Things you need to know.
– Stocks are teetering on the edge – not sure whether to go up or down.
– A pullback to the trendline would only represent a 5% decline.
– JJ to appear on Capitol Hill today and tomorrow to discuss the state of the union.
– The dollar is up, oil and gold are down.
– Try the Linguine Puttanesca
**I am travelling today and tomorrow – so no video today and no blog post/video tomorrow. See you on Friday**
Oh boy…. stocks sold off AGAIN! Quick – someone call someone…. I mean – how can this happen?
Stocks traded lower right out of the gate…as the end of the second quarter is coming to a close…and the explosive rally we’ve seen in TECH – specifically AI Tech – is teetering on the edge, leaving many to ask – Can it hold its gains or will it come under pressure by month end? But remember – the quarter doesn’t end until NEXT Friday – so many will try to ride this out for as long as they can before they hit the bid and reallocate those monies into something else. The S&P did trade off by about 1% before finding some support at 4370 ish…only to end the day down 20 pts or 0.5%. The Dow lost 245 pts or 0.7%, the Nasdaq which has been this year’s winner managed to only lose 22 pts or 0.2%, while the Russell lost 8 pts or 0.5% and the Transports lost 58 pts or 0.4%.
Look, we talked about this…the markets have gotten a bit ahead of themselves because investors/traders and algo’s have taken it there….The bullishness is at the highest level since the fall of 2021 – which is itself a contra indicator…… as high levels of optimism usually suggest a decline is just around the corner (the logic is that everyone is IN so who is left to buy?) – while a high level of bearishness suggests the exact opposite (everyone is out, so who is left to sell?)….and in fact – that IS what we have seen, no? As started in the summer of 2022 – markets sold off as investors wondered what the FED was going to do, how many rate hikes would come and what would that do to the markets. The tone was of distress, concern, caution as we all awaited the coming recession – only asking how bad it was going to be.
Street analysts advising clients to ‘trim’ equity exposure in favor of fixed income products that were returning better than 4.5% for 12 or 24 months or better yet – just go to short term cash (think 3 – 6-month treasuries – that are returning 5.25% on an annualized basis) and remain semi liquid. And while that was good advice for a portion of your portfolio – it should never have been for your total portfolio – unless of course you were completely panicked. As I have been saying those were the FOBI (Fear of Being In) crowd……Investors who were not so sure what the next move by the FED would be and what that would do to a ‘fragile’ economy….Well, folks – the economy wasn’t so fragile, labor remains tight, unemployment remains at historic lows, wages continue to rise – albeit at a slower pace than inflation – New Home Sales remain strong (thanks to the builders being able to offer ‘upgrades’ and special financing – think lower mortgage rate options) and yesterday Housing Starts – ‘blew the roof off the house’ – coming in much stronger than any street analyst predicted – and all those layoffs and cost cutting events over the 3rd, 4th and 1st qtrs. have helped the bottom line by helping protect margins. Calls for S&P 3000 never materialized and nor does it feel like it will….it would represent a 31% drop from here and that just doesn’t seem possible. Which doesn’t mean that the market won’t back off – it will – It’s just by how much? And that is where we are today….
Look the S&P is trading at 19.5 x’s forward earnings….which is up from the 17 x’s in January and ahead of the 5 yr. average of 18.5 x’s….so can you argue that it is a bit over valued – yes…and if we returned to the average it would take the S&P down to 4150 ish (18.5 x $224)…or a 5% move lower….but before we got there – we would hit trendline support at 4190….where my guess is – you would find plenty of buy interest….4190 represents the high in February and the high again in May – before we busted out…so a pullback (in my opinion) should find plenty of support there.
Yesterday – saw more good news in the housing sector – Building Permits rose by 5.2% vs. the expectation of +0.6% and Housing Starts? They blew higher by 21.7% vs. the expectation of -0.1%… and that sent the home builders higher…. PHM + 1.8%, HOV + 1.7%, TOL +2.5%, KBH +0.5% leaving all of these names up more than 50% ytd…. (HOV is up 135%!). The very strong housing data only the latest data point that suggests the US economy is alive and well….even as the Fed hints at further rate increases because they remain concerned about ‘sticky’ inflation – which is the real problem…..How sticky will it be and how high will the FED go to ‘unstick’ it? Current rates are 5% – 5.25% and some project a terminal rate of 6%…. which would equate to 3 more 25 bps hikes or just one more 75 bp hike! (Not that I am suggesting that is the path – I’m just doing the math for you!) And btw- the strong housing data gives the FED just one more reason to remain hawkish….and that means higher rates and that means a strong US dollar and that means pressure on commodity prices. See how I knitted that all together?
As we come into month end – this Friday will be the Russell Reconstitution (known as the Russell Rebalancing) – an event that reflects the changes in the market capitalizations of the constituent companies – forcing Russell to add/drop names from the 1000 and 2000 indexes so that those indexes represent the sector of the market that they are supposed to small and mid-cap growth and small and mid-cap value. And this always causes lots of activity because asset managers that use these indexes as comparisons to their own performance need to make sure that they align themselves with what’s in the index….So there is lots of adding and subtracting and that has already begun, but it will heat up on Thursday and then Friday this week. Volumes will explode, which really means zero for you – the individual investor – but it does put large asset managers into a position of having to ‘re-balance’ their portfolios.
