I know, all you seasoned traders and money managers out there predicted this week's market rally last Friday night.
Kudos to all of you; even a blind horse has to find water at least once. Amid the stench emanating from sweaty victory laps, there remains a reality that suddenly everyone has managed to forget over the course of a decent bounce-back in the markets. That is, there continues to be several areas of the market that are sending conflicting signals against the backdrop of a relief rally, which is how I would characterize something that is unlikely sustainable in nature. Because, let's be real, people -- we could be about to have a grenade tossed into our laps in the form of second-quarter earnings season, and that may blow up the relief rally altogether.
First, keep in mind that global growth slowed before the Brexit, especially in the U.S. For all those sell-side analysts who were enamored by another sluggish quarter by sneaker giant Nike (NKE), in truth, the company's results in North America were tepid due to weak spending on expensive apparel and basketball sneakers. Hence, Nike had to liquidate stuff at TJX Cos.' (TJX) TJ Maxx again.
Second, any company that stunk up the joint in the second quarter will now use Brexit -- which has pushed up the dollar and raised concerns on global growth -- as reasons to slash guidance and potentially announce more cost-saving measures -- which cereal king General Mills (GIS) announced Wednesday.
And finally, those companies that did operate OK in the second quarter will be in no hurry to try to inspire investors by jacking up full-year guidance. What is the payoff for them? A potential short-term pop in the stock during a faux stock rally, but a possible hammering later in the year when a stronger guidance is missed? Thanks, but, no thanks.
Here are a couple of signs in the market that the rally could be short-lived.
Financials Continue to Lag
Treasury yields have plunged post-Brexit. Fed funds futures now indicate there will be no increases in interest rates until the end of 2016, at the earliest. Rumors are rampant the Fed may actually be forced to cut rates due to Brexit uncertainty. Meanwhile, the dollar has strengthened, which further clouds the outlook for U.S. growth. Hence, financials have lagged the broader market this week.
But if investors were that confident Brexit doesn't mean a hill of beans to forward earnings for S&P 500 companies, they would be buying financials, too. They aren't, and that is a red flag.
Consumer Staples Remain in Favor
Consumer staples continue to be viewed as growth stocks ... oops, I mean safe havens. The bullishness on staples this week just doesn't square with the renewed appetite for stocks. If the rally was real, investors would be unwinding this trade amid hope for multiple expansion and earnings acceleration for faster-growth names in the market.
Still No Bids for Materials
If the market reaction to the Brexit Friday was way off base, then materials-related stocks such as Caterpillar (CAT), Alcoa (AA) and Joy Global (JOY) would be falling back into favor during the rally. The hypothetical thesis: Global growth will remain steady to pick up slightly in the months ahead despite the Brexit, and materials stocks that got too oversold.
However, that isn't happening.