He's a real nowhere man
Sitting in his nowhere land
Making all his nowhere plans for nobody
-- "Nowhere Man", John Lennon, Paul McCartney (1965)
Nowhere?
As I do every night, and again every morning, I start out by looking at equity index performance, then I look at market breadth, and then thirdly, I look at sector performance prior to looking at everything non-equity (yields, dollar valuation, commodities, cryptos), and finally individual stocks.
Why that order? Because every method needs order. What is left without organization is no more than chaotic thought, which ultimately accomplishes little. Why that order? That's just my preference. I'll do me, you do you. Whatever gets the job done effectively.
On Wednesday, as we have seen of late, the large-cap indices went literally nowhere. This time, even the smaller-cap indices showed the same level of indecision as their larger-cap cousins.
The headline level large-cap indices -- the S&P 500, Nasdaq Composite and yes, even the Dow Industrials -- all closed out the regular session on Wednesday in between +0.07% and +0.14%. The Nasdaq 100 performed in line with the Composite. Nowhere. The two small cap indices fell narrowly on both sides of the tracks, the Russell 2000 up 0.13%, the S&P 600 down 0.07%. Only the Dow Transports (-0.97%) and the S&P MidCap 400 (-0.6%) showed decisiveness in directional sway and that was generally lower. One might think given the nature of these two groups that this would be reflective of doubts on continued economic growth.
That idea would be backed up by the sector performance tables (using SPDR ETFs as proxies). Yes, Energy ( (XLE) ) easily led the day (which is a cyclical type group), but clearly investors took on a defensive posture for the day. Three of the top-five sectors came from among the four defensive sectors, while three of the bottom-four sectors came from the five cyclical sectors including the Materials ( (XLB) ) and Consumer Discretionary ( (XLY) ) groups that occupied the last two spots.
The Deal Is This
Simply put, the meme stocks are disrupting market data. Winners beat losers at the NYSE by a narrow-ish 9 to 7, and by just a smidge at the Nasdaq. Yet, advancing volume clobbered declining volume by almost 3 to 1 at both the NYSE and the Nasdaq. Aggregate trading volume increased significantly for names domiciled at both of these primary exchanges.
I am not going to go through the entire gamut of meme stocks, such as GameStop (GME) , Bed Bath & Beyond (BBBY) , BlackBerry (BB) and others, but the one that made the most headlines, and traded the most on Wednesday was yet again AMC Entertainment (AMC) .
AMC ran 95% on Wednesday and appears as the wee hours pass to be percolating up another 21% overnight. I see the name trading with a $75 handle as I write this piece. The point I am trying to make is that AMC alone accounted for more than 13% of aggregate NYSE trading volume on Wednesday. Who knows what percentage of all trading for the day was attributable to these meme stocks as a group? While this "craze," which is hardly crazy (short interest is a fundamental metric) remains a central market theme, breadth cannot be a trustworthy measure for daily market health. It really is that simple.
What I find very interesting is that despite the pressure, many of those who are currently holding the bag in these heavily shorted stocks are facing tremendous paper losses, and have yet to throw in the towel. Perhaps they are just stupid? Perhaps they have found a work-around?
According to Bloomberg News, these paper losses combined for the 10 most shorted U.S. stocks have run up to approximately $4.5 billion. This includes $2.75 billion in unrealized losses in AMC alone. Think Melvin Capital was special? Melvin is about to have some company unless at least part of these losses were somehow well-hedged.
It was one thing to be Melvin in GameStop (GME) earlier this year. Yes, experienced traders made serious rookie mistakes there. It would be something else altogether to have behaved similarly elsewhere, but not to have learned from that hard lesson.
That Said...
I day-traded AMC Entertainment on Wednesday, largely because I bought a few shares in the morning just above $40 as I was writing a piece on Zoom Video (ZM) for Real Money. Knowing I would be busy elsewhere, I offered those shares for sale at $55 and went about my business. I then went on to write a piece about Shift Technologies (SFT) for TheStreet's Stocks Under $10 (for which I am co-portfolio manager) after the Zoom piece. I took my eyes off of the ball for a while.
I was then notified that I had made that $55 sale. I hit a home run in my first at-bat of the day. Now, naturally, I was going to play the rest of the day for free -- with house money.
Needless to say, some of the signals that I rely upon to day-trade when I need to, are working at times in AMC, and not at all at others. I traded the name heavily over the final hour, and ended up going out short. Yes, short. Of course I bit the bullet and covered that short well after the closing bell on ARCA, but the fact is that ex-that first trade, I would have lost money on the day. Then again, without that first trade, I would not have been so involved.
Just understand that this is a whole lot more than a group of retail traders in a chat room. There are professional traders using high-speed algorithms to both profit off of the momentum and create overshoot. These algorithms not only compete with each other as they race "through the pipes" but also scour social media and known chat rooms for signals as a means to stay one step ahead of (as well as provoke) folks who must spend valuable seconds manually entering orders. In fact, in some cases, it may be those very firms with net-short positions that are in the mix, trading algorithmically around their core positions in order to create short-term profits as a means to offset what will be long-term losses.
Remember, with the exception of the kids who get placed at some of these hedge funds by wealthy relatives (customers), the ones that got there on merit were all "that math kid" that you made fun of in high school. They are not stupid.
'Damn The Torpedoes, Full Speed Ahead' (probably paraphrased)
--Admiral David Farragut (August 4, 1864)
The Federal Reserve published the latest edition of its Beige Book on Wednesday afternoon. It is clear that the U.S. economy is expanding, or at least was from early April into late May across all 12 of the central bank's regional districts.
