The Fuse
What are futures doing?
After a heavy session yesterday futures are following through with more downside, nearly .6% down on the open but Nasdaq futures down more, over 1% on heavy trade. We’ll see if it changes much before the open, but the hot sectors are getting clipped.
News
European exchanges actually rose up last night, the STOXX up .1% led higher by nice gains in France and Germany. FTSE was flat, so was the US dollar index. Crude oil is slipping, Gold is higher but silver is slightly lower. Yields are mostly lower, German bunds off 1bp while 10 yr US yields down 2bps. Japan has been volatile, Nikkei down 1.4%, Hong Kong down the same and Shanghai off .6%.
Volatility
Volatility is starting to rise up again, mostly due to the fact it fell too much and was showing investor complacency. That is not unusual but with the markets up so high any .5% or more drop in the indices feels like a death spiral is beginning. VIX over 18 for a couple of days would be problematic, but we are not there yet.
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Interest Rates
Modest moves lower in yield as some bond traders are looking for the safety trade as volatility is starting to rise up. Lower yields on the long end as a curve flattener kicks in. Tomorrow’s labor report may move bonds, too. 2/10 spread remains stable, fed funds futures actually see a 4% chance of a cut at the next meeting in two weeks, very interesting. The FOMC is unlikely to move policy.
Earnings
Solid earnings from Broadcom and Crowdstrike last night but the stocks are getting punished. They both ran up hard prior to earnings, so it makes sense to see a retreat. PVH missed badly, Five Below beat and raised but it is selling off. Veeva beat but offered only mixed guidance. Today we hear from Ciena, later tonight Lululemon, Docusign, Guidewire, Rubrik and Samsara.
Events
Rough day for the bulls as the walls started tumbling down from the start of trading. No bids at on on this Wednesday, we had been talking lately about the weaker internals for several days and that eventually the market would catch up to it. A mild pullback could be 2-3% before a reset happens, but that might feel like the end of the world. Uptrend would still be in tact.
Breadth
Horrific breadth but it certainly could have been worse. Some of the recent big time names were spared and actually rose up, but the weight of the Mag 7 was heavy and that brought the markets tumbling down. Oscillators are firmly in the red but not quite oversold yet, new highs and new lows stand at a draw, still not on a buy signal.
Volume
Heavier turnover on a down day means only one thing: distribution. We had that on the small caps, Nasdaq and SPX 500, though the industrials were down the most but did not reflect the heavy turnover. Still it counts as a negative, just not distribution yet. Some are seeing this as an intermediate top and might use this as an excuse to do some selling, hence removing some of the froth that has been created the past two months.
Support Levels
For those looking for a test of support, they did not get it yet but this pullback would be step one of the process. No doubt the 20 ma is going to be the target for testing next, about 1.5% away from current levels and rising quickly. If that can be tested successfully then we could have a rally develop.
The Internals
After several days of blah internals finally something cracked and pushed the bulls over the edge. We have not had this sort of weakness in awhile, and if there is followthrough then there is more to worry about. Those ticks show where there power was on Wednesday, it was sell programs galore. VOLD and ADD were miserable all session and closed on their lows, the VIX still seems tame but give it a chance to rise and protection will be reached for.
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The Dynamite
Economic Data:
- Thursday: Jobless claims, productivity, Barkin speaks
- Friday: Labor report for May, wages, consumer credit
Earnings this week:
- Thursday: CIEN, CAL, CMCO, BF.B, TTC, RBRK, PL, LULU, DOCU, IOT, GWRE, TTAN, QX
- Friday: ABM, GIII
Fed Watch:
It was a loud week for fedspeak as several speakers came out with opinions of the current economic environment. There is no way the committee can be happy with the current inflation situation and outlook, but we have yet to hear from Chair Warsh and his views.
Stocks to Watch
Big Cap Tech – A renaissance of sorts, the big names like IBM, Oracle and Microsoft along with Dell had a phenomenal month, not to mention Intel as well. Can the surge continue? It’s possible but look for some sort of retreat soon.
Energy – Oil prices finally dropped sharply this week after it appeared the Iran War may be winding down. A few more details to get the Strait of Hormuz open and then crude may decline more.
Interest Rates – Long rates are slowly moving downward and that would be a positive for stocks, especially small caps. Can yields fall enough if inflation numbers are rising?
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