase of 16%.
The Economy Is Fine...
San Francisco Fed President Mary Daly, who is a voting member of the FOMC this year, spoke publicly on Monday. She was cautionary in her remarks... "So far, the labor market has adjusted slowly, and the unemployment rate has only edged up. But we are getting to a point where that benign outcome could be less likely."
Daley went on... "Future labor market slowing could translate into higher unemployment, as firms need to adjust not just vacancies, but actual jobs. At this point, inflation is not the only risk we face."
Daly did go on to discuss the possibility of having to reduce rates if the labor market cools more than expected.
Does All This Mean...?
That middle- and lower-income households will become increasingly susceptible to economic shocks resulting in reduced or loss of income? That cash reserves of even middle to upper middle-class households that have attained home ownership are running dry?
That all households of all income levels will experience a decline in capacity for discretionary personal consumption?
That households are in as much of a fiscal jam as is the federal government as the service of still growing debt levels claims and ever larger portion of budgets in their entirety?
Stay tuned.
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last 5.9% y/y.
09:00 - Case-Shiller HPI (Apr): Expecting 6.9% y/y, Last 7.4% y/y.
09:00 - FHFA HPI (Apr): Expecting 0.5% m/m, Last 0.1% m/m.
10:00 - CB Consumer Confidence (Jun): Expecting 100.1, Last 102.
10:00 - Richmond Fed Manufacturing Index (Jun): Expecting 2, Last 0.
16:30 - API Oil Inventories (Weekly): Last +2.264M.
The Fed (All Times Eastern)
07:00 - Speaker: Reserve Board Gov. Michelle Bowman.
12:00 - Speaker: Reserve Board Gov. Lisa Cook.
14:10 - Speaker: Reserve Board Gov. Michelle Bowman.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: SNX (2.82), CCL (-0.02)
After the Close: FDX (5.38)
At the time of publictaion, Guilfoyle was long NVDA and MSFT equity.
