"It is not because things are difficult that we do not dare, it is because we do not dare that they are difficult." -- Lucius Annaeus Seneca
Just Where Are We?
No, this is not going to be a class on ancient Roman stoicism, though I know how much you crave such intellectual journeys into personal development at zero dark-thirty on Monday morning. Such adventure we will leave for another time.
Just where are we? That's the question, and finding the answer is as much about knowing what you are trying to accomplish as it is about understanding an incredibly robust environment for large-cap profitability based upon an ultra-liquid landscape.
What do I mean by that? Take a look (don't worry, I am not going into great detail) at first-quarter S&P 500 earnings, as 91% of the index is already in the books and that last 9% is heavily composed of well-known retailers. At this juncture (based on FactSet data), S&P 500 earnings are running at year-over-year growth of 50.3%, with the second quarter now projected at growth of 59.3%. Remember when low double-digit growth used to blow our minds. Just as the impacts of the pandemic have rendered year-over-year comparisons for key macroeconomic data points not only absurd (and volatile), but to be honest "non-comparable," so it is with corporate performance.
Net profit margin across the S&P 500 for first-quarter 2021 is screaming along at 12.7%. For reference, the consensus view across the community of Wall Street analysts ahead of the season was for something close to 9.3%. These projections are made by private-sector analysts who study industry groups and sectors about as closely as you and I study our children's behavior, yet somehow, net profit margin across the financial sector for the three-month period has landed at 22% versus the 10% these folks were looking for.
Not their fault, you say? Just look at how far off of the mark Wall Street's economists have been? April job creation way, way below expectations. April consumer-level inflation way, way above expectations. April Retail Sales that at least on a month-over- month basis missed by a mile (and a half). On the Wall Street where I grew up, it did not matter how you got it "right" if you were right, and it did not matter why you were "wrong" when you were wrong. You were either rewarded or brought to the edge of termination based on your results.
Something tells me that today's Wall Street is far kinder and gentler than was yesterday's, and not just because the investment banks appear to be struggling with a generation unwilling to accept that this is a 17-hour-a-day job.... for life. Though that is what it takes to become "good" at this, and building habits centered on work ethic will drive positive results for decades. It is also because, at least from my current seat, there appears to be a general tolerance for inaccurate or sloppy work.
Chutes and Ladders
My favorite game growing up was Strat-O-Matic Baseball. I think this might probably be true for just about every statistics nerd in my age group. My father has always told me that my love of numbers and mathematics gave me a leg up in life, and that game honed my ability to quickly produce outcomes in my head based on basic statistics and probabilities.
Long before I ever learned how to play that dice-and-cards baseball board game came (as a little tyke) lazy afternoons playing "Chutes and Ladders" with my sister. Up one second, down the next. Based on the luck of where your peg landed. This children's game may have prepared me as much for today's markets as did having good parents, figuring out probabilities in my head so I could be good at a baseball board game, and maybe as much as having to figure out just what I had gotten myself into at the age of 17 when all my friends were doing teenager stuff like... summer and college.
Last week handed equity traders three "down" days that felt pretty miserable followed by two "up" days that at least applied a bandage to those wounds suffered just a few days earlier. Long or short, don't be fooled into being sure of anything. Just as none of you had any experience in trading a pandemic last year, none of you have any experiences in trading a recovery. Many of us have traded liquid markets before, though nothing like this. None of you have ever seen the federal government so over-extended and willing to try to extend itself much further at a time that the central bank appears committed to something very close to inappropriate monetary policy.
Why? You ask. This is it, I think. If after all of this, destroying an economy and building it back differently, through over-use of easy money, on both the fiscal and monetary sides, "they '' are still unable to create or control inflation, "they" will have to admit that they simply can't. That would mean that all this deficit spending, one administration increasingly more irresponsible than the one prior going back to the turn of the millennium, would have to eventually be paid back, defaulted on, or monetized. (Really the same thing as defaulted on.)
This is causing tremendous indecision as well as algorithmic momentum overshoot as there are no longer sentient beings controlling anything at any place resembling a centralized point of sale. This is most unfortunate.
Smoke and Mirrors
Equity markets roared on Friday. The Nasdaq Composite took back 2.32%, closing out the week down "just" 2.34%. The Russell 2000 (small-caps) did even better, up 2.47% for the day, down 2.07% for the week. Even our broadest and most important measure of large-cap performance hemmed and hawed. The S&P 500 ran up 1.49% on Friday, but gave up 1.39% for the five-day period. The S&P 500 did appear to find support at its 50-day simple moving average (SMA), now 4,064, while managing to break back above its 21-day exponential moving average (EMA).
The Nasdaq Composite, for all of its late-week glory, remains out there. Out there in "No Man's Land" face down in the mud, hoping that the raking machine gun fire fails to hit anything meaty.
