What do you hear? A day at the beach. When you were a kid, you would find a nice sized sea shell, put it up to your ear, and hear the ocean. How nice.
What Do You Smell?
They don't just grow there? You innocently pulled flowers out of your neighbors garden and gave them to your Mom. She smiled, put them up to her nose, gave them a sniff, and then explained why you had to go next door, give them to Mrs."So&So" and then apologize.
How Do You Feel?
Fine, thank you... I think. Why do you ask?
Too Much, Too Soon?
Do you hear the sirens blaring from afar? Do you smell the danger? Sometimes you actually can. How does/did it feel? Crummy, I bet. Financial markets are telling us something, so it seems. Two down days and everyone looks at each other. Gut check? I don't welcome a tougher environment for making money any more than the next guy, but I mean just what were we pricing in? Absurdly loose fiscal policy on top of perversely loose monetary policy as the SARS-CoV-2 coronavirus just backed away once the vaccines worked their magic? Sounds dreamy.
That is precisely what we priced in. Equity markets led broadly by the bond market, but more acutely by US Treasury markets are telling you that they don't know right now. Not catastrophic. Yet. You haven't seen the "ugly stick", but you can hear the stick warming up in that box over there. Don't you go near that box, Pandora... How many times have I told you to stay away. The stick needs no help once it gets out and about. Fear and sentiment need very little in order to turn and turn on a dime they can.
"They" are trying to sell the US Ten Year Note once again, this overnight (Tuesday into Wednesday), they tried 24 hours ago, and then turned on their own dime. I have been writing for weeks now that Fed Chair Jerome Powell may or may not be correct, but the "transitory" inflation narrative did indeed have merit. The bond market now plays the role of the pied Piper, and all other financial markets the role of scores (skillions) of rats just willing to be led wherever it is that the piper leads.
Equity markets? What you might (yes, might) have thought. A second consecutive down day for most of your large-cap headline level indices. Horrendous looking breadth, on increasing trading volume at least at the "big board." The only large-cap equity index to sport any green upon the market's close on Tuesday were the Dow Transports and that was more about the bidding war for Kansas City Southern (KSU) than it was about anything else. Nice bid? No kidding. The loser of this "jump ball" between Canadian Pacific (CP) and Canadian National (CNI) may end up being the winner. Oh, on equity indices, the further you travel down the scale of market capitalization, the uglier it got.
The sector breakdown for Tuesday could not have been handled with more precision than if it had been done by a surgeon. We have spoken of defensive leadership over the past several days, as the Bank of America's (BAC) HNW client data shows that the bank's customers were net sellers of $5.2 billion worth of equities last week, which was the fifth largest weekly outflow on record for that particular metric. All as the banks reported, ahead of the rest of corporate America... an earnings season that we all expect to be excellent. On Tuesday, four sectors shaded green, they were of course the four defensive sectors, followed by the two "growth" sectors, who were in turn trailed by the five cyclical sectors. Kooky. Almost as if this were completely done by computers using algorithms or something.
So, What Changed?
Or what did not change? The virus still runs rampant. Heavily populated nations such as India and Brazil appear helpless in their efforts to flatten the curve. So many available individuals. So many chances to mutate... and mutate, the virus will. Toronto takes emergency measures to mitigate spread, as does Tokyo. The U.S. is in much better shape, you say, yet 40 of 50 states show higher seven day average new infection rates over their 14 day average of new infection rates. Hmm. Apparently our most overtly social, and least vaccinated demographics are finding out that the mutations of this virus are far less willing to leave our young adults and our youth unharmed. This is a problem.
Even if we were in better shape than the rest of the world, and the virus were to leave our younger folks alone, you do understand that we can not dance completely by ourselves, right? I think we have learned, in some cases the hard way, that organic economic growth has to come from both the internal as well as the external. Both pure protectionists and pure globalists are right and wrong. 50% wrong to be precise. In this case, however, we may have no choice as the rest of the planet may have to focus on their very survival over economics for now.
But Wait, There's More...
So, it would seem that markets may have already priced in an economic rebirth, without reminding themselves that the virus remains in charge until it is not. Bond markets see both current and coming inflation as transitory... unless they are flashing a different kind of fear. A fear that few, very few understand. Don't look at me. I never ran anything larger than a platoon. What if the market is pricing in the risk of significant martial aggression by large economic nations with "peer" military capabilities? That would be very bad.
