Things you need to know.
– So close, yet so far…. the S&P fails to enter the next BULL market.
– Money is moving into the underperforming sectors – Industrials, Banks, SMID’s
– Tech declines as investors weigh the FED’s next move.
– Oil churns at $72.50/barrel
– Try the Swordfish Steaks with Lemon Basil Butter
It’s a conundrum….so close but yet so far…the S&P fails to break out into a new BULL market….as that index lost 16 pts or 0.4%. The Nasdaq down 171 pts or 1.3%, all while money starts to move into Industrials up 92 pts or 0.3%, Russell +33 pts or 1.8% and Transports up 345 pts or 2.4%.
Tech went on sale on Wednesday – well, let’s not get crazy – but there was a bit of re-allocation by some investors as they have decided to ring the cash register on recent gains and re-allocate it to Industrials +1.6%, Financials +0.4% , Utilities +1.7% and Real Estate +1.8% sectors that have not been participating so much ytd. Tech is clearly just a bit overdone…. weakness across tech gave way to more than 1.3% losses in the Nasdaq index while the big megacaps (that have been driving the action) fell even further. APPL –0.8%, AMZN –4.25%, META -2.8%, GOOG -3.9%, NVDA –3%, AMD -5% ETC… In the end – expectations of holding rates at these ‘high’ levels will weigh on tech shares until everyone gets more comfortable….
Banks appear to be taking the lead – this after they have gotten slammed post the SVB/FRC hysteria…. The XLF is down 3% ytd, the KBE -14% ytd and the KRE is down 23% ytd. On Monday – the banks got hit because investors were supposedly worried about the tighter regulations (see Monday’s news) …which might prove to be exactly why (after some thought) that investors chose to go all in. On Tuesday – we saw the XLF rise by 1.3% and the KBE gained 4.3% and the regionals – KRE rise 5% as investors are finding value and opportunity in space. Yesterday the party continued – more money moving into the financials and banks…. the XLF +0.4%, the KBE +2.4% and the KRE +3.3%.
Energy did an about face…after rallying on Monday morning and then selling off Monday afternoon and Tuesday on the idea that China wasn’t growing as fast as suspected and on the idea that the Saudi’s were not really committed to cutting production for any specific length of time. Yesterday – we saw oil rally by 1.25% to end the day at $72.63/barrel…still well below the trendline resistance at $74.80 and well below the $80 price target that the Saudi’s need (and want). But there was a change of heart when China reported that their crude imports ROSE in May – this despite a decline in overall Chinese imports of all products. Additionally – US supply data was more bullish than expected as US refiners ‘really kicked up (refining) activity’ hitting the highest level of activity since August 2019…… And all this does is confirm what I have been saying all along….there is nothing wrong with DEMAND….and the EIA confirmed that by telling us that US refineries operated at 95.8% of capacity last week….suggesting that demand is STRONG, stronger than what they would have you believe….an argument I fully support….I mean all you have to do is look around – lines at the airports, lines at gas stations, Traffic across all the major arteries, people are moving and shaking…..this whole idea that demand is weakening is BS….I like energy. This morning WTI is trading down 36 cts at $72.20/barrel.
And SMID’s? Small/Mid-Caps – They too are appearing to be getting some love by investors…as they look elsewhere for opportunity in what could become a ‘soft landing’ engineered by the FED……Look, the Nasdaq and megatech have been stealing the show….with Nasdaq up 27% ytd and megatech up triple digits…..Investors are searching for the next opportunity as we enter the second half of the year….and IF the FED can really pull it off (soft landing) then I would expect to see a roaring rally in this sector as well. Just look at the RTY – this week alone it is up 8% taking up 7.4% ytd, IWM + 8.5% this week taking it up 8.1% ytd and IJJ +7.5% on the week is now up 5% ytd. See that? Going from negative to positive on the year in 4 days – Clearly money IS moving in and moving in fast.
Industrials will benefit as well….and we can start to hear rumblings of better days ahead for this sector too. XLI which was negative on the year (-1%) as of Monday is now up 4.7% ytd….so lots of opportunities there. We saw new strength in names like CAT +4%, DE +2.1%, HON +1%, EMR +2%, ITW +3.2%, SWK +6%, HI +5% – all industrial names that are set to benefit IF they (the FED) can pull it off. Even BA – which got slammed on Tuesday after they announced a defect in the ‘Dreamliners’ horizontal stabilizer – found some love after street analysts assure us that this headline is not a game changer for BA’s outlook for the year – yesterday it was up 2.3% leaving it up 11% ytd.
