"You'll take my life, but I'll take yours too
You'll fire your musket, but I'll run you through
So when you're waiting for the next attack
You'd better stand, there's no turning back"
-- "The Trooper" Steve Harris (Iron Maiden), 1983
As I Was Saying...
This is more of a traders' market than it is one for investors. Wow. Am I ever glad that 24 hours ago, in this column, I expressed caution and mistrust after Wednesday's high volume rally. For all intents and purposes, Wednesday should have confirmed Monday's bullish reversal as a potential change in trend. However, I did not like how both the S&P 500 and Nasdaq Composite stopped short on Wednesday of taking and holding any key moving averages, most notably in each case the 21-day exponential moving average (EMA).
Instead of basking in some new trading regime, domestic equity markets along with US sovereign debt markets took a beating of rare magnitude. The Nasdaq Composite gave up 4.99% for the session; its sibling, the Nasdaq 100, contains no financial stocks and is more highly concentrated in technology, and thus closed down 5.06%. Equity index futures had entered the day in a state of weakness, but not profound weakness.
Then the Bank of England raised its benchmark rate just 25 basis points, while forecasting 10% inflation in the UK centered on energy prices that would drive the British economy into recession this year. The BOE also projected economic growth for the UK of just 0.25% as far out as 2024. The catalyst for this weakness in the British economy and the apparent helplessness that the central bank there expressed is based on the negative impacts of the Russian invasion into Ukraine as well as the global reaction to that war. Then add on China's ongoing and baffling response to COVID while Beijing ignores the fact that there are better vaccines available.
It would appear that planet Earth has a problem, or a number of problems that may have caused traders and investors to reconsider Wednesday's rally into the face of persistent consumer inflation and a trajectory for monetary policy that, while attempting not to shock markets with a hike of 75 basis points in the semi-near future, is clearly moving in a direction that will slow economic activity while placing a bid under the US dollar.
That in turn makes it tough for nations trying to service debts denominated in US dollars or to conduct business with US-based multinational corporations. Not to mention that this condition places a drag on corporate performance itself.
The carnage was broad-based. In addition to what happened to the S&P 500 and the Nasdaq twins, the Russell 2000 surrendered 4.04%, the S&P 400 closed down 3.65% and the Dow Transports, our "outperformer" for the session, gave up 2.89%.
Remember this chart?
Let's zoom in on the extreme lower right...
Readers will note that on Thursday the Nasdaq Composite traded below the low (turning point) of Monday's reversal. The Nasdaq Composite also closed lower than it did either on Monday or a week ago (last Friday). These two factors together from a technical perspective effectively end this week's attempt by the Nasdaq Composite to form an investable bottom.
Today is Jobs Day, and I have at least five Fed speakers on my radar. We have all seen what high-speed algorithms designed to intentionally force directional market overshoot can do, so each day is its own entity with no institutional memory whatsoever. This means that what is reality can change in a flash, but this attempt by the Nasdaq to turn markets in a northerly direction (for now) has failed.
Now, look at this.
The S&P 500 has also been battered but is in a different technical ballpark than is the Nasdaq Composite. Thursday's S&P 500 low was higher than was Monday's S&P 500 nadir. The index also closed on Thursday above where it closed last Friday. Hence, the S&P 500 closed down 3.56% on Thursday, but also closed up 0.3% week to date. From a technical perspective, this week's attempt by the S&P 500 to form a bottom or change in trend is not quite dead going into Jobs Day. That maybe ridiculous to point out. I don't know. The market will surely let us know, but as slight as this glimmer of hope is, the S&P 500 is not dead.
Thursday's results to include the above-mentioned contraction across all major and mid-major equity averages was just stunning. All 11 S&P sector-select SPDR ETFs closed not only in the red but at least 1% lower. Seven of the 11 closed down at least 2%. Four of the 11 closed down at least 3% as the path lower was led by Consumer Discretionaries (XLY) and Technology (XLK) . These two funds gave up 5.6% and 4.81%, respectively, with Communication Services (XLC) in third or really ninth place at -3.69%.
Certain sub-sector or industry-specific equity indexes forced jaws to drop. The Dow Jones US Internet Index closed down 5.65%, led lower by DoorDash (DASH) , Snap (SNAP) and Netflix (NFLX) . These three stocks gave up 10.4%, 9.58% and 7.69%, respectively.
