When Record Highs Become Boring, Catch-Up Trade Catches On, Powell on the Hill
The week gets hotter and hotter as it winds down. This is not a warning. Just a reminder to play the game in front of you. Be agile and adapt to your environment.
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The closing bell had tolled. Quite a while ago at this point. I was closing up my workstation, as I typically do about half an hour or forty-five minutes after the regular session comes to an end. That is unless there is a reason to be trading after-hours. I normally take a couple of hours off at that point of the day.
Then I saw the headline. It gave me a quick laugh. Atop a short piece by Connor Smith at Barron's website, this headline really said it all. "Another Boring Day, Another Pair of Records."
Smith, or whomever writes his headlines, wasn't being sensationalistic in the least. The day had been more or less boring. The S&P 500 had set yet another record-high close. So did the Nasdaq Composite and its more elite sibling, the Nasdaq 100. Huzzah! I don't know when winning for those running net-long portfolios got boring, but when that has happened in the past, at least in my own myopic, anecdotal view, I have ended up yearning for record highs not too far in the future.
This is not a warning. This is no alarm. Just a reminder to play the game in front of you. Be agile. Adapt to your environment. Always know where you want to go, as well as where you're not willing to go.
This week will get infinitely more entertaining from here on out. Today, Fed Chair Powell testifies, as does Treasury Secretary Yellen. Fed Gov. Bowman will, however, have the last word, and we know her to be one of the Fed's leading hawkish thinkers now that Esther George and Loretta Mester have moved on.
That's just Tuesday. The week gets hotter and hotter as it winds down. Rock on.
Monday Funday
How exciting was Monday? Treasury yields for the most part, stayed put. Most of our major to mid-major equity indexes closed out the session with smallish gains. The S&P 500, Nasdaq Composite, and Nasdaq 100 gained 0.1%, 0.28%, and 0.23%, respectively. Small to mid-cap indexes played along and modestly outperformed the majors. The Russell 2000, S&P 600 and S&P 400 gained 0.59%, 0.55%, and 0.34%, in that order.
There were two significant outliers. The Philadelphia Semiconductor Index gained a crisp 1.93% on the day, led in a northerly direction by Intel INTC, Advanced Micro Devices AMD and Marvell Technologies MRVL, while the Dow Transports surrendered 0.79%, led lower by maritime transport company Matson Inc. MATX.
The above winners benefited from a Monday morning note penned by four-star rated (of five at TipRanks) analyst Ben Reitzus at Melius Research. Reitzus wrote: "We are believers in a 'catch up' trade for some in semis, hardware, and even software." Reitzus was referring to the AI trade where many have watched the likes of Nvidia NVDA soar in near isolation. Possible winners mentioned included AMD, Apple AAPL, Intel, and IBM IBM. There was also some belief away from that piece that Intel's 6.15% surge was pushed along by some short covering.
Breadth
Six of the 11 S&P sector SPDR ETFs closed out Monday in the green with Technology XLK in the lead at +0.68%. Interestingly, Tech's cousin in growth, Communication Services XLC, led the losing sectors lower at -0.88%.
While the semis as a group ran higher, the Dow Jones US Software Index gave up 0.61% led by ServiceNow NOW at -4.99% and the Dow Jones U.S. Internet Index gave up 1.18% as Meta Platforms META and DoorDash DASH both ceded nearly 2%. I did add to my ServiceNow (at $768) long position on Monday as I indicated I would at TheStreet Pro.
Winners beat losers by a 9 to 8 margin at the NYSE and by roughly 5 to 4 at the Nasdaq. Advancing volume took a 56.5% share of composite NYSE-listed trade and a 68.1% share of composite Nasdaq-listed trade. Aggregate trade was indeed up 9% day over day at the Nasdaq and across the Nasdaq Composite lending some substance to the price discovery found in those names. However, aggregate trade continued to fall across NYSE-listings and across the membership of the S&P 500, which discounted the day's results in terms of significance.
Good Reason for Monday's Trepidation
Despite the generally positive direction of price discovery on Monday, investors walked lightly ahead of Powell's twin appearances before our legislators on Tuesday and Wednesday, ahead of Yellen's appearance before legislators on Tuesday and before consumer and producer prices for June land on Thursday and Friday.
Powell is likely to face some hostile questioning from Senate Banking Committee members representing both sides of the aisle on Tuesday as inflation has not yet been tamed or at least reached the central bank's 2% objective. Additionally, it has become more obvious of late that there are some cracks forming in U.S. economic performance as the lag effects of a more restrictive monetary stance have started to slow activity.
Inflation Expectations Cool
The New York Fed released its June survey for Inflation Expectations on Monday. According to the release, consumers expect to see prices increase at a 3% annual rate over the next year, down from 3.2% in May's survey. Expectations for rising home prices over the next year fell to 3% from 3.3%, which is roughly where the trailing 12-month average is for that item. Additionally, the median expectation for annual inflation over the next three years increased to 2.9% from 2.8%, but the median expectation for annual inflation over the next five years dropped to 2.8% from 3%.
This is generally positive news as it shows an anchoring or re-anchoring of consumer inflation expectations. The unfortunate part of all of this is that these expectations have anchored well above where the Fed is trying to take inflation and in regard to inflation, there is always the fear of self-fulfilling prophecy.
The next report on these expectations will land on Friday morning in the University of Michigan's preliminary July report on Consumer Sentiment. For June, this survey showed 3% inflation expectations over both one year and five-year windows.
Say What?
On Monday, Bloomberg News reported that Boeing BA is currently in discussions with the Department of Defense in an attempt to preserve its federal government contract business in the wake of the firm agreeing to plead guilty to a criminal charge related to two fatal crashes of its 737 Max jets in 2018 and 2019.
A spokesperson for the Pentagon stated that the DoD will assess the plea deal and then "make a determination as to what steps are necessary and appropriate to protect the federal government."
As readers likely know, I have never had an equity position in Boeing for anything other than a short-term trade. I remain invested for the long-term in Lockheed Martin LMT, Northrop Grumman NOC, General Dynamics GD, GE Aerospace GE and Rocket Lab USA RKLB.
Economics (All Times Eastern)
06:00 - NFIB Small Biz Optimism Index (Jun): Expecting 89.4, Last 90.5.
08:55 - Redbook: Last 5.8% y/y.
16:30 - API Oil Inventories (Weekly): Last -9.163M.
The Fed & The Treasury (All Times Eastern)
09:15 - Speaker: Reserve Board Gov. Michael Barr.
11:00 - Speaker: Federal Reserve Chair Jerome Powell.
13:30 - Speaker: Reserve Board Gov. Michelle Bowman.
16:30 - Speaker: Treasury Secretary Janet Yellen.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: HELE (1.59)
After the Close: SGH (0.31)
At the time of publication, Guilfoyle was long NVDA, AMD, NOW, LMT, NOC, GD, GE and RKLB equity.
