Things you need to know
- Bull & Bear Indicator? What’s up with that?
- Tech continued to get sold, Blue chips saved the day.
- Bonds up, yields down, oil down, gold up.
- It’s a BIG week – earnings, eco and the FED all come together.
- Try the Veal Capriccioso
If you read my notes last week – you learned that both GS and UBS told us that the hedge fund guys (the Momo crowd) had been running for the exits at breakneck speed, tripping over each other as they tried to lock in profits ahead of earnings season….. reducing their exposure to AI, semiconductors, the Mag 7 and the memory names. Their message has been clear: the momentum trade had become crowded and valuations had become stretched. Made sense right – it’s not like we haven’t been discussing this for weeks.
Then BAC comes out and tells us their ‘Bull & Bear Indicator’ is sitting at 9.6 out of 10—one of the highest readings we’ve seen in years. 9.6 suggests extreme bullishness… (the scale is 0-10, 0 being extreme bearishness.)
At first glance, those reports sound like they’re in direct conflict, but they’re not.
That’s because they measure two different things. GS and UBS are focused on what hedge funds are doing. BAC is looking at how the entire investment community is positioned. They measure mutual funds, ETF flows, pension funds, institutional managers, hedge funds, cash balances, credit markets and technical indicators.
And here’s the important part…The Bull & Bear Indicator is actually a contrarian indicator. Why? Because a reading of 9.6 isn’t telling investors to buy because everyone is bullish. It’s WARNING that investors may have become too bullish and stocks could weaken.
Think of the relative strength index – when the reading approaches and pierces 70 – that’s usually a sell signal (and when it kisses and breaches 30 – that’s usually a buy signal). And guess what? The S&P and Nasdaq RSI indexes were also screaming overbot from late April thru early June – which apparently didn’t bother anyone – until the hedge fund selling got more aggressive in early June – just weeks ahead of earnings…. Again, something we discussed – recall I said that the bar had been raised and stocks were priced to perfection – so don’t be surprised to see a ‘sell the news’ reaction.
In any event – readings above 8 have been viewed as tactical sell signals because when everyone is on the same side of the boat, there aren’t enough buyers left to keep driving prices higher. – which doesn’t mean there are not buyers – it just means they are becoming more discerning.
So, let’s put the pieces together. BAC warned us that the market had become overcrowded. GS and UBS were showing us that the hedge fund community recognized that risk and began heading for the exits. GS even suggested that after five weeks of relentless selling, the fast-money crowd may finally be showing signs of capitulation and exhaustion. This is important – because they are not saying ‘the market is showing signs of capitulation’ they are saying the tech sector is – after the sellers exhausted themselves. Ironically…that’s not a bad thing.
Then earnings arrived, and so far the results have been nothing but great…86% are beating estimates on the top line, while 80% of them are beating on the bottom line…and we’ve only had 27% (135 names) of the S&P report so far – so expect those numbers to change.
Now, after Thursday’s tech driven flush, the market tried to regain its footing on Friday – but the recovery was anything but convincing. It wasn’t a broad-based buying spree. It was more of a pause…a chance to digest what had just happened.
By the time the bell rang on Friday – the Dow was up 236 pts, helped by strength in more traditional blue-chip names. Think TRV, HD, IBM, SHW, V, JNJ & JPM.
The S&P 500 managed to tack on 3 pts, The Nasdaq, however, remained under pressure, falling another 162 pts, the Russell lost 10 pts, the Transports gave up 102 pts, the Equal Weight rose by 62 pts, while the Mag 7 lost 27 pts.
That tells you the rotation out of technology wasn’t (maybe isn’t) over. The Fast Money guys (Momo) continued to lighten up on many of the same AI and semiconductor names that led Thursday’s selloff, Tech lost 1.5% while money rotated into sectors viewed as more defensive and less dependent on aggressive growth assumptions.
Real Estate and Basic Materials the biggest beneficiaries – up nearly 2.2% and 2% respectively. Consumer Staples up 1%, Financials up 0.9%, Communications up 0.9%, Healthcare up 0.7%, Energy and Industrials up 0.4%, while Utilities gained 0.2%.
Again, this only supports rotation vs. liquidation.
The bond market finally found some stability. The TLT and TLH went up 0.1% and 0.2% respectively. Yields eased somewhat after Thursday’s spike, with the 2 yr at 4.32%, the 10 yr at 4.69%, and the 30 yr was at 5.15%. This morning – yields are moving lower on the back of a possible cease fire in the Mid-East.
Oil pushed higher…brent traded above $100 while WTI traded at $92.40 amid fears of escalating tensions across the Middle East and further supply disruption – but cooler heads appear to have prevailed. Rumors of renewed diplomatic efforts helped ease prices into the close, and over the weekend the news is that those diplomatic efforts have been successful (but we’ve seen this before) easing those tensions and pushing prices lower this morning. Brent is now trading at $88 while WTI is down $7 at $82.60.
Gold which has been confused trading between $4,000/$4,200 – not sure if inflation is an issue and if or when the geo-political drama will end – leaving it to settle at $4,052. This morning on the back of the ‘news’ – gold bugs are taking it higher on the assumption that inflation won’t be an issue, and the drama may be closer to an end than the beginning. It is up $50 at $4,100 and remains in that trading zone.
The VIX which shot higher last week – up and thru all 3 trendlines – supported the idea of the ongoing anxiety and valuation risk. This morning it is down 5% as markets celebrate any ceasefire news. It is sitting right on the edge – between complacent and concerned and could go either way – depending on the geo-political headlines and/or the earnings headlines. This morning it is trading at 17.60. (Last week’s high was 20.30). Trendline support is down at 17.30 – if we break that – then look for the VIX to trade back to the mid 16’s and if that happens – expect stocks to go higher.