While we are teasing a breakout on the S&P – we aren’t there yet……and since there isn’t a lot of eco data for the rest of this week we must wait until next week’s CPI, PPI and then the ultimate FED decision which markets appear to be convinced that they will skip and wait for another month’s worth of data….The question you have to ask is – Will we see CPI and PPI tick up? Or will it remain at current levels? Now the expectations are for ongoing declines….which is good, but if that is not the case then I expect to see the mkt back off because the conversation will turn to more rate hikes in July…..….I think the recent euphoria suggests that we will see declines across both measures and then that will cause the FED to begin to change the narrative and suggest that rates can now be held steady…..NOT DECLINE but not rise any longer….And if that is the case – then be prepared for an ongoing rally…..that will bust up and thru 4290 (Aug 2022 high) putting 4600 (March 22 high) in the cross hairs.
Yields on the 2 yr. treasury rose to 4.56% yesterday – up from 4.47% as wagers are now being made that we will see a rate hike in July…. the 10 yr. also shot higher – ending the day yielding 3.79% – up from 3.66%…. the 3- & 6-month bills are yielding 5.3% and 5.44% respectively. Now, while I think it is a bit premature to bet on a July hike (waiting to see next week’s data) remember – that same market was betting on 3 rate cuts before year end – something that is no longer part of the narrative. (Or at least not part of the majority narrative). I still do not see happening at all.
The VIX (fear index) continues to trade lower…. ending the day at 14.05…. suggesting real complacency – and you know how I feel about that. That could be a warning sign for turbulence ahead…. which could also explain why some asset managers are re-allocating recent gains in TECH – because if we get an event that causes the VIX to spike – TECH will be the first sector to get whacked…. only because it has outperformed this year.
This morning – US futures are essentially flat…. The Dow is +4 pts, the S&P +1, the Nasdaq is down 1, while the Russell is +5. The Eco data is about Initial Jobless Claims of 235k and Cont. Claims of 1.802 mil. Nothing that will move the markets ahead of next week’s eco data and FED meeting. Expect more churn as we move into the end of the week.
European markets are just a bit higher…. up about 0.3% across the board with the exception of the UK- which is down 0.2% as they expect to report headline inflation of 6.9% – which would be higher than the 6.3% average estimate of 2023 UK inflation. European investors are also waiting patiently for what the US eco data will be next week and what the new message might be from the FED. Will it be Skip and Hold (60%) or Skip and Hike (35%) or Skip and Cut (5%)?
Gold – holding steady in 1960 ish….….as it churns ahead of next week. Remember – further hikes in rates will put pressure on Gold, while a pause will offer some support…$1961 is below intermediate trendline support at $1976….so this could go either way…..Further hikes could see Gold test long term trendline support at $1885/oz….something I don’t see happening because I am now in the camp that the FED will offer up the Skip and Hold narrative as long as inflation continues to decline. I reserve the right to change my mind IF the data is not what I assume it will be.
The S&P closed at 4267, down 16 pts – much of the weakness credited to all of those weak TECH names that are members of both the Nasdaq and S&P. Could this be the start of that pullback I have been referring to? Well, we don’t know that yet, but it could be. 4290 is in the crosshairs – Why? Just because it was the March high and we are only 30 pts or 0.7% away from kissing it….In order to pierce it – we need to kiss it, back off, kiss it again, back off and then BOOM- or maybe not….depends on the narrative next week, so sit tight….This could go either way….In the end – remember – the fight against inflation is NOT over yet…and won’t be over until it gets closer to the 2% target they keep identifying – a number I think will soon be raised to 3%…..which means we are a bit closer than we were yesterday. Capisce?
Stick to the plan, DCA (dollar cost average) into it. If you are nervous about a decline – position yourself with some of the contra trades that offer that exact protection…. the SH, PSQ, DOG even the VIXY. I for one am adding new money to those sectors I identified above.
We remain in the 4130/4290 trading range…We are also in the ‘blackout period’ – for FED members….no more talking directly to the markets…anything they need or want to say – will get leaked via – Goldman Sachs or the WSJ.
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
“The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kace
Capital Advisors.”
Grilled Swordfish with Lemon Basil Butter.
Swordfish Steaks are great and as summer approaches you can remind yourself of this simple yet great dish.
For this you need: Swordfish, Shallots, Butter, Fresh Lemon Juice, Fresh Basil, s&p.
Start with fresh swordfish steaks. Marinate in: Olive oil, S&P, fresh lemon juice – cover with saran wrap and let sit for at least 1 hour on the counter. You want it to be room temp when you put it on the grill.
In a food processor add the shallots – chop. Next add the softened stick of butter, fresh basil, s&p and the juice from one lemon. Pulse until you have it all mixed. Using a spatula – remove from the food processor and put in the fridge to harden.
Preheat the grill on high for 10 mins…. When ready – place the swordfish steaks on the grill and sear. Leave for 4 mins or so (depending on thickness) then flip.
Arrange the swordfish steaks on a warmed plate, add a dollop of butter and complement with a mixed green salad. Your favorite chilled white wine is the perfect complement –
Buon Appetito
