Things you need to know.
– The Dippers come in to save the day.
– PPI today, CPI tomorrow – What will it reveal?
– 10 yr yields pushing 4.8%.
– Oil Up, Gold flat.
– JPM, GS, BAC, WFC, & C all due to report
– Try the Risotto Siciliana
Ok – take a breath…. the bulk of the market found buyers that were willing to test the water – dip their toes – following the selloff in stocks over the past month that saw individual names get hammered while the broader indexes all come under pressure.
The Dow gained 360 pts, the S&P up 9 pts, the Nasdaq gave up 75 pts, the Russell added 5 pts, Transports took back 145 pts, while the Equal Weight S&P added 59 pts.
While it feels a bit uncomfortable – let’s put it in perspective – 4 of the 6 indexes while down – remain within what is considered a normal trading pattern – down less than 10%, it doesn’t become a concern for investors until we hit official correction territory defined as losses of 10% – 20%, and then when they pierce 20% losses – it is considered a ‘bear market’. Currently the Dow is down 7% off the December high, the S&P down 7%, the Nasdaq -6.2%, while the Equal Weight S&P is off 7.7%. The issue for the markets and investors is that the Russell and Transports are in official ‘correction territory’ down 11.5% and 10.6% respectively.
Now what does that mean?
The Russell represents the SMIDS (small and mid-caps) which are typically more sensitive to economic changes than large-cap stocks and so when it enters correction territory it raises a couple of concerns.
Small-cap companies rely heavily on domestic markets and have less financial resilience compared to large-cap firms. They are also usually borrowers -so higher rates have the potential to hurt them. Capisce?
So, the correction in the Russell that we are seeing may indicate concerns about slowing U.S. economic growth, rising interest rates, or tightening credit conditions. A decline suggests investors are becoming more risk-averse, favoring larger, more stable companies or defensive sectors.
Now the Transports.
The Transportation Average tracks airlines, railroads, trucking, and shipping. A correction here can mean:
Economic Growth Concerns: Transports are highly sensitive to economic activity because they move goods and raw materials. A slowdown in transportation demand often points to reduced economic output or consumer spending.
Dow Theory?
Confirmation of trends – Here is where we look at Dow Theory. Dow Theory tells us that the movements of the Industrials and Transports should confirm each other to signal the strength or weakness of the broader market.
When both Industrials and Transports are in decline it raises a couple of questions. A simultaneous decline in both indexes is viewed as confirmation of a bearish market trend under Dow Theory. It suggests that both production (Industrials) and distribution (Transports) are slowing, signaling broad economic weakness. This is seen as a strong indicator of a potential recession or a deeper market downturn.
But we need to see a breakdown of KEY support Levels (think 10%) – and we have not seen that yet with the Industrials – it has not entered ‘correction territory’ – for that to happen – the Industrials would need to breach 40,500….currently, it sits at 42,300.
In the end – A decline in both indexes suggests a risk-off mentality in the market, where we can expect investors to move capital into defensive sectors, fixed income, or cash. And with 10 yr treasuries now rubbing up against 4.8%, it is slowly becoming a problem for stocks.
So now, let’s look at the sectors and what they reveal. Only 4 sectors show any 2025 gains – Energy out front at +5.3%, Healthcare – something I have been talking about lately (was an underperformer in 2024) is up 2.4%, Basic Materials gaining 1.2% while Industrial are just north of the flat line up 0.8%. The other 7 sectors are all lower led by Consumer Staples – down 2.7%, Tech down 2.3%, Real Estate down 2.4%, Financials – 1.4%, Utilities – 1.3%, Consumer Discretionary – 1.2%, and Communications down 1%.
Now within all of those sectors – there are large cap/mega cap individual names that represent the best of their industries that have entered ‘correction’ territory for many of the reasons I have outlined, and this is where you – as a long term investor get to go shopping. Make a list of your favorite names and keep your eyes on the action.
Bond prices are down and yields are up and that is now an issue….the 10 yr yield has surged by 33% since JJ started cutting rates in September….Yesterday it ended the day yielding 4.76% – it has now pierced the April high of 4.73% and is about to test the October 2023 high of 5% and if it does – I suspect stocks will come under more pressure.
Oil – continues to push higher – this after the latest Biden move to impose even tougher sanctions on Russia last week – which removes about 700k barrels/day of supply off the market and that has only managed to ignite the move. I discussed this is yesterday’s note. Yesterday, oil gained another $2.20 or 2.9% to end the day at $78.80….and is now up 7% in 3 days….as it now kisses $80/barrel – a level that proved to be resistance both in April and July…The question now is – is the 3rd time a charm? Will oil pierce up and thru $80 or will it prove to resistance yet again?