Now this week now demands your attention…. Because this isn’t just another week. This could very well be the week that determines whether last week’s selloff was nothing more than a healthy reset or the beginning of something more significant.
We’re going to hear from about 150 S&P companies – including four of the most important companies on the planet. MSFT, META, AAPL & AMZN. Investors want answers, they don’t just want beats anymore.
Last week, Alphabet raised AI capital spending to $205 billion and forced investors to ask whether the economics of AI are beginning to get stretched.
This week, MSFT has the first opportunity to answer that question. Can Azure continue growing at a pace that justifies all this spending? Is Copilot gaining enough traction to prove AI can become a meaningful profit engine? Can MSFT continue expanding margins while investing tens of billions of dollars into AI infrastructure?
Then comes META Will Zucky double down on AI spending. Can digital advertising continue to fund this investment cycle? On Thursday, the spotlight shifts to APPL and AMZN.
APPL will tell us about the health of the consumer and whether its AI strategy is beginning to resonate. AMZN will give us an update on AWS, cloud demand and whether businesses continue investing aggressively in AI.
Today we’ll hear from NVTS, CDNS, APLD, ESI, NUE, UHS, BRO, WELL – these names represent Tech, Basic Materials, Healthcare, Financials, and Real Estate.
But it isn’t just earnings. Remember – tomorrow starts the July FOMC meeting and the results will be announced on Wednesday at 2 pm. Will he host a press conference or not? I would love to see NO press conference – but I don’t think that will happen.
No one expects a rate move. The market is putting a 30% probability on it…But everyone will be listening for even the slightest change in tone. This is why I say, I wish there wasn’t a presser, I say, let the market figure it out – the way we used to do.
Then comes Thursday, arguably the biggest macro-economic day of the week. We’ll get our first look at second-quarter GDP – expectation is +2.1%. We’ll get the June PCE Price Index – the Fed’s preferred inflation gauge – and it is expected to be ‘better’. We will also get Personal Income, Personal Spending and weekly Jobless Claims. Friday wraps it all up with the Employment Cost Index, Chicago PMI and the final reading of July Consumer Sentiment – which is not expected to suggest everyone is happy.
So, make no mistake… This week isn’t simply about who beat earnings estimates. It’s about whether Corporate America can justify the massive AI spending. It’s about whether the economy remains strong enough to support premium valuations. It’s about whether inflation continues moving in the right direction. And it’s about whether the Fed believes it has room to remain patient. At the end of the week, we’ll know a lot more than we know today.
Asian markets closed Monday higher, European markets are all higher…. Germany up 1.5%, Spain up 1.3%, Euro Stoxx up 1.2%, Italy up 0.7%, France up 0.7% while the UK is up; 0.4%.
US futures (as you might expect) are up big…. Dow up 500 pts or 1%, the S&P’s up 74 pts or 1%, the Nasdaq is up 460 pts or 1.8% while the Russell is ahead by 38 pts or 1.3%.
The S&P closed at 7411 up 4 pts. We ended the week just below trendline resistance at 7472 – Right now- it looks like we will slice right thru that on the opening, leaving the July highs of 7,580 in sight, but before you go ‘all in’ – remember – this is a BIG week on many fronts – be methodical, not emotional and don’t forget – the mid-terms are now only 3 months away – and there is a lot to consider and there could continue to be some more volatility.
Personally…I still believe this has been a price reset rather than the beginning of a bear market. The AI story hasn’t changed. The eco data remains robust and tensions in the Middle East remain constant….and while politics don’t usually price stocks in the long term, it can create chaos in stocks in the short term. Think opportunity.
What has changed is that investors are no longer willing to accept the story, they want proof. And that’s exactly what this week is all about. Remember…Markets climb a wall of worry—not a wall of certainty.
If you’d like to discuss your goals, evaluate the risk in your portfolio or simply get a second opinion, give me a call at 561-931-0190.
I’m always happy to provide a complimentary portfolio review and risk assessment.
Take good care,
Kp
[email protected]
Source: Bloomberg, CNBC, Reuters, Wall Street Journal
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Veal Cutlet Capriccioso
This is a great dish – colorful, hearty, and easy to make. You can easily substitute chicken or even a pork cutlet – Make it your own.
For this you need – Veal cutlets, flour, eggs, seasoned breadcrumbs, olive oil, butter, fresh arugula, Ripe Cherry Tomatoes, sliced red onion, lemon juice, and shaved parmegiana cheese.
In a bowl – beat 3 eggs (add a splash of milk), on a separate plate put some flour and on a third plate – place the seasoned breadcrumbs.
Begin by pounding the cutlets to thin them out. Now, dredge the cutlet in the flour – dip in the egg wash and then cover in breadcrumbs – pressing gently so that the breadcrumbs stick to the cutlet. Place on a plate.
Next, heat up a lg roasting pan and add some oil and butter – enough to cover the bottom of the pan. Turn the broiler on high. Once the oil is hot add the cutlets – to the oil – dip one side in the oil and then immediately flip them.
Once one side is broiled then flip again and broil the other side. Cook the cutlets until they are crispy golden brown on both sides. Remove and place on a warmed plate.
Top the cutlet with some arugula, then the cherry tomatoes (cut in half), and the red onion. Squeeze fresh lemon juice sparingly – drizzle some olive oil – season with s&p and top with shavings of Parmegiana cheese.
Enjoy your favorite wine –for this I actually preferred a chilled white vs. a heavy red.
Buon Appetito