STRAIGHT FROM THE TRADING FLOOR
by Michael P. Reinking, Sr. Market Strategist
Patricia Medina - Market Strategy Analyst
DOW 39,132 (+62), S&P 500 5,089 (+2), Russell 2000 2,017 (+3), NYSE FANG+ 10,004 (-28), ICE Brent Crude $81.68/barrel (-$1.99), Gold $2,046/oz (+$16), Bitcoin ~51.0k (-1082)
From an equity market perspective this week was really the tale of two halves, with Nvidia earnings acting as the demarcation point. Coming out of the long weekend US equity markets pulled back modestly to start the week. There was some rotation as tech/growth stocks underperformed as investors took some chips off the table ahead of this catalyst. You could see the anxiety building as the VIX had moved up to around 16 from 14 last week, in an otherwise quiet tape. That uneasiness went up another notch after Palo Alto cut revenue guidance after the close on Tuesday sending the stock sharply lower and pulling the entire cyber security and technology sectors with it.
Early in the week the S&P 500 pulled back to test its 20d ma, a technical level that has been respected since this rally began at the end of October, but it never broke. Heading into its announcement Nvidia had pulled back ~10% from last week’s high, leaving it up “only” 36% YTD. We all understand the importance of this company as it is the poster child for the technological renaissance that is underway, but it is very rare that a single earnings report captures this much attention.
With the weight of the world seemingly on his shoulders Jensen Huang delivered, beating the very high expectations and convincing investors that this will be a long and durable investment cycle. Yesterday the stock was up >15% adding over $275B of market capitalization, the largest one-day increase in history. That one day market-capitalization gain is also larger than all but 26 of the companies in the S&P 500.
This seemed to trigger a collective sigh of relief from traders around the world and kicked off a global risk on rally. While we have become somewhat desensitized to new all-time highs here in the US this also helped the Nikkei hit its first new all-time high since 1989. We had some fun with what was going on back then in our notes yesterday, so I’ll spare you a repeat performance, but just to put things in perspective the S&P 500 was around 350 at the time. According to Statista, in 1989 6 of the 10 largest companies in the world by market-capitalization were in Japan. The only two companies of that 10 that remain in the top 50 around the globe are Exxon and Toyota.
As I think we made abundantly clear already Nvidia earnings were the biggest catalyst this week. After a couple of busy weeks of economic data, the calendar was a bit lighter this week. Broadly the data continues to point to a resilient economic backdrop with some of the survey data pointing to a potential re-acceleration.
Earnings from the first of the major retailers were solid and did not point to a significant drop in consumer spending following the holiday season. Operational efficiency and cost cutting helped the bottom line. From a macro perspective, management teams suggested there is more disinflation in the pipeline something we also heard from some of the food products companies last week.
There was broad participation across most major US indices and sectors. Small caps continued to underperform ending the week down modestly as these stocks are struggling with the prospects of rates staying higher for longer. Within the S&P 500 every sector ended the week up over 1% with the exception of energy, though it did end modestly higher.
Global Markets - As mentioned above there was broad participation around the globe.
China - Coming out of the extended holiday indices in China rallied pretty sharply with the China Shanghai Composite up nearly 5% this week, reversing the YTD losses. The PBOC cut its 5yr Loan Prime Rate, which is the reference rate that most impacts mortgage lending, by 25bps which was more than expected. The government continues to take action to try and stabilize both property/financial markets. There was an interesting Bloomberg article discussing losses at quant funds recently which potentially has been adding to some of the volatility and caused regulators to institute a 3 day trading ban on one of the larger players.
Gains across other geographies were more muted in the neighborhood of up ~1%.
As mentioned above a quieter week from a data perspective. Global flash PMIs were released this week. In Europe the surveys continued to point to continued contraction within manufacturing while services improved. In the US that dynamic was opposite with manufacturing moving higher and remaining above 50, the demarcation line of growth, for the second consecutive month. Before last month this had been below that threshold in 13 of the previous 14 months. Growth on the services side moderated as did employment growth with services staffing being called out. The prices components remained well contained.
For the first time in two years the Conference Board’s Leading Indicators did not signal a recession with 6 of 10 components turning positive. Claims data also moved lower this week as well. This data all continues to point to a resilient economic backdrop. As we’ve noted over the last year there has been a disconnect between the soft survey data which was pointing to a slowing economy and hard data which was strong. Some of that soft data has started to turn a bit higher which if proven correct would definitely feed into that soft or no landing narrative.
This week central bankers were out in force continuing to drive home the message that they are in no rush to begin cutting rates. Markets have repriced over the last couple of weeks and expectations for the first-rate cut have now been pushed back to the middle of the year. This week there was some slight flattening of the curve with the 2yr modestly higher while the long end of the curve was slightly lower which all came during today session as 10/30yrs were down ~8bps, but why is a little bit of a head scratcher.
The USD index pulled back modestly unwinding the post CPI spike but continuing to hold above the 200d ma.
Corporate Credit spreads continued to tighten this week. EM led the spread compression in HY. Demand for IG paper remained strong leading to modest tightening. Cisco Systems, Inc sold $13.5BN of bonds rated AA- in the US IG market to partly fund the $28BN acquisition of Splunk Inc. The deal had seven tranches with the 40yr bond yielding 90bps over Treasuries after initial guidance in the 1.25% area.
The Technicals Still Matter
The index pulled back to test first support early in the week which held and after Nvidia earnings the rest is history. The RSI divergence we've mentioned continues to get more marked. Today we saw some profit taking in the large cap names into strength. There was broader participation this week with the technical picture for the equal weight version improving (see last week's comments in sections below)
After hitting record highs last Friday there was some upside follow through to start the week. Tuesday the market gapped lower and traded down to test last week’s low and nearly tag the 20d ma. That gap got filled over the next couple of days before fading into the close today.
As we’ve noted there has been a momentum divergence recently with RSI not confirming price as we move higher. On a weekly basis RSI has finally gotten in to “overbought” territory as well (Chart 2). The index had closed higher in 14 of the previous 15 weeks since this rally started at the end of October before this week's modest pullback. The market seems a bit susceptible to a pullback or at least some consolidation.
On the downside the first levels to watch are the 20d ma ~4,950 and then Tuesday’s low at 4,920. Below that a retest of the 50d and 4,800 the level we broke out from would all fall in the context of a normal pullback within an uptrend and be reasonably healthy.
I do want to highlight that the picture for the equal weight version of the index is very different as it has been consolidating for 2 months. This does suggest that we could start to see some more rotation. Included same time frames as above for comparison.
Next week it will continue to be a busy week of earnings from the late cycle tech/retail companies we also get Berkshire Hathaway earnings over the weekend. On Tuesday durable/capital goods orders and consumer confidence will be released. Most of the key economic data will be related to inflation with US PCE and CPIs in Japan/Europe. On Friday, ISM manufacturing will get some attention, recall there was a big jump in the prices component in January so this will be closely watched. PMIs in China PMIs are also out on Friday. Next week there is ~$169B of Treasury auctions across 2/5/7yr maturities. This week's 20yr auction went very poorly but that is not the most liquid tenure so markets shrugged that off, but markets will pay extra attention next week. New Zealand has a rate decision next week with some speculation that they could hike. Thursday is a Leap Day, month end and the MSCI Quarterly index rebalance. Enjoy the weekend!