Desert Water Bag
Perhaps mankind's greatest invention. Still have my original. I'll probably have it for the rest of my days, even if I never tiptoe out into the desert again.
A bag that sweats. Probably 19th century technology. One never knows how refreshing water slightly cooler than air temperature can be until one spends continuous time outdoors in a hot, arid climate sans shelter. Whoever invented that bag obviously read his or her environment and saw the need to adapt. It was a quality-of-life issue.
As we have discussed in recent notes, the major domestic equity indexes have been trading roughly sideways since the reversal low of May 12. Today is May 27. We have experienced some wildly volatile days during these two-plus weeks, in both directions, but the market has not taken a serious leg down that really left a mark since. A psychological mark, perhaps, but not one on the charts. Listening to various talking heads appearing in the financial media this week, I hear talk of markets trying to bottom, the bottoming process, or feeling around for a trade-able bottom.
These folks have already missed the forest for the trees. If I told you ahead of time that I could gift you a volatile two-week period that largely moved sideways while granting nice-size moves daily, would you eagerly accept, thinking that you could turn a few bucks? Of course you would. One must adapt to the environment. An unidentified critic accused me of turning day (short-term) trader recently. While I have never claimed to be anything other than a hybrid trader/investor/economist, what I try best to be is whatever is required to excel in any environment.
I have been saying and writing for months, many months, that this was more a traders' market than an investors' market. So, what is an individual supposed to do? Stand there and take the elevator down, or get cashy and use the skills developed over decades on Wall Street and the ability to evolve based on the need to overcome in order to seize victory where victory is possible? Methinks we need a little less exposure to talking heads that either have something to sell or have never had skin in this game themselves.
Just the Facts
Now, about the current turn of the worm. Has this market found that bottom? As mentioned in this column this week, the set-up was favorable for a shortish-term rally similar to what we saw in mid-March. That does not mean that we have a permanent bottom. We likely will not know the answer to that question until it is obvious. Folks who have never traversed bear market conditions won't like that. Neither do us older folks who have experienced both easy markets as well as difficult markets.
The truth is that China has done tremendous damage to its own economy (and others) through its Covid lockdown policies. Waiting on China to unscrew manufacturing bases and supply lines is costly. So is relocating these bases and lines. No easy way out for corporations that build and sell. You just saw Apple (AAPL) prepare to move some manufacturing operations to Vietnam in order to de-risk to some degree its exposure to China's inability to work with and around the virus.
Elsewhere, Russia apparently looks to annex parts of eastern and southern Ukraine insensitive to Ukrainian human suffering, as well as the tremendous costs to Russia in terms of lost lives, equipment and treasure. Regionally, this significantly hampers the European economy, kinks up to some degree global economies, and forces a condition of food and energy insecurity on nations everywhere.
As long as Russia and China do things the way they currently do them, global economies -- or rather, globalized economies -- cannot fully recover. One might say that the US economy did just fine during the Cold War, and there was only limited globalization throughout that period. This is true. Kind of true, anyway. One must understand, however, that while there are benefits to a less global economy that include middle-class wage growth as well as both manufacturing and supply chain security, there is also less potential for headline growth. There, from a corporate perspective, also would be less potential for margin expansion.
Marketplace
The S&P 500 ran 1.99% on Thursday; the Nasdaq Composite gained 2.68%. The Dow Transports were even hotter, up 2.89%. All the small to mid-cap indexes did well, too. Treasury debt securities were largely flat for the session. Ten of the 11 S&P sector-select SPDR ETFs shaded green on Thursday, with Consumer Discretionaries (XLY) way out in front, up 4.9%. Indeed, the five cyclical sectors and two growth sectors took places one through seven on the daily sector performance tables. The four defensive sectors? You guessed it, places eight through 11, with the REITs (XLRE) closing lower (-0.11%) for the session.
Breadth was outstanding. Winners beat losers at the NYSE by 5 to 1 and by 3 to 1 at the Nasdaq market site. One factor that turned markets green for the day was the much better earnings and outlook for retailers serving budget-minded consumers, among them Dollar General (DG) and Dollar Tree (DLTR) . What are they getting right that Walmart (WMT) and Target (TGT) could not? The SPDR S&P Retail ETF (XRT) ran 4.78% on Thursday.
