Outlook for week of Sep 18-22
The recent Q2 earnings season has drawn to a close, although it's worth noting that not all companies adhere to a conventional calendar year for reporting. In the past week, four S&P 500 firms disclosed their Q2 earnings, with three of them surpassing consensus earnings per share (EPS) expectations. In the broader context, a substantial 99% of S&P 500 companies have already released their Q2 results. In terms of growth, Q2 earnings exhibited a year-over-year decline of -5.8%, which is notably better than the -6.8% estimate made when Q2 concluded. Additionally, Q2 revenues showed a year-over-year increase of +1.0%, outperforming the initial estimate of -0.4% at the close of Q2. These figures can be compared to the final growth rates of -2.8% for earnings and +4.3% for revenues observed in Q1.
The sector performance landscape has largely retained its cyclical nature over the course of this week, with a focus on the year-to-date (YTD) performance in 2023 compared to the full-year figures for 2022. As of the closing data on September 14, 2023, the 11 market sectors exhibit varying levels of performance. Notably, the Communications Services sector has surged with a significant YTD gain of +45.7%, contrasting sharply with its -40.4% performance for the entirety of 2022. This resurgence is echoed in other cyclical sectors like Information Technology (+40.2% YTD, -28.9% in 2022) and Consumer Discretionary (+37.2% YTD, -37.6% in 2022). Meanwhile, defensive sectors such as Energy (+5.8% YTD, +59.0% in 2022) show a different pattern, emphasizing the shifting dynamics within the market. Industrials (+7.1% YTD) and Materials (+5.9% YTD) have displayed more moderate gains. On the other hand, sectors like Utilities (-8.2% YTD) and Health Care (-2.4% YTD) have seen declines in 2023 compared to their defensive standings in 2022, while Financials (+1.8% YTD) and Real Estate (-0.7% YTD) show relatively subdued performance in the cyclical category. Lastly, Consumer Staples (-2.1% YTD) holds a defensive position, experiencing a slight dip in YTD performance relative to its 2022 results.
As of September 14, the S&P 500 (SPX) had experienced a notable gain of +47 points, equivalent to +1.1%, seemingly deviating from the previous week's Neutral outlook. However, with the SPX declining by -42 points on the following day (midday Friday, Sep. 15), the previous outlook appeared to be back on track. The SPX had been engaged in a four-week battle with the 50-day Simple Moving Average (SMA), currently positioned at 4,483. Amidst a market characterized by limited catalysts, predicting the direction and timing of a breakout remains challenging. In this predominantly sideways market, key technical thresholds, including longer-term resistance at 4,600 and support at the 100-day SMA (currently at 4,363), remain relatively stable.
In the realm of interest rates, the 10-year U.S. Treasury yield ($TNX) initiated the week near 4.30%, displaying a mostly sideways trajectory until a modest uptick later in the week. As of midday Friday, Sep. 15, it stands at around 4.32%. Notably, historical data over the past eight years, featuring 25 interest rate changes, indicates that when the probability exceeds 65% on the day of a Federal Reserve meeting, a rate hike or cut has ensued. Presently, the fed funds futures indicate only a ~4% likelihood of a +0.25% hike on September 20, a ~29% chance of a similar hike on November 1, and an ~11% probability of a hike on December 13. Collectively, these probabilities suggest a ~43% chance of at least one more rate hike in 2023, though it remains uncertain, with the data set to play a decisive role. Although a rate hike by the Fed this week is highly improbable, Treasury yields and crude oil prices have returned to year-to-date highs, contributing to market stability. The indicators point towards another week characterized by choppy sideways movements and an expectation of increased volatility.
In conclusion, despite prevailing gloominess among traders and consumers, the current economic landscape surpasses earlier 2023 expectations. Volatility has reached a post-COVID low, the labor market remains robust, salaries outpace inflation (which is significantly lower than a year ago), GDP is projected to exceed 2% in Q3, and the SPX is within 8% of its all-time high. The overall sentiment still suggests a strong Neutral outlook for the next week. However, the presence of a single Bearish, Bullish, and Volatile indicator suggests a notable possibility of increased volatility in the coming week.
Economic reports scheduled for next week:
Monday, Sep. 18: The NAHB Housing Market Index for September is set to be released. This index combines various factors like single-family home sales, future sales expectations, and buyer traffic to provide insight into new home sales trends, offering an overview of the conditions in the new home selling market.
Tuesday, Sep. 19: The reports for August on Housing Starts and Building Permits will be unveiled. Housing starts measure the initiation of construction on new single or multi-family homes and serve as an indicator of housing demand and the construction industry's strength. Building permits, a prerequisite for excavation, often influence future housing starts.
Wednesday, Sep. 20: The Federal Open Market Committee (FOMC) will convene for its regular meeting. This is typically when the committee announces any changes in interest rates. Following the meeting, there is usually a press conference led by the Chairman of the Federal Reserve.
Thursday, Sep. 21: Initial Jobless Claims data will be released for the week ending Sep. 9, 2023. The prior week saw a rise of 3,000 claims after a 12,000 decline. The four-week moving average now stands at 225,000, down 5,000 from the previous week. Additionally, Existing Home Sales figures for August will be published. This provides valuable insights into housing market demand as it consolidates completed closings of single-family dwellings, a significant segment of the housing market. Home purchases often signify economic stability and can influence future purchases of durable goods. The Leading Economic Indicators for August, composed of 10 components that typically precede overall economic changes, will also be released. Despite the term "leading," this report tends to have a more subdued market reaction since its components have already been disclosed.