This expansion has been driven by a U.S. consumer who has not only been deprived of a normal life for more than a year, but has had his or her pockets stuffed by Uncle Sam while in some cases various obligations have been suspended for elongated periods of time. In fact, there would appear to be smooth sailing ahead as one reads through the material if not for widespread supply chain disruptions, labor supply shortages, and rapidly increasing consumer-level pricing.
Admiral Farragut entered the U.S. Navy as a midshipman at the age of 9, and saw combat in the War of 1812, in the 1820's against pirates, in the Mexican-American War of the 1840s, and ultimately in the Civil War as the Navy's very first admiral. He was a Tennessee man who remained loyal to the flag that he had served under for nearly his entire life. Farragut passed on at the age of 69 in 1870, after serving 60 years on active duty.
The torpedoes would have been called mines today, and on August 4, 1864, Farragut was commanding a U.S. fleet that needed to enter a mine-filled Mobile Bay in order to engage the CSS Tennessee, and Confederate land forces at Fort Morgan in order to support the Union Army's siege and possession of the Mobile, Alabama area on the Gulf of Mexico. Needless to say, the U.S. Navy took heavier casualties than did the U.S. Army that day.
What does the Fed do now? Full speed ahead? Damn the torpedoes? Take financial casualties?
About The Fed
On Wednesday, Philadelphia Fed President Patrick Harker, not a voting member of the FOMC this year, said "I think it is appropriate for us to slowly, carefully move back on our purchases at the appropriate time, when that is, that is something we need to start discussing." This reads as if Harker was afraid to say too much, but one thing seems clear -- Harker, in my opinion, is concerned that the Fed may already be behind the eight ball.
Dallas Fed President Robert Kaplan (also not voting this year) and Fed Gov. Randal Quarles (who Sen. Elizabeth Warren apparently has no taste for) have both expressed concerns of late that the time to talk about tapering the Fed's asset purchase program may be upon us. (No kidding.)
What the Fed is doing now is to announce plans to go to market with all of the corporate bonds and ETFs holding corporate debt that the central bank had accumulated under the SMCCF, a crisis era lending vehicle you may know as the Secondary Market Corporate Credit Facility, which was meant to reduce economic fallout across the corporate landscape early on in the pandemic. The facility holds $5.21 billion in direct corporate debt and $8.56 billion in ETFs.
The Fed expects to take the rest of the year to unwind this program, which is unrelated to the $120 billion monthly balance sheet expansion that we speak of so often. To put this in perspective, this program holds in assets, just 11% worth of what the Fed purchases in assets from the U.S. Treasury and in mortgage-backed securities (why on earth?) every single month. In Fed terms, this program, while seemingly very large, is really peanuts.
Finally, a Good Idea
President Biden met with Sen. Shelley Moore Capito of West Virginia who is leading the Republican side in crafting a negotiated infrastructure deal. While all appear to understand that a bipartisan deal would be preferable unless the Dems think they can keep all 50 senators on their side of the aisle in line, there was no public comment made by either of the principals involved.
What President Biden did go public with was a shift by his administration to work with churches, businesses and celebrities in order to revamp demand for COVID-19 vaccinations. Currently 62.9% of eligible Americans have received at least one dose, but demand has slowed to a trickle. You'll recall that the president had set a goal of 70% at least partially vaccinated by Independence Day. Biden did warn the unprotected about the long-term effects of living with what comes after the virus itself. Personally, I think far too many folks are ignorant to the fact that full recovery is not nearly as common as many think. Naysayers point to a 99%+ survival rate and conveniently ignore a full recovery rate that some put as low as 75%.
Now, for this good idea. Anheuser-Busch InBev (BUD) has teamed up with the White House to offer every American of drinking age a free beer (or non-alcoholic brew) if the public reaches the president's 70% goal by July 4th. Rumors remain unsubstantiated that handfuls of individuals have volunteered to get vaccinated again and again if necessary.
Economics (All Times Eastern)
08:15 - ADP Employment Report (May): Expecting 657K, Last 742K.
08:30 - Initial Jobless Claims (Weekly): Last 406K.
08:30 - Continuing Claims (Weekly): Last 3.642M.
08:30 - Unit Labor Costs (Q1-F): Flashed 0.3% q/q SAAR.
08:30 - Non-Farm Productivity (Q1-F): Flashed 5.4% SAAR.
09:45 - Markit Services PMI (May-F): Flashed 70.1.
10:00 - ISM Non-Manufacturing Index (May): Expecting 63.0, Last 62.7.
10:30 - Natural Gas Inventories (Weekly): Last +115B cf.
11:00 - Oil Inventories (Weekly): Last -1.662M.
11:00 - Gasoline Stocks (Weekly): Last -1.745M.
The Fed (All Times Eastern)
12:30 - Speaker: Atlanta Fed Pres. Raphael Bostic.
13:00 - Speaker: Philadelphia Fed Pres. Patrick Harker.
15:05 - Speaker: Reserve Board Gov. Randal Quarles.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (SJM) (1.66), (TTC) (1.21)
After the Close: (AVGO) (6.46), (COO) (3.09), (CRWD) (0.06), (DOCU) (0.28), (LULU) (0.90)
(BlackBerry and Shift Technologies are holdings in TheStreet's Stocks Under $10 portfolio. Click here to learn more about this portfolio, trading and market commentary service.)