Moonlight. Too much light. Door drops open. Follow the back of the head to your front. Line shortens. Engine groans. Hear it. Feel it. Boots vibrate. Kind of tickles. Moving toward the back/front of the craft. Facing the shore. The head to your front disappears into the sea. In a flash, you are under water with 125 pounds on your back.
It's different this time. The ocean is angry. Breathe. Need to breathe. Rolling, twirling, caught inside of some big wave. Keep your rifle dry. Yeah. Crap. Shoulder out of socket. Again. Swim with three limbs. I hate, hate, hate when one of my shoulders is out when I'm in the sea. Upside down now. Just great.
Wait... Air at last. Prone in the surf, covered in sand. Doc, get my darned shoulder back in. Mother... Frick! Ahhhhh. OK. It moves, maybe a little crunchy. Doc knows better. I know better. It's gonna kill for a month, but I am not letting my peeps see me leave the field for a dislocated shoulder. Low crawl. No silhouettes. We got everybody?
The algorithms piled on algorithms. Remember that 21-day exponential moving average (EMA) we have been talking about for over a week? The S&P 500 tested and repeatedly pierced that line from both directions for about four hours Thursday. With maybe 90 minutes until the closing bell, the level finally broke.
You may hear many try to explain what happened to equity markets late Thursday, and all the reasons mentioned are indeed a part of the mosaic. They all combined to create an angry sea that will not welcome your participation. They were all part of the weight, part of the 125-pound pack on your back.
The catalyst for the beat-down into the close was the breaking of the 21 day EMA across the buffet line of equity market indexes. The extreme risk-off sentiment? The fear of drowning? That was the expected drop of May Consumer Price Index (CPI) data on Friday morning. Fear breeds panic. Panic breeds exertion. High-speed algorithms feed on momentum. So it has been written...
Shots From Afar
Here on Friday morning, expectations are for year-over-year headline inflation of 8.2% in May and for core inflation of 5.9%. We all know that gasoline prices have ramped higher of late. Might we see a core rate that improves in June, but a headline rate that edges back up toward eight and a half percent? Don't even say it. The public doesn't care about the core and the headline. They only know that they might need to buy a bicycle, walk, or get a job closer to home.
The Federal Reserve's Federal Open Market Committee (FOMC) will decide on policy next Tuesday. There will be no surprise. They will target the fed funds rate 50 basis points higher. They will update the kickoff of the spanking new excess liquidity vacuum also known as "quantitative tightening." The press conference will be one of affirmation. That controlling inflation is the prime objective. Keyword-reading algorithms just love that jive talkin'.
On Thursday morning, the European Central Bank announced (talk about forward guidance) that it will increase its benchmark rate from -0.5% to zero (maybe higher) by September. The ECB also told investors to prepare for that first hike of 25 basis points in July as the central bank also brings its large-scale bond buying program to a halt. You see the Italian 10-Year? You ain't seen nothin' yet, Sparky.
The Knight's Tale (excerpt)
"And when a beast is dead, he hath no pain;
But man after his death must weep and plain,
Though in this worlde he have care and woe:
Without doubt it maye standen so."
- Geoffrey Chaucer, 1387?
Blood on the Saddle
Losers beat winners at the New York Stock Exchange (NYSE) by a rough 5 to 1 and at the Nasdaq market site by about 5 to 2 on Thursday. Advancing volume took only a 7.1% share of composite NYSE trade (there were no bids) and 34.6% of all trade in Nasdaq-listed names.
Trading volume was a bit sketchy. Again. Aggregate trading volume did indeed increase significantly both for stocks listed at the Nasdaq and for constituent members of the Nasdaq Composite. OK, down day, heavier volume. Makes sense. But, and this may or may not be a big but. Let you know at 08:30 ET.... aggregate trading volume for NYSE-listed names, where breadth was most profoundly negative, actually contracted just a smidge from Thursday's levels. Trading volume edged just slightly higher across the S&P 500.