Friday, Sep. 22: No economic reports are scheduled for this day.
Previous update:
The second-quarter earnings season for S&P 500 companies has come to a close, with only one company from the index reporting their Q2 earnings this week, and that particular company managed to surpass the consensus earnings per share (EPS) expectations. To provide an overview, a total of 497 companies in the S&P 500, which accounts for a remarkable 99% of the index, have already disclosed their Q2 financial results. To gain perspective, it's worthwhile to compare the aggregate beat rates from this quarter to those of previous quarters to gauge the overall performance of companies relative to market expectations.
In the current week, there has been a notable shift in the cyclical sector bias within the market. When examining the year-to-date (YTD) performance of market sectors in 2023 compared to their final performance in 2022, we can observe some significant fluctuations. The Communications Services sector has surged, demonstrating a remarkable YTD gain of +42.8% compared to its -40.4% performance in 2022, signifying a substantial cyclical shift. Similarly, the Information Technology sector has shown considerable strength, with a YTD increase of +40.4% compared to its -28.9% performance in the previous year, aligning with the cyclical trend. Consumer Discretionary follows suit, with a YTD growth of +32.3% against its -37.6% performance in 2022, indicating a pronounced cyclical upswing. Industrials have seen a positive YTD change of +7.6% compared to their -7.1% performance in 2022. Materials have also rebounded, boasting a YTD gain of +4.7% relative to their -14.1% performance in the previous year, both aligning with the cyclical category. On the other hand, Energy, which had been in a defensive position in 2022, has now shown a YTD increase of +3.3%, contrasting with its +59.0% performance in the previous year. Financials and Real Estate, two other cyclical sectors, have experienced slight declines, with YTD changes of -0.5% and -0.7%, respectively, compared to their -12.4% and -28.5% performances in 2022. In the defensive sector, Health Care has seen a YTD decrease of -3.1%, while Consumer Staples has declined by -3.4%, compared to their -3.6% and -3.2% performances in 2022, indicating a shift towards defensive positions. Lastly, Utilities have exhibited a significant YTD decline of -11.9%, diverging from their +1.4% performance in 2022, marking a clear move away from the defensive category. This reshuffling in sector bias in 2023 compared to the previous year underscores the dynamic nature of the market and the evolving investor sentiment.
Equity markets have been displaying a back-and-forth pattern of short-term uptrends and downtrends in the past four weeks, resulting in relatively little overall movement. This trend appears likely to persist for some time. Currently, as of midday on Friday, September 8, the S&P 500 (SPX) is showing only marginal gains.
When examining key technical levels, it becomes evident that there hasn't been much alteration in recent weeks. The longer-term resistance level remains at 4,600, while the shorter-term support and resistance is still centered around the 50-day Simple Moving Average (SMA), which currently stands at 4,478. Additionally, the 100-day SMA continues to provide support at its current level of 4,346.
While it is crucial to note that seasonal patterns should not be the sole basis for trading decisions, it is worth mentioning that September has a well-documented history as the most challenging month for the S&P 500. Dating back to 1949, September has seen a decline in the index 55% of the time, and recent years have not shown significant improvement in this regard.
Turning our attention to the 10-year US Treasury interest rate ($TNX), it began the week at approximately 4.20%, reached a high point of 4.30% mid-week, and then experienced a decline towards the end of the week. Currently, at the time of this writing, which is midday on Friday, September 8, the rate hovers around 4.26%.
Over the past eight years, which encompassed 25 interest rate adjustments, whenever the probability exceeded 65% on the day immediately preceding a Federal Reserve meeting, a rate hike or cut was implemented. Presently, the fed funds futures are indicating a roughly 7% probability of a +0.25% rate hike at the upcoming meeting on September 20 and approximately a 41% chance of another +0.25% hike on November 1. This translates to a cumulative probability of approximately 48% that there will be at least one more rate hike by November 1. It is important to note that these probabilities are subject to daily fluctuations, but historical data suggests that they would typically need to surpass the 65% threshold for another rate hike to materialize.
As the second-quarter earnings season drew to a close, various market factors came into play, including the ascent of treasury yields and crude oil prices, a strengthening dollar, and resilient economic indicators. Looking ahead, the signals suggest that the coming week may continue to be characterized by a somewhat erratic but predominantly sideways market. With the earnings season for Q2 completed and the Federal Reserve expected to maintain its current policies for the next seven weeks, market movements are likely to be influenced by factors such as geopolitical developments, economic data releases, fluctuations in interest rates, shifts in oil prices, and changes in the dollar's strength. It's worth noting that when the August Consumer Price Index (CPI) report is unveiled on Wednesday, September 13, some volatility in the market's opening hours may be anticipated. While the week saw more downgrades than upgrades in various indicators, the overall balance suggests a prevailing sense of Neutral sentiment for the upcoming week.
Upcoming economic reports for the following week are as follows:
On Monday, September 11, there are no scheduled economic reports.
Similarly, on Tuesday, September 12, no economic reports are set to be released.
