Let the games begin... and may the odds be forever in your favor.
All-time highs were handed out like "participation" trophies on Monday. The S&P 500, Nasdaq Composite, Nasdaq 100, and Dow Jones Industrials all closed up small yesterday, all at record levels as well. Cyclicals did better as well, or maybe that was just the Financial sector that finished out in front ahead of the unofficial kick-off of earnings season.
Goldman Sachs (GS) , rose 2.4% on Monday and JPMorgan Chase (JPM) ran 1.4%, both outperforming the KBW Bank Index, which finished up 1.2% for the session. I took advantage of this run into earnings (either that, or I am a fool) and shorted trade-sized positions in both of those names overnight in an attempt to get as close to the very highest prices for both ahead of the digits.
The question that most seem to be asking going into the season is simple: "Will these results that are expected to land at peak acceleration for the year, especially given the weak comps, provide a catalyst for the next leg up?"
I thought hard before taking those two positions. I mean, I expect to see robust profits across the group. Revenues should probably contract. One would think that the outlook for net interest margin will disappoint. Bank stocks are historically priced according to their ability to make money through traditional consumer banking means, regardless of how well they do elsewhere. Why do you think the group has traded at such a low multiple for more than a decade? Sure, they have more than offset a tough net interest environment over the years by producing incredible trading revenues during times of national/global duress.
Banks have taken advantage of booms in demand for investment banking even as demand for credit has been cooler than desired. Even as junior employees complain about their hours and employees of all ages, and at least to some degree display hesitancy in returning to the office.
This makes for a tough short-term environment in terms of predicting market direction. All said, long-time readers know I don't chase anything already on the run.
I remain long Wells Fargo (WFC) at the investment level, and under Charles Scharf that stock has outperformed. Just bear in mind, remember how seemingly forever, the major banks were mired with market caps placing their values below tangible book? The sector may trade at just 13 times forward-looking earnings, but if you read Carlton English at Barron's on Monday, she pointed out that the average bank residing in the S&P 500 now trades at two times tangible book. Either the run continues, or these stocks take a rest. Time is short, and soon we'll know.
For the new readers, when I refer to position size, a trade-sized position is roughly about the same as an entry-level position. This means that I am willing to spin the wheel, but not willing to risk getting my head kicked in. I have already explained the importance of knowing one's price target and panic point on all positions. It's just as important to know how large an exposure one wants to have to one name in dollar terms (for your wallet) and in percentage terms (as in waiting upon your portfolio).
It is different for every trader, but for me, an entry-level position is generally one-eighth of my intended position size, which would be a full position. I very much believe in incremental entry as well as incremental exit, which means that in most cases, my price target for investments will evolve as will my position size.
These are living things, there is no "set it and forget it" unless occupationally one does something else to produce and this little game of ours is for them a little "side action." Nothing wrong with that. We appreciate the increased participation.
I found it interesting that at the professional level, those expressing fear, or the lack of fear ahead of earnings season chose to express themselves quite differently in regards to what vehicle was used in the seeking of some protection.
Some in financial media have focused on the VIX, or the CBOE Volatility Index, referred to in common slang as the "fear gauge." Note that after a spike last week as the marketplace gyrated, this index has settled back down toward established support going into earnings season. Let me show you something else, however.
Interest in index-related options would appear to contrast with what the VIX is telling us. The CBOE Options Index Put/Call Ratio (which omits all single-stock options) spiked on Monday to its highest level since mid-June, and third highest reading since early March. Apparently I am not alone in thinking that there will be at least one tough day (perhaps today) this week. We'll see.
Breadth was awesome on Monday. Then again, the last two "up days" have come on incredibly dwindling aggregate trading volume.
Bigger Than Earnings
Perhaps a bigger deal this morning than second-quarter banking earnings will be the June data for consumer prices, which is put together by the Bureau of Labor Statistics. Expectations are for a headline pace of 4.9% year over year coming off of May's 5.0%. The core rate (or ex autos) is projected to print at 4.0%, up from May's 3.8%. This is one data point, along with wage growth, where the year-over-year number is much more focused upon than the month-over-month number.