My take? The sales were chaotic. There was a clear run into cash ahead of the CPI print. Not everyone participated in what was almost a panic, but enough professionals did participate that we do need to pay some heed. The S&P 500 still closed more than 200 points above the May 20 low. There is a clear lack of confidence in CPI consensus. If there were confidence, the technical level that broke would not have been an issue and the selloff would have been priced in, not having occurred in the manner it did.
All your favorite equity indexes, from large-caps to small-caps, gave up 2% give or take. The Nasdaq siblings pushed closer to 3%. All 11 S&P sector-select SPDR ETFs closed lower for the session, led to the downside by Communication Services (XLC) at -3.07%. Consumer Staples (XLP) were top "dog" at -1.5%.
Layoffs?
A trickle to be sure, not a flood. A print that moved in the wrong direction nonetheless. The Labor Department publishes weekly totals for first time jobless benefits every Thursday morning. This number runs one week behind real-time and its sibling, the continuing claims print runs two weeks behind. This week (yesterday), the jobless claims number printed at 229,000, an increase of 27,000 from the revised level of 202,000 the week prior.
A big deal? On the macro level, not really. If you're among the 229,000, most definitely. The issue, potentially, would be that this was the highest one-week total since January, and also printed above the last full-year (2019) pre-pandemic average of 218,000. The continuing claims number remains at a multi-year (decade) low. With a number of key companies referring to situations such as being "overstaffed" of late and others calling for outright payroll reductions or freezes, this is the one place, given the frequency of the data, where evidence of dents in the labor market's armor will show first.
We all know the US economy contracted in the first quarter. We all know the US economy skates on very thin ice this current quarter. We hear that a recession is likely sometime in 2023. Chances are that we are very close to being in one right now. I certainly hope not, but know this. When the worm turns on labor, it will turn with an angry vengeance. I've seen it. I've lived it. Keep your head down and count on nothing.
Stanley Druckenmiller
--From the 2022 Sohn Investment Conference (on Thursday, 9 June)
On Markets....
"My best guess is that we're six months into a bear market. For those tactically trading, it's possible the first leg of that has ended. But I think it's highly, highly probable that the bear market has a ways to run."
On Policy....
"That period (last year) was incredibly costly, because a lot of assets were purchased during that period that a lot of people moving out the risk curve will lose a lot of money on."
On the day after tomorrow...
"If you're predicting a soft landing, it's going against decades of history."
2026
Yes, it's true. On Wednesday, Cathie Wood's ARK Invest published a research piece on Zoom Video (ZM) that suggests the "work from anywhere" darling could reach $1,500 per share by 2026. Using the firm's Monte Carlo analysis, this is Ark's projection, with a bull case (25% probability) that ZM trades at $2,000 by then and a bear case (25% probability) that ZM trades at $700 by then.
At the $1,500 projection, the stock would need to compound at a 76% annual growth rate. At the bear-case projection, from Thursday night's closing price of $110.40, ZM would need to appreciate 634%.
OK, go ahead. Laugh. Sounds outlandish. Is the trajectory correct, though? Would you buy Zoom Video for a triple, or even a double by 2026? The firm is profitable. Still trades at 29x forward earnings. The price projections, in my opinion, are silly that far out. The concept projected? A lot less so. Food for thought.
OK, Gang...
You are as ready as you are going to be. They are going to come after you. Again. Stand side by side. Look to your left. Look to your right. This is who you defend.
The little one who stills sleeps. The loved one who came in late from work. The one you do not know watches, who sees you as the shining beacon of all that is honorable. Live up to the standard set. If you haven't, then change. Yes, you can. You can be the hero. You can rise from what has held you back. Don't do it for yourself. Do it for them. Do it for love. Now go, and God bless.
Economics (All Times Eastern)
08:30 - CPI (February): Expecting 8.2% y/y, Last 8.3% y/y.
08:30 - Core CPI (February): Expecting 5.9% y/y, Last 6.2% y/y.
10:00 - U of M Consumer Sentiment (June-adv): Expecting 58.3, Last 58.4..
13:00 - Baker Hughes Total Rig Count (Weekly): Last 727.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 574.
14:00 - Federal Budget Statement (May): Last $308B.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings scheduled for release.