However, on Wednesday, September 13, we can anticipate the release of the Consumer Price Index (CPI) for August. The CPI measures changes in the average price level of a fixed basket of goods and services, reflecting inflation or deflation relative to the base year of 1984. Additionally, the Treasury Budget for August will be published. This monthly report monitors year-over-year fluctuations in tax receipts and expenditures, though it typically doesn't have a significant market impact outside of April when most taxes are collected.
Moving on to Thursday, September 14, we will receive data on Initial Jobless Claims for the week ending September 2, 2023. Claims were down by 13,000 after a 3,000 decrease in the prior week, and the four-week moving average currently stands at 229,000, marking a 9,000 decline from the previous week. Furthermore, the Producer Price Index (PPI) for August will be released, which gauges inflation at the wholesale or manufacturing level. Additionally, the Retail Sales report for August will be closely watched as it offers insights into consumer sentiment and spending habits. Lastly, Business Inventories for July will be reported, providing a measure of goods available for sale, held by producers, or acquired for resale. It's essential to note that this is a lagging indicator since its components have been previously disclosed.
Finally, on Friday, September 15, we can expect the release of International Trade data, including Import and Export Prices for August. These reports track the prices of goods purchased in the US but manufactured abroad and goods sold abroad but produced in the US, respectively. Changes in prices are influenced by inflationary pressures and currency exchange rates. Additionally, Industrial Production and Capacity Utilization figures for August will be published. Industrial production measures industrial output as a percentage relative to 2007 output levels, while Capacity Utilization measures output potential as a percentage relative to the actual 2007 output. Lastly, we'll see the University of Michigan Consumer Sentiment report for September, typically the Preliminary version, released around the midpoint of the month. This report compiles data on consumer attitudes and expectations, aiming to predict discretionary spending patterns.
Previous update:
Stocks displayed mixed performance during late morning trading as investors digested the August Nonfarm Payrolls report, which presented a blend of outcomes. While Nonfarm Payrolls exceeded expectations at 187K, there was a downside revision of 110K for the past two months. Additionally, Average Hourly Earnings showed a 0.2% increase, slightly below the anticipated +0.3%, with a year-over-year growth of +4.3%. The Unemployment Rate ticked up to 3.8%, surpassing the 3.6% estimate. Examining Bloomberg's Federal Reserve rate hike probabilities, there's a 41% chance of a 25-basis-point hike in November, a slight dip from the previous day's 47%, indicating a mildly dovish interpretation of the employment data by traders. Nevertheless, the 10-year yields climbed by nine basis points to 4.183% today, maintaining the upward trend observed throughout the summer, emphasizing the importance of monitoring yield trajectories as we enter the historically challenging month of September.
As Q2 earnings season concludes, it's apparent that 58% of S&P 500 companies surpassed revenue expectations, while an impressive 79% exceeded earnings estimates. This contrasts with the previous quarter's figures of 67% and 78%, respectively. Several prominent companies are yet to report their results in the upcoming week, including CRMT, ZS, GTLB, ASAN on Tuesday, PATH, GME, AI, AEO, CHPT on Wednesday, TTC, DOCU, GWRE on Thursday, and KR on Friday.
The S&P 500 Index (SPX) experienced a bullish turn by regaining the 50-day Simple Moving Average (SMA) on Tuesday. This rebound seemed to be driven by softer data in JOLTS and Consumer Confidence, resulting in lower yields. However, the SPX currently appears to be somewhat indecisive, trapped between the 4,335 support level (where it bounced back on August 18th) and the 4,600 resistance level (previously encountered in late July and early 2022). In the short term, it appears that a drop in 10-year yields below 4.0% might be necessary to retest the 4,600 level, as there are no other apparent bullish catalysts to sustain recent momentum.
The Nasdaq 100 Index (NDX) exhibits similar technical patterns to the S&P 500. This week, it too reclaimed its 50-day SMA, a positive sign. However, it is also sandwiched between near-term support around 14,600 and resistance near 15,900. Looking at a longer time frame, the pullback observed from late July to mid-August appears to be a typical summer retracement, with the mid-August rebound aligning with the 23% Fibonacci Retracement level from the October low to the July high.
Regarding 10-Year Yields (TNX), there is some good news for the bulls as yields have retraced slightly after reaching a new cycle high of 4.36% on August 22nd. The downside, though, is that the upward trend in yields that began in May remains intact. If TNX continues to rise and hits another cycle high in the coming weeks, it could exert selling pressure on equities. Historically, bond yields have had an inverse relationship with stocks, representing competition for risk assets and correlating with higher borrowing costs for corporations.
Looking ahead to the coming week, it's expected that bond yields will play a significant role in shaping near-term market movements due to the absence of major catalysts. The current stock market remains mixed, with the Dow Jones Industrial Average (DJI) up 80 points, the S&P 500 (SPX) up 4 points, and the Nasdaq (NDX) down 9 points as of late in the trading session. On the positive side, all three indices, SPX, NDX, and COMPX, have reclaimed their respective 50-day Simple Moving Averages (SMA), and there are signs of slack emerging in the labor market. Conversely, the bearish aspects include the ongoing uptrend in 10-year yields and high valuations, as the forward P/E ratio for the SPX currently stands at around 19, notably above the 10-year average of approximately 17. Given the lack of apparent catalysts for the stock market in the upcoming week, it appears that the focus will primarily be on yields. Consequently, the outlook for the next week leans toward a "Neutral" stance for stocks, with the direction likely influenced by yields in an inverse relationship.