Investors/ traders must keep in mind that this spring versus last spring is something of a skewed comparison as the nation was largely put into a mandated lockdown last year. Economists are having some trouble in deciding just what pockets of inflation are transitory and what are structural. It's not really that hard. Anything that serves either technological progress in commerce or the globalization of labor has also served to keep consumer prices down over the past 30 years. Hence, anything, such as a decoupling with China, that serves isolation, should also serve to make structural -- higher wages, but also higher prices.
I thought it also important to point out that this administration does not have an isolationist agenda, as much as an ongoing "cold war" with China. There is obviously every attempt being made to smooth out relations with the European Union as well as Japan and South Korea.
Oh, and foreign interest in U.S. paper remains strong. On Monday. Treasury raffled off $58 billion in 3-Year Notes and $38 billion in 10-Year Notes. Yields increased slightly on Monday, but indirect bidders (foreign accounts) took down 63.4% of the 10-Year issuance, which is well above recent norms. $24 billion worth of the 30-Year Bond goes for sale this afternoon.
If Not Now, Then When?
The Department of Defense is finally seemingly close to scheduling a long-awaited combat simulation test for the expensive/lucrative (depending on your point of view) F-35 fighter aircraft that was first set for 2017. The exercise will be run by the U.S. Navy and will include 64 sorties against simulated modern Chinese and Russian fighter craft. All interested parties now wait for the Pentagon to incorporate input from an independent assessment of the test by outside experts.
This all has put full-rate production on ice -- for years. The DOD has planned to order 85 F-35s next year and 94 in 2023, up from 79 this year. There is already a $10 billion to $15 billion upgrade in the works that must be voted on by Congress.
For those long Lockheed Martin (LMT) , or thinking about getting long LMT as the shares approach support, this is the catalyst. This aircraft becomes much more lucrative once it hits full-rate production, and that can't happen until it pases this test. I cannot imagine letting the test take place until "they" are confident in the results.
My thinking is to start accumulating the shares in the mid-$370s given the chance and then to work my "buy" order as low as $370 precisely if all goes according to plan (which is rare). I am not long the name yet, so I won't get ahead of myself. Resistance is clear. That will be the pivot at some point.
This name is now on my radar. I would expect at least some kind of pop on news of a specific date for the Navy to go ahead with their test.
Hmm... Not a Spider
The Walt Disney Company (DIS) made a bottom in mid-May. This was a turning point, ending a downward trend in support, as the trend of lower highs continued. What had looked like a potential downward sloping Pitchfork morphed into a six-week pennant that closed in anger last week. Then "Black Widow" showed the way. The future, perhaps short-to medium-term future, but the future of the "hybrid" box office, where the cinema is headed.
"Black Widow '' opened 15 months late in roughly 4,000 physical movie theaters as well as on the Disney+ streaming service as a pay per view offering. Expectations were scattered, but the consensus seemed to be for generation of some $90 million in total around opening weekend. Box-office receipts for the movie globally came to more than $78 million, while another $60 million or so was taken in by the streaming service. Disney's strategy of simultaneously offering at least blockbuster level films across all methods of delivery appears to have worked very well.
The new model? Even after more folks are more comfortable returning to participation in mass entertainment? It would appear so. I am long the name. My price target is a cautious return to the old high of $203. As I would like that spot to be a pivot rather than an endpoint, we'll get there first... then we'll see.
Economics (All Times Eastern)
06:00 - NFIB Business Optimism Index (Jun): Expecting 99.6, Last 99.6.
08:55 - Redbook (Weekly): Last 19.4% y/y.
08:30 - CPI (June): Expecting 4.9% y/y, Last 5.0% y/y.
08:30 - Core CPI (June): Expecting 4.0% y/y, Last 3.8% y/y.
13:00 - Thirty Year Bond Auction: $24B.
14:00 - Federal Budget Statement (Weekly): Last $-132B.
16:30 - API Oil Inventories (Weekly): Last -7.983M.
The Fed (All Times Eastern)
12:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.
12:45 - Speaker: Minneapolis Fed Pres. Neel Kashkari.
14:30 - Speaker: Atlanta Fed Pres. Raphael Bostic.
14:50 - Speaker: Boston Fed Pres. Eric Rosengren.