"Start by doing what is necessary, then do what's possible, and suddenly you are doing the impossible."
-- St. Francis of Assisi
Continuance
Markets seem set in their ways. At least for now. At least ahead of this (Tuesday) morning's heavy macroeconomic calendar, at least ahead of tomorrow (Wednesday) afternoon's FOMC song and dance.
We have already witnessed the bond market either repudiate the very notion of sustained economic growth, and/or structural consumer level inflation -- or perhaps just react to a perseverent cross-border thirst for yield. Sort this out we will.
Answers will reveal themselves as data points. Such input evolves into policy response. The wheel of fate spins as fast as does the roulette wheel in the casino. Unlike the roulette wheel, fate only slows down, never actually stops. No permanent winners. No permanent losers. No final score. Just winning and losing. Again. And again.... and again... and then... one day... as the heart beats its last, you hope it was / you were good enough.
Markets
There was indeed some profit-taking across the deep end of the Treasury spectrum on Monday. Certainly, this pressure did not turn into a fire sale. The 10-year Note hit support at a yield of 1.5% shortly after midday, and has been working its way ever so slowly back into the 1.48%'s ever since. (Note to financial journalists: Please stop referring to rising yields as rallies, I still hear this at leading outfits. Seasoned pros: help the young ones here.) This did nothing to sway recent trends impacting equity markets.
The Nasdaq Composite rallied for a third consecutive session, and for a sixth in seven, largely on strength in technology. The Technology sector select SPDR ETF ( (XLK) ) has now completed a cup formation and comes close to either forming a handle or breaking out without one. Both the Philadelphia Semiconductor Index (SOX) and Dow Jones U.S. Software Index reinforce individually the pattern expressed by the broader ETF.
Conversely, the Dow Jones Transportation Index has given ground in seven of the last nine sessions, and the Russell 2000 (small-caps) has done the same for three of the last four.
Animal Crackers
Pick your favorite now traditional "old school growthy" type acronym -- FANG {Facebook (FB) , Amazon (AMZN) , Netflix (NFLX) , Alphabet (GOOGL) }, FAANG {add Apple (AAPL) }, or FATMAN {add Tesla (TSLA) , and Microsoft (MSFT) , delete Alphabet}, or FAATMAN {leave Alphabet in there} -- and you either batted 4 for 4, 5 for 5, 6 for 6 or 7 for 7 on Monday.
All while market breadth turned rather sour.
Losers beat winners at the New York Stock Exchange as declining volume beat advancing volume, even if the S&P 500 rallied late to show a minor gain. Up at the Nasdaq, losers edged winners, but advancing volume bested declining volume decisively. Pick your favorite acronym.
Sector performance for the Monday session showed no real change from what has been the norm over the past week or two, with the exception of the two growth sectors hopping over the more defensive-type groupings. Cyclical sectors remain out of favor with investors as the bottom four rungs on our daily ladder were occupied by these kinds of stocks that are much more reliant upon economic growth, and subsequently consumer level inflation.
It makes sense, or at least it should, that the Financials have performed so poorly of late as yield spreads have contracted (curves flattened). However, it probably should terrify those depending on this V-shaped recovery (that I did not expect to be this strong half a year ago) to carry on through the year's second half that Materials and Industrials have performed so poorly, backed by a commodities complex and maybe (just a maybe here) even the "new" homes market (due to a scarcity of said materials as well as available labor) that appears to be well past or getting past peak pricing.
Great Expectations
How great are they? Not sure. If it was part of the mission of the FOMC to create increased flexibility in policy preparation or tolerance for a wider range of inflationary possibilities going forward, the mission appears to be a success according to a survey conducted by the New York Fed.
While just Monday, in this space, I presented the work of the Cleveland Fed, which certainly downplays the current spike in headline level inflation, the New York Fed shows that if need be, the artillery has done its job of softening up the ground ahead and if need be, the infantry can move in.