Upcoming economic calendar for next week:
Previous update:
The conclusion of the regular Q2 earnings season is nearly at hand. In the past week, 10 companies listed on the S&P 500 index disclosed their Q2 earnings, out of which 8 surpassed the consensus earnings-per-share (EPS) predictions. In totality, a substantial 97% (484 companies) of the S&P 500 contingent have submitted their Q2 performance figures up to this point. A comparative assessment of beat rates, considering results from prior quarters, is presented below.
In terms of expansion, the Q2 earnings have demonstrated a year-on-year decline of -7.2% thus far, a slight deviation from the projected -6.8% at the conclusion of Q2. Correspondingly, Q2 revenues have exhibited a positive growth of +0.8% year-on-year until now, in contrast to the estimated -0.4% at the culmination of Q2. To contextualize, these figures stand against the conclusive growth rates of -2.8% and +4.3% for earnings and revenues respectively, as seen in Q1.
This week has seen a complete resurgence of the cyclical bias observed earlier this year, reflected across various sectors. As of the market's closure on August 24, 2023, the market sector performance for the year-to-date (YTD) period in 2023, compared with the full-year figures of 2022, underscores this trend. In this context, the breakdown of sectors is as follows: Communications Services has exhibited an impressive +38.3% YTD performance in 2023, rebounding from a significant -40.4% decline in 2022; Information Technology reflects a +36.8% YTD performance in 2023, recovering from a -28.9% decrease in 2022; Consumer Discretionary displays a +27.7% YTD growth in 2023, bouncing back from the -37.6% dip in 2022; Industrials show a +7.3% YTD uptick in 2023, compared to the -7.1% drop in 2022; Materials register +3.5% YTD performance in 2023, recovering from a -14.1% slump in 2022; Financials record a slight decline of -1.5% YTD in 2023, following a -12.4% decrease in 2022; Real Estate witnesses a -1.9% YTD performance in 2023, rebounding from a -28.5% contraction in 2022; Energy, positioned within the defensive category, sees a marginal decline of -2.0% YTD in 2023, contrasting with the substantial +59.0% growth in 2022; Health Care encounters a -2.7% YTD decline in 2023, differing from the -3.6% contraction in 2022; Consumer Staples shows a -3.0% YTD performance in 2023, similar to the -3.2% decrease in 2022; and Utilities, defensively positioned, experiences a -11.0% YTD downturn in 2023, as opposed to the -1.4% dip in 2022.
In the previous update, it was noted that the existence of two bullish indicators at their extremes, persisting for a few consecutive days, heightened the likelihood of a positive rebound in the early part of the following week. The market had experienced a decline of approximately 120 points (-2.7%) over the course of the preceding four sessions in the prior week. However, during the initial three sessions of the ongoing week, there was an upward shift of roughly 66 points (+1.5%), effectively confirming the accuracy of this earlier prediction.
The technical levels outlined in the previous communication largely retain their status. These encompass an extended resistance level at 4,600, a shorter-term resistance at the 50-day Simple Moving Average (SMA) – presently positioned at 4,460, and a support level at the former threshold of the bull market, standing at 4,292. It's noteworthy that this support level aligns just below the 100-day SMA, currently situated at 4,313.
Throughout the course of the previous week, the interest rate on the 10-year U.S. Treasury ($TNX) displayed a pattern of fluctuations. It commenced the week at approximately 4.29%, reached its peak around 4.36% in the middle of the week, and then underwent a decline towards the week's conclusion. Presently, as of midday on Friday, 8/25, it stands at around 4.23%, as reported at the time of writing.
On the morning of Friday, August 25, Federal Reserve Chair Jay Powell delivered his address at the Jackson Hole symposium. In his speech, he affirmed the Fed's responsibility to curtail inflation and expressed commitment to attaining the 2 percent inflation target. Powell acknowledged that although inflation had receded from its peak, it remains elevated, hinting at the potential consideration of further rate hikes.
Over the last eight years, encompassing 25 instances of interest rate adjustments, whenever the probability surpassed 65% on the day just before a Fed meeting, it corresponded with a rate hike or cut. At present, the fed funds futures are pricing in a roughly 21% likelihood of a +0.25% rate hike at the meeting on 9/20, and approximately 42% probability of another +0.25% increase by 11/1. Consequently, the cumulative likelihood of at least one more rate hike by 11/1 is around 63%. These probabilities are subject to daily alterations but currently remain in proximity to the 65% threshold, aligning with the expectations outlined in Powell's speech.
As anticipated, there was a rebound from oversold conditions during the past week, and the indicators now suggest the potential for further upward movement in the midst of anticipated volatile and choppy market conditions ahead.
In summary, the previous week witnessed a shift in sentiment among retail traders, marked by equity volume put/call ratios that leaned towards bearishness in the short term. Drawing from historical trends that have exhibited accuracy, this positioned the equity markets for a projected short-term rebound, which materialized during the initial three sessions of the week.
Reviewing the aggregated indicator activity this week, it's noticeable that there were more upgrades than downgrades. Consequently, the overall indication leans towards a Moderately Bullish outlook for the forthcoming week. However, as one indicator remains categorized as Volatile and a significant dispersion persists across indicators, a secondary assessment of Volatile seems appropriate.