Today begins the semi-annual Humphrey Hawkins testimony….this is where JJ goes to Capitol Hill and presents the state of the economy to the House Financial Services Committee as well as the Senate Banking Committee – the expectation is for him to come under assault by Lizzy Warren – because she can and she has made it very clear that she is NOT a fan of the chairman. She continues to ask – why must rates go up? Just pay people more and problem solved…. Yeah, Lizzy…not so much…. Clearly, you must have skipped Econ 101. Inflation remains out of control for 2 reasons – One – the FED stimulated way to long – but remember JJ was trying to ‘keep his job’ and Two – the Biden’s have spent way too much money, they have made the US – energy dependent on the Saudi’s and OPEC+ and we are financing a war that has dragged on way to long. There should have been a diplomatic solution to this months ago…. but let’s not go there.
Eco data today is all about housing…. The only data point is Mortgage Apps…. Last week they were up 7.2% and with the strong housing data yesterday – it is anyone’s guess what today’s data will bring. 30 yr. rates have stabilized around 7 – 7.25%…So let’s see.
This morning we see markets churn as we wait for JJ to appear on the hill Dow futures -13 pts, the S&P’s down 2, the Nasdaq down 12 and the Russell up 2.
Oil is down because they are recirculating the weaker China story AND because of the stronger dollar (see above). For China – the world’s largest IMPORTER of oil – investors remain concerned about a faltering recovery…. never mind that yesterday I pointed out that China is buying RECORD amounts of oil from Vlad – and that would suggest that their economy is NOT faltering at all…. But hey…. today is a new day…just wait until tomorrow – the story will change again. The only thing I will say that is the real driver is the strength of the dollar…and the ‘perceived’ future strength of the dollar. This morning oil is trading at $71.26/barrel leaving it $2 away from the down trending trendline. – which will surely continue to cause angst for the Saudi’s. I am sure that Prince MBS is desperately trying to figure out what to do to get it to trade at $80.barrel.
Gold – as expected is also under a bit of pressure…. due to the dollar strength and nothing more…. This morning it is trading down $1.30 at $1,946/oz. It is now in the $1895/1975 trading range…. (Long term support/intermediate term resistance) and will be driven by how strong or not the dollar becomes.
European markets are also churning…. doing nothing much at all….UK inflation came in a bit hotter at 8.7% than the expectation of 8.4%. But was inline with last month’s level – so you can say that it didn’t do anything and remained stable….not going higher or lower….although – excluding food and energy – UK inflation rose by 6.5% UP from 6.2%…..and therein lies the controversy……Inflation in the UK remains sticky – just like it is here in the US.
This morning – treasury yields remain essentially unchanged. The 2 yr. treasury is yielding 4.7%, the 10 yr. 3.76%, the shorter duration bills – 3 and 6 months are yielding 5.2% and 5.3%.
The S&P closed at 4388 – down 20 pts…. This morning the tone suggests more churn and again – this should not be a surprise at all…the market has performed exceedingly well but is a bit stretched….so get ready for a pullback- a reversal (to the trendline) should not be unexpected…. Just sayin’
Stick to the plan. Build out the defensive part of your portfolio….do not keep chasing tech names that are way overdone… If you are nervous about a decline – position yourself with some of the contra trades that offer protection…. the SH, PSQ, DOG even the VIXY. See my clip above.
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.”
Linguine Puttanesca
As many of you may know this dish originated in Naples and is today a staple of the Neapolitan household. It is made from tomatoes, black olives (or Kalamata Olives), capers, anchovies, onions, garlic, oregano and parsley. It is easy to make and has an interesting history.
So how did it become so popular? As you might imagine – legend has a number of explanations…
1. The intense aroma would lure men from the street into the local brothel where the prostitutes would be cooking the sauce to lure the patrons.
2. The prostitutes made it for themselves to keep the interruption of their business to a minimum.
3. And in a twist – it was a favorite of married women who wished to limit their time in the kitchen so that they may visit their lovers.
Whatever its origin, it is a great dish that is easy to prepare – is spicy, tangy and vibrant – an appropriate description of the mkt today…
Start with 3 crushed garlic cloves sautéed in olive oil for about 3 / 4 mins…do not let it burn… next add a diced white onion and diced/minced anchovy filets and sauté for another 5 / 8 mins. – as they cook, they melt away. Add one can – 28 oz – of kitchen ready crushed tomatoes… not puree – Crushed. Add about 1/4 of a can of water – Let simmer for 10 mins or so. Next add capers, oregano, pepper, chopped Italian parsley, and rough chopped pitted Kalamata olives or pitted black olives – whichever you prefer – but do not mix… It is one or the other. No need to add salt as the anchovies are salty enough. If you like more bite, you can add red pepper flakes at this point… cover and let simmer.
In the meantime – bring a pot of salted water to a rolling boil and add the Linguine or spaghetti. Do not use Capellini as it is too thin, and it clumps up etc… Let boil for 8 mins or until aldente. Remove and drain – keeping a mugful of the pasta water. Add the pasta to the sauté pan with the Puttanesca sauce and heat and stir until well coated and fragrant. Serve immediately onto warmed plates offering up grated Parmegiana cheese on the side.
Buon Appetito