As readers will note, the Nasdaq Composite found support on successive days just above the 13,000 level, which is psychological, not technical, potentially making it weaker. Psychological levels held more sway back when humans controlled price discovery. Algorithms see trends,and see technical patterns and levels. They can even see psychological levels if those who pay the programmers want them to. I really don't see them caring as much now that their days are spent going down rabbit holes on YouTube as they did back when they were stabbing each other with sewing needles in trading crowds. (Different folks.)
The thing I noticed about last week was this: On Friday, cyclical and growth sectors led. All four defensive sectors ended the day in positions 8 through 11. For the week, those four defensive sectors (using SPDR sector select ETFs as proxies) finished in first through fourth, led by Consumer Staples (XLP) and followed by the Utilities (XLU) . Growth finished the week in ninth and tenth, with Information Technology (XLK) finishing well behind Communication Services (XLC) . Semiconductors (a group I am hanging on to) took the most severe beating, with the Dow Jones U.S. Semiconductor Index taking a 4.3% beating for the week despite rallying 3.1% for the day on Friday. The Philadelphia Semiconductor Index similarly rallied 3% on Friday to end the week down 4.2%.
The deal is this: Trading volumes were absolutely anemic on Friday. This was no minor decline in activity. Winners beat losers by 8 to 1 at the New York Stock Exchange as aggregate trading for NYSE-listed names decreased 16.1% on Friday from Thursday. Winners beat losers by 4 to 1 at the Nasdaq as aggregate trading volume for names listed at that exchange saw a 14.3% drop-off in activity on Friday from Thursday.
Does this make the Friday gains less meaningful? Well, money gained and money lost do count no matter how much you may wish they either would or would not. The fact is that this drop-off in activity tells us that the action was based more on trading than investment than had been the selling earlier in the week on much heavier volume.
Forget the VIX (by the way, never ever speak of the VIX in percentage terms. Nobody in the industry does that, but I hear it in the media all the time). You will see that the CBOE Total Put/Call Ratio hit a level last week higher than anything seen since November. That's how you measure caution.
In other words, portfolio managers have not jumped on board the two-day rally just yet, or that Friday's "un-rotation" was simply more speculative in nature than anything else. Stay agile. Stay hungry.
The Chinese macro? Yes, but no. By the way, the Chinese April numbers for Industrial Production, Retail Sales, and Fixed Asset Investment are pretty much disappointing across the board. Slowing acceleration? Tougher comps? Yes, yes, and coming to a theater near you, in about two months.
I'm really talking about the story that I believe broke on Sunday at Bloomberg News that AT&T (T) is in talks to combine its media business (WarnerMedia) with Discovery Inc. (DISCA) . As regular readers well know, I am long both these names as I had finally chosen AT&T over Verizon (VZ) as AT&T seems to be the more aggressive of the two and seemed well-positioned to be able to keep paying the juicy dividend (6.5% yield). That had been one of my concerns. As for Discovery, this was one of the names that Credit Suisse (CS) had been forced to liquidate after the Archegos debacle. As I told you at that time in both print and on television, I am quite comfortable taking the other side of any trade where I know I am up against Credit Suisse.
Oh, the story has ViacomCBS (VIAC) trading higher, too. Thanks again, Credit Suisse. Can't stop laughing while typing. I really can't stop. Might wake up the family.
OK, I've composed myself. I will probably take off at least half these two longs today, just to lock some profits and get the risk down to as close to "house money" levels as possible. The worst part of modern Wall Street is that when you openly tell someone that you are going to beat them, and then you do exactly that, they don't even know. For they have become nothing more than an algorithm, incapable of carrying on with an old-fashioned rivalry. These are the days one really misses open outcry. What a joy this would be.
The cult war is on. Tesla (TSLA) CEO Elon Musk had been tweeting again on Sunday, and it was not very good for Bitcoin at all. Over the weekend, Bitcoin traded below $44,000 apiece as Musk suggested that Tesla might rid the supposed $1.5 billion in Bitcoin holdings from its balance sheet. The entire cryptocurrency complex sold off along with Bitcoin. Yes, even Dogecoin.
I have no dog in this fight, but as one cult crashes into another and many of the players involved probably belong to both cults, this can only get more entertaining. In the meantime, my focus remains on companies that produce, manufacture or transport either raw materials or semi-finished to finished goods and do so profitably. Seems so easy. We'll see.
Economics (All Times Eastern)
08:30 - Empire State Manufacturing Index (May): Expecting 24.3, Last 26.3.
10:00 - NAHB Housing Market Index (May): Expecting 83, Last 83.
16:00 - Net Long-Term TIC Flows (Mar): Last $4.2B.
The Fed (All Times Eastern)
10:05 - Speaker: Federal Reserve Vice Chair Richard Clarida.
10:25 - Speaker: Atlanta Fed Pres. Raphael Bostic.
18:00 - Speaker: Dallas Fed Pres. Robert Kaplan.
Today's Earnings Highlights (Consensus EPS Expectations)