Economic reports for next week:
Monday, August 28:
No economic reports are scheduled for this day.
Tuesday, August 29:
The S&P Case-Shiller Home Price Index for June will be released, offering insight into the year-on-year change in average prices of single-family residential real estate across 20 major cities in the U.S. The Conference Board Consumer Confidence for August will also be unveiled, which provides an assessment of consumer sentiment. Among other indicators, factors like gasoline prices and stock market performance significantly impact this measure. Additionally, the Job Openings and Labor Turnover Survey (JOLTS) for July will be published, aiming to gauge the number of available job openings. This data is collected voluntarily from around 16,000 companies within various industries.
Wednesday, August 30:
The ADP Employment Change report for August will be released, drawing data from approximately 400,000 U.S. businesses and 23 million employees in the private sector. Though often seen as a precursor to the official nonfarm payrolls report by the Bureau of Labor Statistics (BLS), it doesn't account for government jobs, leading to occasional discrepancies. The second (Preliminary) estimate of Gross Domestic Product (GDP) for Q2 will also be provided, revising the data about 60 days after the end of the quarter. Additionally, the Pending Home Sales Index for July will be presented, focusing on signed contracts and offering a forward-looking perspective compared to existing home sales data.
Thursday, August 31:
Initial Jobless Claims for the week ending August 19, 2023, will be reported, reflecting changes in unemployment claims. The four-week moving average will be updated as well. The Personal Consumption Expenditures (Core PCE) for July will be released, serving as a gauge for inflation and representing the Federal Reserve's preferred metric. Personal Income and Spending reports for July, which use data from monthly employment reports, will help gauge income trends and forecast consumer spending. Additionally, the Chicago PMI for August will provide insights into business conditions within manufacturing and service firms in the Chicago area.
Friday, September 1:
The Monthly Employment Situation for August will be a comprehensive release including various labor market indicators such as Nonfarm Payrolls, the Unemployment Rate (U-3), Average Hourly Earnings, Average Workweek, Underemployment Rate (U-6), and Labor Force Participation Rate. This set of reports, often released on the first Friday of each month, offers a broad view of the labor market. Furthermore, the Construction Spending report for July will provide information about new construction activity, offering potential predictions about future housing and economic growth. Lastly, the ISM Manufacturing Index for August will be released, tracking economic data from manufacturing companies and indicating trends in the sector's profitability. An increase in this index is generally seen as favorable for equities, suggesting growth in manufacturing sector profits.
Previous update:
The regular second-quarter (Q2) earnings reporting period is almost concluded. In the past week, 15 companies listed on the S&P 500 index released their Q2 earnings, with 14 of them surpassing the anticipated consensus earnings per share (EPS) expectations.
In total, 471 firms (94%) within the S&P 500 index have disclosed their Q2 financial results to date. Here are the collective rates of exceeding expectations compared to figures from recent quarters.
In terms of growth, Q2 earnings have exhibited a year-over-year decline of -7.5% up to this point, slightly below the initial estimate of -6.8% at the close of Q2. Likewise, Q2 revenues have shown a year-over-year increase of +0.9% so far, surpassing the initial estimate of -0.4% as of the conclusion of Q2. This stands in comparison to the final growth percentages of -2.8% and +4.3% respectively observed during the first quarter (Q1).
Throughout the latter part of 2023, there has been a discernible shift away from a pronounced cyclicality trend within the market. The performance of various market sectors during the year-to-date (YTD) period in 2023, juxtaposed against their performance for the entire year of 2022, becomes evident through a breakdown of the 11 distinct market sectors, as of the closing figures on August 17, 2023. The sector landscape unfolds as follows:
In the realm of Communications Services, a remarkable upswing of +38.6% in YTD performance is observed, standing in stark contrast to the sharp -40.4% decline experienced in 2022. This sector firmly aligns with the cyclical classification. Likewise, the Information Technology sector portrays a robust +34.3% YTD performance, diverging from its -28.9% performance trajectory in 2022, showcasing its cyclical nature.
In the domain of Consumer Discretionary, a positive YTD performance of +28.1% is witnessed, in contrast to the steep -37.6% slump encountered in 2022, further reinforcing its classification as cyclical. The Industrials sector, with a YTD performance increase of +7.8%, differs from its -7.1% showing in 2022, substantiating its cyclical categorization.
Materials sector, experiencing a YTD performance uptick of +3.9%, diverges from its -14.1% performance in 2022, echoing its cyclical nature. In the Energy sector, a marginal YTD decline of -0.5% contrasts with its substantial +59.0% performance surge in 2022, placing it in the defensive category.
The Financials sector undergoes a YTD performance decrease of -1.1%, distinct from its -12.4% performance in 2022, upholding its cyclical character. Health Care, with a YTD performance dip of -2.0%, as against its -3.6% performance in 2022, exemplifies a defensive sector.
Consumer Staples, recording a YTD performance drop of -2.1%, veers away from its -3.2% performance in 2022, aligning with the defensive classification. Meanwhile, Real Estate's YTD performance registers a decrease of -2.6%, in contrast to its -28.5% performance in 2022, reinforcing its cyclical nature.
Lastly, the Utilities sector displays a significant YTD performance decline of -10.9%, differing from its -1.4% performance in 2022, further solidifying its position within the defensive category.