Advancing volume took an 86.7% share of composite New York Stock Exchange trade for the day, while taking an 82.3% share of that metric for Nasdaq-listed stocks. Now here is where it gets a bit tricky. Aggregate trading volume was slightly lower on Thursday from Wednesday for NYSE-listed names as well as for constituent members of the S&P 500. However, aggregate trading volume increased, albeit just slightly, for Nasdaq-listed names as well as across the constituent membership of the Nasdaq Composite.
What does that mean? It means that we technically have a partial confirmation of the bullish reversal, not of May 12 -- that attempt already died a painful death -- but of the reversal of May 20.
Can you count on it? You can count on nothing. Aggregate trading volume in general is still on the light side. However, I do think, especially for Nasdaq stocks, there is a serious attempt being made to at least have one heck of a bear market rally. This thought is backed up, if not confirmed, by higher volume day over day across the Russell 2000 as well.
Is it more than a bear market rally? What have I taught? Win the fight to your front. Invest strategically when strategy is possible. Trade tactically, which is almost always possible.
Remember This...
The jack of all trades can out-survive the master of but one discipline. One must be able to trade, and invest. One must learn, understand and be able to act upon what one sees through the lens of either technical or fundamental analysis. The technical analyst who cannot read a balance sheet or an income statement is doomed to fail. The fundamentalist who cannot recognize patterns on a chart is just as doomed, especially in the age of algorithmic price discovery.
It is useless to know where the bus stops are if one does not know which direction the bus travels. It is almost as useless to know which way the bus moves without knowing where the bus stops are.
The Death of Crypto?
China has created a digital version of its own government-issued currency and banned transactions in independent cryptocurrencies, including Bitcoin and Ether. We know this. El Salvador has adopted Bitcoin as legal tender, the first sovereign nation to do so. We know that.
Federal Reserve Vice Chair Lael Brainard testified before the House Financial Services Committee on Thursday in regards to the eventual potential issuance of a digitized version of the US dollar. Brainard said, "It could provide a safe, central bank liability as the neutral settlement layer in the digital financial ecosystem. It would actually facilitate and enable private sector innovation." Brainard later added, "The recent turmoil in crypto financial markets makes clear that the actions we take now -- whether on the regulatory framework or a digital dollar -- should be robust to the future evolution of the financial system."
The threat to cryptocurrencies is obvious. In a battle for power, and money is power, global central banks and treasury departments for the most part have not even started to defend themselves. They will, either through regulation, competition, or both. The threat to cash and the "off the books" economy might even be more ominous. Why would the federal government allow, if it were in its power to control, an underground, untaxed economy? Especially given that both cryptocurrencies and cash better serve a number of illegal purposes than they do in many cases day-to-day transactions.
I am not sure that I am in favor of a digital national currency, as such a creation could lead to things such as forced negative interest rates on savings accounts as a means of taxation, but I do see it coming. Cryptos, at least the few of higher quality, are a threat to the US dollar and to the whole reserve fiat currency framework. You might not like it, but when push comes to shove, the major central banks will defend their turf.
Thursday Night Lights
How good were earnings Thursday night? Real good. It's hard to believe that, in aggregate, Ulta Beauty (ULTA) , Marvell Technology (MRVL) , Dell Technologies (DELL) , Zscaler (ZS) and Costco (COST) all reported solid to good to very good quarters. The tech firms did well. Costco showed that it can out-manage Walmart and Target, and Ulta? Wow. Was that one of the best beats and raises ever? It's on the short list. Rock and roll.
Economics (All Times Eastern)
08:30 - Goods Trade Balance (Weekly): Last $-125.32B.
08:30 - Personal Income (Apr): Expecting 0.6% m/m, Last 0.5% m/m.
08:30 - Consumer Spending (Apr): Expecting 0.6% m/m, Last 1.1% m/m.
08:30 - PCE Price Index (Apr): Expecting 6.4% y/y, Last 6.6% y/y.
08:30 - Core PCE Price Index (Apr): Expecting 4.9% y/y, Last 5.2% y/y.
08:30 - Wholesale Inventories (Apr-adv):
Expecting 2.1% m/m, Last 2.3% m/m.
10:00 - U of M Consumer Sentiment (May-F): Flashed 59.1.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 728.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 576.
The Fed (All Times Eastern)
07:35 - Speaker: St. Louis Fed Pres. James Bullard.
Today's Earnings Highlights (Consensus EPS Expectations)