No one speaks of this. As Russian forces appear to mass on what passes at this time for the Ukranian border. As Communist Chinese forces fly 25 fighter aircraft over Taiwanese air space. Think the Russians won't try to annex Ukraine's bread basket? They took Crimea and its environs back in 2014. They consider that ground theirs and they might be judging U.S. or EU reaction. Will it be as weak as it was in 2014?
Then there is Taiwan. The autonomous island nation that is the successor of the nationalist Chinese government that was overthrown in 1949 by the communists. Beijing still considers Formosa to be within its jurisdiction. For that matter, Taipei may consider Beijing within their jurisdiction, except Taiwanese forces are not (or can not) behaving aggressively. We have all seen what the Chinese central government has done to Hong Kong. There was some yelling, but the world really took a pass. The UK, for the most part as the nation with a truly legitimate beef here, other than "just for show" really took a pass. Soccer is easier to fight about.
Obviously, both Ukraine and Taiwan are not defenseless. Invasion and occupation would be costly. Does that matter to Moscow? Does that matter to Beijing? These are answers we do not know to questions that we must ask. What does Poland do? That's NATO. What does Japan, South Korea, or Vietnam do? More importantly, what does North Korea do? Lastly, what does President Biden do? Does anyone believe that North Korea sits on its hands as conflict erupts elsewhere. You wanted to know what could go wrong. A whole lot can go wrong. Push-ups. Begin.
On Tuesday morning I showed you both an S&P (Small Cap) 600 and a Philadelphia Semiconductor Index that were both perched upon their respective 21 day SMA and from varied distance threatening their 50 day SMA's. The small- caps not only knocked on that door, they kicked it in.
The semiconductors appear to be taking this whole risk-off move one step at a time, as Helene Meisler pointed out last night in her market note...
Helene also pointed out last night that the banks are similarly positioned...
Both the semis and the banks seem to have lost the swing trading crowd. These stocks both stand at the critical juncture of testing portfolio managers. This is either where they find some support, or should that blue line crack... fuel could be poured on an open fire as professional distribution becomes more evident.
Market momentum has been tested three times already just in 2021 alone, and has passed with flying colors, albeit with some broadening rotational moves each and every time. Is it different this time? It is if it becomes apparent that the planet has lost momentum in trying to control viral spread. It is if somebody in Eastern Europe, at the Taiwan Strait, or the Korean Demilitarized Zone starts shooting.
1) I don't know. Maybe I just expected something more exciting from Apple (AAPL) . Took some time tested discipline to not make a sale after the release of the new AirTags (yawn) and some amped up iMacs and iPads using Apple processors. I can't believe they added a purple iPhone... OMG, I'll take two.
2) Turns out price does matter. Yes, Netflix (NFLX) did report both Q1 EPS and revenue beats, as well as increasing Q2 EPS guidance. The firm, without experiencing much churn also showed much (much, much, much) less growth in new subscribers than anticipated, and now expects far (far, far, far) fewer global streaming paid net additions for the second quarter than had been Wall Street's consensus. Just what was the street looking at? Everyone copying each other's homework again? Hmm. It would appear to this novice that while the masses are not quitting on Netflix, new subscribers are choosing cheaper alternatives where cheaper alternatives exist. In other words, Disney (DIS) is probably kicking the spit out of Netflix. Netflix does expect to start repurchasing stock again for the first time in about a decade. That's the only reason why this selloff is not even worse.
3) Cathie Wood's ARK Invest (ARKK) ETFs continue to add Coinbase (COIN) , now at the expense of Nvidia (NVDA) and Virgin Galactic (SPCE) after reducing Tesla (TSLA) last week. I have told you that I would be transparent on this name. I have not added (nor reduced) since hitting what I consider to be 3/8 of a full position. I am watching as the name tries to build an IPO base, which it seems to be doing. Currently I am down 4.27% on this name. I do not yet have any derivative positions written against the position.
Economics (All Times Eastern)
10:30 - Oil Inventories (Weekly): Last -5.889M.
10:30 - Gasoline Stocks (Weekly): Last +309K.
13:00 - Twenty Year Bond Auction: $24B.
The Fed (All Times Eastern)
Fed Blackout period.
Today's Earnings Highlights (Consensus EPS Expectations)