Given the SPX's decline of -93.69 points (-2.1%) over the course of the week, it appears evident that the prediction from the previous week regarding a "breakout," wherein the SPX would exhibit trading movement of around 1.0% in either direction by the end of the week, has proven to be quite accurate. This movement was notably driven by the shifts in bond yields. Treasury Yields, it can be asserted, have significantly contributed to the recent weakness observed in the equity market since the commencement of August.
Reflecting on observations made two weeks ago, it was noted that a resilient resistance level was found at 4,600 in the near term, and anticipation for support around 4,450 was evident. Upon examining the current situation, the resistance at 4,600 continues to exert its influence. While fleeting support was briefly witnessed at 4,450 during the past week, this support proved short-lived. It's noteworthy that the confluence of the 4,450 level and the 50-day Simple Moving Average (SMA) faltered on Tuesday (8/15), indicating a potential enduring resistance point for the SPX in future upward movements. However, an alternative point of interest emerges at the junction of the 100-day SMA and the previous bull market threshold (approximately 4,292), which might serve as a robust point of downside support should the SPX maintain its downward trajectory in the immediate future.
Starting the week around 4.18%, the interest rate on the 10-year US Treasury ($TNX) displayed a continuous climb throughout the week, reaching a significant point of technical resistance at 4.33% on late Thursday (8/17), as demonstrated in the provided data. This resistance has its roots as far back as 10/21/22, and achieving a yield beyond this mark necessitates a look back nearly 16 years to 11/7/07. Presently, the rate stands at around 4.23% as of mid-day Friday (8/18).
On Wednesday (8/16), the FOMC unveiled the minutes from their July meeting, which highlighted the continuing divergence of opinions among committee members regarding the necessity for further tightening measures. Over the past 8 years encompassing 25 interest rate adjustments, a probability exceeding 65% on the day preceding a Fed meeting has consistently led to a rate hike or cut. In the current context, the Fed Funds Futures are indicating roughly a 10% likelihood of a +0.25% hike at the 9/20 meeting and about a 26% probability of another +0.25% change on 11/1. Naturally, these probabilities are expected to undergo multiple revisions in the period leading up to the respective meetings.
In terms of outlook, the long-awaited decline has finally materialized, with the data reflecting a nearly 5% drop in the past 2? weeks. This suggests the potential for a near-term rebound before the downward trend resumes.
In summary, the message that high yields, overextended stock prices, stagnant earnings, and a sluggish China have conveyed to retail traders has been heeded. The prevailing conditions do not favor an unabated bullish sentiment, as the environment is not conducive to it.
Reviewing the indicators provided, a significant variance emerges this week. Notably, two bullish extremes have been in place for a few days, implying a reasonably favorable chance of an early-week Bullish rebound.?Yet, in the absence of these extremes, the overall forecast for the upcoming week leans Moderately Bearish. This secondary outlook appears logical, considering the broader context.
Looking ahead to next week's economic reports, Monday, August 21, has no scheduled releases.
Previous update:
Stocks are facing a predominantly downward trend today in response to the Producer Price Index (PPI) report's unexpectedly high inflationary data released this morning, leading to an uptick in bond yields. Both the headline and core PPI figures stood at +0.3%, surpassing the projected +0.2% for both categories. Moreover, the year-over-year statistics exceeded estimates, with the headline at +0.8% instead of +0.7%, and the core at +2.4% instead of +2.3%. As of the current writing, the SPX index has declined by approximately 0.3% for the week, settling near its lowest point in the past month. This recent downturn in the stock market over the last two weeks might be attributed to bearish seasonality, near-term bearish technical indicators, and a lack of additional bullish catalysts, given the conclusion of Q2 earnings season.
The Q2 earnings season is nearing its completion, with around 90% of S&P 500 companies having reported their results. Of these, 58% have surpassed revenue expectations, and an impressive 79% have exceeded bottom-line estimates. These figures compare to the respective percentages of 67% and 78% in the previous quarter. Notably, several notable companies are scheduled to announce their earnings next week including Home depot, Agilent Technologies, Cisco, Applied Materials, Deere & Company and others.
The Cboe Volatility Index (VIX) has seen a moderate increase, rising by 0.12 to 15.97, indicating a relatively heightened level of volatility in August as stocks have encountered selling pressure. The recent upturn in the VIX might also be attributed to the typical bearish seasonality associated with the August-September period. Essentially, the rising VIX suggests an increasing demand for protective measures, with VIX traders anticipating potentially larger movements in the SPX. For context, a VIX reading around 16 translates to approximately a 37-point daily fluctuation in the S&P 500, either upward or downward.
The S&P 500 is currently extending its recent decline and seems to be in the process of testing the support level represented by its 50-day Simple Moving Average (SMA) today. Indications of a potential shift in trend started emerging on the Relative Strength Index (RSI) in late July. This was manifested as negative divergence, implying that the RSI was establishing lower highs while the SPX was achieving higher closing highs. A clearer understanding of whether the 50-day SMA will successfully act as support is likely to emerge by the upcoming week. Until then, it might be advisable to adopt a relatively cautious approach, especially considering the presence of bearish seasonality in the near future.