Gold – which pierced $2700 on Friday – has pulled back to the trendline and is holding that position at $2685…where both the short term and intermediate term trendlines are converging. The next move will depend on what happens today and tomorrow – when we get the latest reads on inflation. A sign of higher inflation will benefit gold as money moves into it as a hedge.
Today at 8:30 we will get the latest PPI report and as we discussed yesterday – it is expected to surge. y/y numbers up substantially over last month and that would not be good. Tomorrow brings us the latest CPI report and while they are trying to tell us that it will remain unchanged, I am in the camp that says the risk is to the upside. Higher PPI reads over the last 3 months eventually make their way to the consumer level…and that is coming….
Earnings as well are top of mind beginning tomorrow – with the release of the big banks. And while we will hear all about NII and Investment Banking and sales and trading revenues, which are all expected to be good. I want to hear what these guys are telling us about their ‘Loan Loss Reserve Accounts’. You see, this is where they put money aside to blunt the losses from consumer defaults – think mortgage and cc defaults. An increase in this acct will suggest that they are preparing for tougher times ahead and for me, that will be a key metric. And for WFC and BAC? I want to hear what they have to say about the housing market and the mortgage market. In the end – The estimates reflect a generally optimistic outlook for the banking sector, with anticipated growth in earnings and revenue driven by factors such as increased dealmaking, trading activities, and favorable interest rate environments. But as usual – the banks tend to perform well – ahead of the earnings and then when they report, the trader types hit the sell button to lock in those gains…JPM up 10% in the qtr., GS +10%, C + 13%, WFC +21%. & BAC + 11% Capisce?
US Futures are up! Dow futures +145 pts, S&P’s up 33 pts, Nasdaq is up 165 pts, while Russell is up 14 pts. Yesterday the S&P filled the gap created on November 6th…. that is a good thing….it broke intermediate trendline support at 5822 but managed to close above it. While the tone appears more bullish today, I remain a bit concerned that it is just a dead cat bounce after 5 days of pressure. PPI will be very important, so I sit and wait…
European markets are higher as well. Bond yields across Europe remain an issue…. Analysts telling us that gilt yields are trapped in a ‘vicious circle’ – the rise in yields will put a strain on public finances, which will force tighter fiscal policy, which will put a strain on the economy. Markets across the zone are all up between 0.3% – 0.8%.
The S&P ended at 5836 27 – up 9 pts…. after trading down to 5773 filling that gap. Let’s see what happens next – the tone is upbeat right now, but will it be that way post the PPI read? We are now in the 5822/5950 trading range. A move up will only be because the inflation read surprises everyone and is not as hot as expected. But if not, then I suspect that the mood remains cautious and stocks trade lower. Again, I don’t see the FED making a move this month or even this quarter and while I don’t think they should cut at all this year, the market is still pricing in a July cut. Let’s see.
Remember – stay focused, manage your risk, stick to the plan. History demonstrates that a well-planned, long-term focused and diversified financial plan can withstand virtually any market surprise and related bout of volatility.
Any questions? Give me a call. Click here https://slatestone.com/contact-us/ to contact me – Put KP in the message box and I will reach out to you to discuss your investment portfolio and any questions you may have.
Take good care.
Sources: Bloomberg, CNBC, Reuters, Wall Street Journal
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Risotto Siciliana
This is such a good dish. You can use it as a main or as a side. It’s up to you.
It’s Risotto – Sicilian style.
For this you need: Vegetable broth, Carnaroli rice, butter, a bechamel sauce (butter, flour and milk), saffron, prosciutto or sliced ham, scamorza (an Italian semi soft cheese made with cow’s milk), chopped parsley, and fresh grated Parmegiana cheese.
Preheat the oven to 375 degrees.
Start by bringing the vegetable broth to a boil and then add the rice – do not stir it, just let it cook for about 15 mins until the rice absorbs the broth.
While the rice is cooking – make the bechamel sauce (which is butter, flour and whole milk) and chop the ham and cut the cheese into small cubes.
When the rice absorbs the broth – remove from the heat. Put the rice in a glass bowl and add the bechamel, saffron, the grated parmegiana, and parsley. Season with s&p. Mix well.
Next add ham and scamorza cheese. Mix well.
Now place the rice mixture in a buttered baking dish dusted with breadcrumbs. Smooth it out and top it off with more breadcrumbs and parmegiana cheese. Place it in the oven and bake for 25 mins. You want it to be nice and toasty.
Buon Appetito