The survey shows that expected inflation one year out had risen to 4% in May from 3.4% in April. The survey also shows that the median respondent in May expected an inflation rate of 3.6% three years out, up from 3.1% in April. This is the highest reading for this metric produced by this survey since 2013.
Has the public bought into the Fed's "transitory" narrative when it comes to inflation? It would appear so -- to a degree. It also seems that the public has resigned itself to dealing with a greater rate of structural consumer-level inflation for longer than anything that I would have considered to be "transitory." Then again, the public is often as wrong as is the Fed on these matters.
Markets, for now, one day ahead of the three-ring circus, seem less convinced.
Noto With the Tackle
JPMorgan Chase (JPM) CEO Jamie Dimon gave investors a look into the current quarter on Monday. Speaking of expectations, it appears that trading of both equities and fixed income has returned to something he'd "call more normal" compared to last year's robust performance, while the CEO ratcheted lower expectations for net interest income based on the yield curve as well as loan growth both having underperformed optimistic projections. On the bright side, at least some of this will be offset by outperformance in investment banking.
Do I get out of the Financials? No. Am I less exposed? To the more lucrative parts of the banking business? Yes. I'll stick with at least a couple of names more dependent upon net interest income, and less dependent upon trading, investment banking.
I have stuck with both Wells Fargo (WFC) on the big financial center level based on my belief in CEO Charles Scharf's ability to turn this thing around, as I have been in KeyCorp (KEY) for regional exposure since cashiering U.S. Bancorp (USB) in what turned out to be a better trade than I thought it was at the time.
Oh, one more thing. I have also started to dip my toes in the water in SoFi Technologies (SOFI) , the recent SPAC IPO fintech that is starting to take off. I really like CEO Anthony Noto's aggressive style. You remember him from Goldman Sachs (GS) and Twitter (TWTR) . I remember him as a linebacker at West Point. You want to see aggressive? This kid was all over the field. Now, can SoFi and the like tackle the big banks? We know that Jamie Dimon is alert to the threat. I wouldn't bet against.
Good News
A study in the U.K. shows that the COVID-19 vaccines produced by Pfizer (PFE) and AstraZeneca (AZN) are 96% and 92% effective (respectively) against hospitalization versus this much feared Delta variant (formerly known as the first Indian variant). This is in line with defense offered by these vaccines against the Alpha (formerly the U.K.) variant.
The catch, and this is important, is you need to get your second jab. The Delta variant is considered to be 60% more contagious than earlier variants and perhaps more severe for the unvaccinated, which raises concerns for children in the U.S. where this variant is estimated to make up just 6% of current new cases, but is now the dominant strain in the U.K. forcing back a relaxing of pandemic-based social restrictions.
Bottom line? My opinion is get your jabs when you can and don't try to half-axx it.
Economics (All Times Eastern)
08:30 - Retail Sales (May): Expecting -0.6% m/m, Last 0.0% m/m.
08:30 - Core Retail Sales (May): Expecting 0.4% m/m, Last -0.8% m/m.
08:30 - Empire State Manufacturing Index (June): Expecting 22.1, Last 24.3.
08:30 - PPI (May): Expecting 6.4% y/y, Last 6.2% y/y.
08:30 - Core PPI (May): Expecting 4.8% y/y, Last 4.1% y/y.
08:55 - Redbook (Weekly): Last 14.5% y/y.
09:15 - Industrial Production (May): Expecting 0.6% m/m, Last 0.7% m/m.
09:15 - Capacity Utilization (May): Expecting 75.1%, Last 74.9%.
10:00 - Business Inventories (Apr): Expecting -0.1% m/m, Last 0.3% m/m.
08:30 - Consumer Spending (February): Expecting 0.2% m/m, Last 0.2% m/m.
13:00 - Twenty Year Bond Auction: $24B.
16:00 - Net Long-Term TIC Flows (Apr): Last $262.2B.
16:30 - API Oil Inventories (Weekly): Last -2.108M
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (HRB) (5.06), (ORCL) (1.33)
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