The technical indicators for the Nasdaq 100 appear somewhat more concerning in comparison to the S&P 500, given that the NDX is currently descending to its lowest points since late June and is positioned below the 50-day Simple Moving Average (SMA). The recent decline in the Nasdaq 100, which is largely composed of technology stocks, can likely be attributed to the recent uptick in bond yields. This rise in bond yields tends to have a negative impact on assets with longer durations, thus affecting the relative weakness in the tech-heavy NDX.
The upward movement of 10-year yields is persisting today, potentially influenced by the hotter-than-expected Producer Price Index (PPI) report released this morning. If the current trajectory continues, there's a possibility of testing the previous cycle peak of 4.33% seen in October last year, which could result in further decline for stock prices. Elevated yields generally reduce the appeal of equities in terms of valuation, particularly for assets with longer durations, and they also elevate the cost of capital for smaller businesses, which could negatively impact future profits. Therefore, this situation warrants close observation. Although inflation has been on a downward trend, the increase in yields might be partially attributed to heightened treasury issuance for fiscal stimulus and the potential unwinding of the yen carry trade.
As today's trading session enters its final hour and a half, stock performance remains varied, with the Dow Jones Industrial Average (DJI) up by 70 points, the S&P 500 (SPX) down by 7 points, and the Nasdaq 100 (NDX) down by 91 points. As earnings season reaches the 90% mark, it is anticipated that the upcoming week's price movements will be primarily influenced by technical factors and changes in bond yields. The Nasdaq 100 seems to be heading towards a close below its 50-day Simple Moving Average (SMA), while the S&P 500 is displaying some signs of support as it approached its own 50-day SMA earlier in today's session. A potential scenario involves a relief rally if 10-year yields retreat slightly and the S&P 500 maintains its support at the 50-day SMA. However, the situation could take a downturn if yields continue to climb.?A potential "breakout" could take place next week, indicating that the S&P 500 might experience a movement of approximately 1.0% either higher or lower by the end of next Friday, primarily influenced by the direction of bond yields.
Here's a preview of the economic releases scheduled for next week:
Previous update:
As we approach the end of the regular Q2 earnings season, 165 companies in the S&P 500 have recently reported their Q2 earnings this week, with an impressive 129 of them surpassing the consensus earnings-per-share (EPS) expectations. So far, a total of 420 companies in the S&P 500 have disclosed their Q2 results, accounting for 84% of the index's constituents. Comparing the current Q2 results with previous quarters, the growth outlook indicates a year-over-year decline of -8.1% for earnings, slightly worse than the estimated -6.8% at the end of Q2. On the other hand, Q2 revenues have performed slightly better, showing a year-over-year increase of +0.1%, compared to the projected decline of -0.4% when Q2 concluded. In comparison, the final growth rates for earnings and revenues in Q1 were -2.8% and +4.3%, respectively.
As of August 3, 2023, the market in 2023 continues to show a cyclical bias, with most sectors experiencing significant year-to-date (YTD) gains compared to the full-year performance of 2022. The Information Technology sector has been particularly robust, showing an impressive YTD growth of +41.7%, significantly rebounding from its -28.9% performance in 2022. Similarly, the Communications Services and Consumer Discretionary sectors have also seen remarkable YTD growth at +41.1% and +31.9% respectively, compared to their negative performances in 2022. Industrials and Materials sectors have also made substantial recoveries, recording YTD gains of +10.8% and +7.7% respectively. However, not all sectors have followed the cyclical trend, with some showing defensive characteristics. The Energy sector, while performing exceptionally well in 2022 with a growth rate of +59.0%, has experienced a slight decline in 2023 with a YTD performance of -1.4%. Similarly, the Health Care and Utilities sectors have also registered negative YTD growth rates of -2.4% and -8.3% respectively, although their 2022 performances were relatively stable. Overall, the market's performance in 2023 indicates a clear focus on cyclical sectors, with some defensive sectors facing challenges.
At the close of Thursday, the SPX experienced a significant decline of -80.34 points (-1.8%) for the week, indicating that last week's "neutral" outlook missed its mark. Over the past two weeks, there had been a prediction of a possible 5% or less pullback at any moment, and from Monday's (July 31) high to Thursday (August 3), the aggregate decline amounted to -1.9%, aligning with that expectation.
As of Thursday's close, the SPX remained at a level 25.8% higher than its low point of 3,577 on October 12, 2022, but it was still 6.6% below its all-time high of 4,796 achieved on January 3, 2022. While there is a belief that the SPX will eventually reach new highs in 2023, the near-term resistance at 4,600 seems formidable. If the index were to drop further, there might be some support around 4,450, assuming it reaches such a level. As of midday Friday, August 4, the SPX has seen a slight uptick of +37 points (+0.8%).
Throughout the week, the 10-year U.S. treasury interest rate ($TNX) started at approximately 3.98% and steadily increased until Friday, when it experienced a slight pullback. Currently, at midday on Friday, August 4, it stands at around 4.07%, marking a new nine-month high.
Over the past eight years, with 25 interest rate changes, whenever the probability exceeded 65% on the day preceding a Federal Reserve meeting, a rate hike or cut has been implemented. Presently, the fed funds futures indicate a roughly 12% chance of a +0.25% rate hike at the September 20 meeting, and approximately a 20% chance of another +0.25% increase on November 1. These probabilities are subject to daily fluctuations until the official announcement.
Midweek volatility spurred by multiple catalysts settled down towards the end of the week, resulting in calmer markets.?Indicators suggest that next week may see more consolidation and sideways movements as the most probable scenario.