Want more? OK. The Dow Jones US Software index backpedaled to the tune of 5.14%, led lower by Shopify (SHOP) and Cloudflare (NET) . These two names gave up 14.91% and 13.93%, in that order. The Philadelphia Semiconductor Index took a beating of an even 5%, in line with the Nasdaq Composite itself. Qorvo (QRVO) , down 8.3%, and Marvell Technology (MRVL) , down 7.34%, took the brunt among chip stocks.
As far as breath is concerned, get a load of this: Losers beat winners at the New York Stock Exchange by a rough 15 to 2 and at the Nasdaq market site by a little more than 5 to 1. Advancing volume took but a 6.4% share of all composite NYSE-listed trade and a whopping 17.1% of composite Nasdaq-listed trade. The only silver lining would be in the decline in trading volume on Thursday from Wednesday. Though aggregate trade was still elevated on Thursday, trading decreased across NYSE-listed names, Nasdaq-listed names, S&P 500 constituent names and Nasdaq Composite constituent names. In short, the selling on Thursday was even broader than was the buying on Wednesday, but the pros were more active on Wednesday. Interesting.
The obvious driver for liquidation across the equity space could be the action across Treasuries. The long end of the curve took a pounding on Thursday as the US 10-Year paid 3.05% (up 13.5 basis points) by day's end. Ten-Year paper yields 3.07% here on Friday morning. The slope of the curve steepened. The US Two-Year Note paid 2.71% late Thursday (down 14 basis points) and pays 2.73% this morning.
The 10-Year /Two-Year yield spread did this...
.... while the 10-Year/ Three-Month spread marches on.
In the longer run, a steeper yield curve representative of positive real rates does paint the picture of a healthier economy. That said, getting from here to there might be akin to crossing a financial minefield.
Rumors were rampant up and down the street on Thursday afternoon. One rumor had traders trying to hedge themselves through options and futures markets, exacerbating free-fall conditions as the pressure accelerated. Another had hedge funds being forced to liquidate technology holdings as positions in leveraged and or inverse ETFs went bad. Gee, who could have seen that coming?
Here What I've Been Trading
If that last rumor has any merit, the pressure or at least the intense selling pressure experienced on Thursday would be a somewhat finite condition. Maybe. I was very active on Thursday. I had experienced a tremendous paper gain in Tesla (TSLA) on Wednesday and it had for the moment become my largest holding. At the first sign of trouble on Thursday morning, I liquidated that entire position, which is unusual for me, but I did not want to lose ground that I had just gained. I needed that win. This created an oversize cash position, which I sat on for several hours.
Ahead of Thursday's regular session close, I sprinkled some love back into a number of Sarge names that have been beaten (some of them severely) of late. I have increased (long) exposure to Nvidia (NVDA) , Advanced Micro Devices (AMD) , Apache (APA) , Salesforce (CRM) , General Dynamics (GD) and Apple (AAPL) . I also left my cash position considerably larger than usual. I am somewhat confident in all these names at these levels, maybe a little less so in Nvidia and Salesforce based on valuation, but I was really betting on CEOs. I bet on Jensen Huang, Lisa Su, Marc Benioff and Tim Cook.
As for the other two names, they are both up nicely for me since initial entry. I actually want to trade out of APA and into something like Pioneer Natural Resources PXD, but APA was oversold on Thursday in response to earnings and GD manufactures main battle tanks. Get a chance to add exposure to main battle tanks (and submarines) on a down day, in this geopolitical environment? You don't have to ask me twice. Cash is currently double its normal weighting upon my book. That is intentional. I don't want the cash. I wanted the dry powder. Remember what I always say about targets of opportunity.
You Guys See...
... that Mets game last night? How 'bout those New York Rangers?
Who Wore It Better?
April Employment Situation (08:30 ET)
Non-Farm Payrolls: Expecting 390K, Last 431K.
Unemployment Rate: Expecting 3.5%, Last 3.6%.
Underemployment Rate: Last 6.9%.
Participation Rate: Expecting 62.5%, Last 62.4%.
Average Hourly Wages: Expecting 5.5% , Last 5.6%.
Average Weekly Hours: Expecting 34.7, Last 34.6 hours.
Other Economics (All Times Eastern)
13:00 - Baker Hughes Total Rig Count (Weekly): Last 698.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 552.
15:00 - Consumer Credit (Mar): Last $41.82B.
The Fed (All Times Eastern)
09:15 - Speaker: New York Fed Pres. John Williams.
11:00 - Speaker: Minneapolis Fed Pres. Neel Kashkari.
15:20 - Speaker: Atlanta Fed Pres. Raphael Bostic.
19:15 - Speaker: Reserve Board Gov. Christopher Waller.
20:00 - Speaker: San Francisco Fed Pres. Mary Daly.