Following the U.S. Treasury downgrade by Fitch on August 1, interest rates surged, leading to a 1.38% decline in the SPX, the largest daily drop since late-April. Simultaneously, the VIX (volatility index) soared to a three-week high. However, as July's employment data was released with moderate figures, the markets settled down by week's end.?This week saw a relatively balanced number of upgrades and downgrades, but overall, the indicators are largely neutral across various aspects.
Next week's economic data releases are as follows:
Previous update:
As we are now in the peak of the regular Q2 earnings season, a significant number of S&P 500 companies have already reported their Q2 results. This week alone, 159 companies from the index released their earnings, with an impressive 136 of them surpassing the consensus earnings-per-share (EPS) expectations. So far, a total of 262 companies (52%) have reported their Q2 results, and the aggregate beat rates are compared to the final results from recent quarters.
From a growth perspective, Q2 earnings are currently showing a decline of -1.8% year-over-year (y/o/y), which is better than the estimated decline of -6.8% projected when Q2 ended. Similarly, Q2 revenues have seen a positive growth of +2.0% y/o/y, outperforming the estimated decline of -0.4% projected at the end of Q2. These figures indicate a more favorable earnings and revenue trend compared to the final growth rates of -2.8% and +4.3%, respectively, observed in the previous quarter (Q1).
As of July 27, 2023, the market continues to show a clear cyclical bias with almost one-third of Q3 completed. The year-to-date (YTD) performance of the 11 market sectors compared to their full-year performances in 2022 highlights significant trends. Among the cyclical sectors, Information Technology has made an impressive comeback, registering a remarkable YTD gain of +43.5% after facing a substantial decline of -28.9% in 2022. The Communications Services sector also demonstrated strong growth, recording a YTD increase of +41.5% following a significant downturn of -40.4% in 2022. Similarly, the Consumer Discretionary sector displayed resilience, bouncing back with a YTD rise of +32.3% after experiencing a sharp loss of -37.6% in 2022. Industrials have shown steady progress, achieving a YTD growth of +11.4% after encountering a decline of -7.1% in 2022. Materials recovered from the previous year's decline, posting a YTD gain of +8.9%, compared to a decrease of -14.1% in 2022. Despite challenges, the Real Estate sector managed a modest YTD increase of +2.6%, showing improvement from the significant loss of -28.5% in 2022. Financials have also made steady strides, recording a YTD growth of +2.4% after facing a decline of -12.4% in 2022. On the other hand, the defensive sectors displayed varied performance. Consumer Staples maintained relative stability, achieving a YTD gain of +1.4% compared to a slight decline of -3.2% in 2022. Health Care faced some headwinds, experiencing a marginal decline of -1.0% YTD, showing a modest improvement from the -3.6% loss in 2022. The Energy sector showed a mixed trend, facing a YTD decrease of -2.5% following a substantial gain of +59.0% in 2022. The Utilities sector encountered challenges in 2023, resulting in a YTD decline of -4.8%, although this is not as significant as the -1.4% dip in 2022. The data underscores the prevailing cyclical trend in the market, with sectors like Technology, Communications, and Consumer Discretionary leading in robust performances, while defensive sectors such as Utilities and Energy have exhibited mixed performance when compared to their strong showings in 2022.
The SPX ended Thursday's trading session with a minimal increase of +1.07 points (+0.02%), aligning closely with the "neutral" outlook mentioned in the previous week's analysis. The prediction of a potential 5% or less pullback was seemingly confirmed as there was a significant selloff of around 70 points in the final two hours of trading on Thursday (7/27). However, Friday's market open with a gap up suggested that the pullback might not have fully materialized.
The sharp plunge on Thursday was triggered by two key events. Firstly, technical resistance was encountered at the 4,600 level. Secondly, a notable spike in US Treasury yields was observed when the Bank of Japan (BoJ) announced plans to modify its yield curve control policy, allowing the -0.5% to 0.5% range to function as reference points instead of strict limits. At the close of Thursday's trading session, the SPX remained 26.8% above its low on 10/12/22, which stood at 3,577. However, it was only 5.7% below its all-time high of 4,796 reached on 1/3/22. On Friday we saw a sharp rebound.
Throughout the week, the interest rate on the 10-year U.S. treasury experienced fluctuations, starting at approximately 3.81% and reaching around 3.98% at mid-day on Friday, July 28th.
Historical patterns have shown that whenever the probability of a rate hike or cut exceeds 65% just before a Fed meeting, such a change has typically occurred. On July 25th, the probability of a rate hike on July 26th was 97%, and the Fed proceeded with a +0.25% increase, marking the 11th increase in this cycle. Currently, the Fed Funds Futures indicate approximately a 22% chance of another +0.25% hike at the September 20th meeting and about a 17% chance of another +0.25% increase on November 1st. These probabilities are subject to change up until the announcement.
While economic data during the week showed a mix of results, the overall economy appears to be growing at a steady pace, the labor market remains robust, and consumer spending continues. Despite some positive economic indicators, technical resistance may hinder significant upside advances.?As a result, the outlook for the upcoming week remains mostly neutral, with the potential for a largely sideways market.
Upcoming Economic Reports for Next Week:
Monday, July 31:
Tuesday, August 1:
Wednesday, August 2:
Thursday, August 3:
Friday, August 4: