You could see it building a couple of months back. March was truly sloppy. The front half of April brought baseball, and another rally for the Information Technology sector. Now, for a couple of weeks this time, you can see it again. Capital flow is moving away from high valuation, or growthy type names and into businesses that either produce, sell, or transport the kinds of things that hurt if you drop them on your foot.
The tech space, including the semiconductors, software/cloud types, and computer hardware, as well as Internet stocks that are no longer classified as "tech" stocks, having been moved into Communication Services, are now the "hot potato." He or she who holds onto the hot potato the longest gets burned.
The action across equity markets got ugly on Monday, real ugly.
At the index level, the Dow Jones Industrials and Dow Transports both surrendered huge "up" days in their entirety by the time that bell at 11 Wall Street had peeled its last. Those two were easily the outperformers for the day. Both the Nasdaq Composite (-2.55%) and Nasdaq 100 (-2.63) were beaten silly from the get-go as were small-cap stocks.
At the sector level, what has been portrayed through asset allocation could not be any clearer. Across the 11 recognized S&P sectors, the four considered to be defensive in nature (Utilities, Staples, REITs, Health Care) took first place through fourth place for the day, while all four saw their representative Sector Select SPDR ETFs finish the day in the green. The two growth Sector SPDRs (Communication Services: (XLC) and Technology: (XLK) ) led the market lower giving up 1.9% and 2.5% respectively.
Plain to see, portfolio managers may or may not fear inflation... portfolio managers may or may not fear tax reform. Clearly, they are now in masse, positioning themselves for a changed environment.
It's not just here in the U.S., either. The selloff in tech types has spread overnight, running through both Asian and European markets as ECB Executive Board member Isabel Schnabel has been talking up German inflation expectations.
Key data on April consumer-level inflation is due Wednesday morning. It doesn't matter that month over month, inflation might not look all that scary. Investors have been taught to respect, through the Fed's often spoken of (for decades now) annual target of 2%, anything higher than that. April inflation, on a year-over-year basis is, at the headline level, going to obliterate that target.
Of course, the pandemic has more to do with this than anything else. Mass fear of the virus on top of an economy intentionally shuttered by mandate-forced inflation to basically come to a complete stop for April, May, and June of 2020. The headline year-over-year rate of consumer-level inflation is being exacerbated by both rising current inflation as well as the disinflation (not outright deflation, that is different.) seen one year ago.
Expectations for the April CPI print is for growth of 3.6%, with some economists this >< close to 4%. This will come after a March print of 2.6% that came on top of a February posting of 1.7%. No, you are not crazy, spit costs more.
Sometimes we can find a silver lining somewhere inside a "down" day once drilling down into the data. Not Monday, though.
Losers beat winners more than 3 to 1 at the Nasdaq, and more than 2 to 1 at the NYSE. Declining volume beat advancing volume just as decisively at both of our primary exchanges. New highs trounced new lows at both exchanges -- by about 14 to 1 at the NYSE. This kind of imbalance can sometimes be seen as a turning point, so wear your stupid helmet. Don't make me tell you twice.
This happened as investors also took some funds out of the long end of the Treasury curve. The 10-Year Note moved up to 1.6% on Monday, and has kept on going overnight. I now see (at zero dark-thirty) that the 10-year Note is paying more than 1.62%, while all major U.S. equity index futures also look soft.
I think we can easily see that a large number of professional portfolio managers, perhaps at the behest of their risk managers (not too many of these folks are truly on their own anymore), have moved to distribute equities more broadly than they had probably been positioned.
Very interestingly, this comes as first-quarter earnings have simply hit the ball out of the park. As we went into this past weekend (according to FactSet), 88% of the S&P 500 had reported. The blended (reported and projected) rate of earnings growth for the quarter has gapped up to 49.4%, while revenue growth is now up to an even 10%.
Consensus view into the second quarter is now for earnings growth of 59.5% on revenue growth of 18.7%. All the while, the 12-month forward looking P/E ratio had come in over successive weeks, from 22.5 times to 22 times to 21.6 times, and after Monday, certainly lower than that. Net profit margin across the S&P 500 has to this point landed at 12.6%, comparable to 9.3% one year ago. That's your ballgame in a nutshell.
I wonder what rising input costs such as wage growth, higher costs for both raw and finished materials, higher transportation fees, and increased corporate taxes will do to margins? Anyone want to guess? Hence, valuation is being forced to move toward earnings with a touch of uncertainty sprinkled on top.
Progression of a Snapping Twig
I am going to guess that most readers don't know that if you fill your socks with vegetation and wear them over your boots that you not only make less noise moving through a wilderness environment, but you also leave fewer and less easily identifiable tracks. Kick a rock, or snap a twig, though, and there is no hiding. You just have to hope that a monkey or a bird makes a sudden movement elsewhere, or even better, find out that you really are all alone.
Readers will see above the Nasdaq Composite adopt support at the 50-day simple moving average (SMA) and resistance at the 21-day exponential moving average (EMA). Support survived two piercings last week, only to see the door kicked in, on Monday.
The most dangerous thing I see here is that the index closed at its lows of the day on Monday, undercutting the lowest points of those two prior tests.
Yet, the technology sector SPDR ETF (XLK) , above, has not yet broken that line. Now, that's interesting. Let's explore this.
Well, I guess we can not blame the computer hardware industry, which is where "they" place Apple (AAPL) , not to mention Dell (DELL) , HP Inc. (HP) , or NCR Corp. (NCR) , which is the old National Cash Register. What these firms make a lot of, even if still tech stocks, is stuff that can still hurt if you drop it on your foot.
We see above that the chart gets much uglier for the software/cloud industry. Looks like I am going to have to figure a way out of that long position that I had been building in ServiceNow (NOW) . By "out", I mean reduce exposure, I don't mean "out" out.
We're going to have to earn a degree in financial engineering there. Actually, the position is down over a couple of weeks, not down relative to net basis, but I can not stand there and hope. Hope is not a strategy.
Well, here's the recent "pain" trade. The semiconductors are down just as hard as is software, even harder of late. During a shortage. Semis do not hurt if you drop them on your foot, but they are indeed very commodity-like in their characteristics.
We are not wrong to think that managers are selling tech ahead of the April inflation numbers. We are not wrong to think that uncertainty around corporate tax structure is a concern. What has been completely missed by most folks who cover, but do not trade the markets is that the seismic shift around technology on Monday was centered more specifically on the semiconductor space than elsewhere, and the primary catalyst was not the cyber attack on the Colonial Pipeline or some confrontation between U.S. and Iranian naval forces.
The catalyst was simply the fact that Taiwan Semiconductor (TSM) , foundry to the world, reported revenue (in New Taiwan Dollar terms) for April that showed 16% year-over-year growth (huzzah?), but unfortunately month-over-month "growth" of -13.8%.
In other words, amid a global shortage in chips, the top dog in fabrication sold far fewer in raw numbers of this precious "commodity."
Dips In Chips
While I have worked tirelessly (such a hero) to rebalance my portfolio to reflect more fully the need to be less exposed to this "pain" trade and more exposed to what works in what I see as the coming environment -- Materials, Industrials, and stuff that moves -- nobody dances without the chips.
Dips in chips more than any other group (again, just my opinion) are opportunities. That said, no promises on how much better an opportunity any given industry might present down the road, but I am not selling my chips. At least not the ones whose CEOs I know can bat clean-up.
Oh, One More Thing
I am really running out of time. I had so much more to write today. I am sorry, but I already start work at 03:30 every day. I would be unable to watch baseball at night if I started any earlier. Priorities. That said, Exxon Mobil (XOM) is flirting with a breakout.
You are looking at either that breakout produced by a cup pattern with a $62.50 pivot, or you are looking at a cup that is about to add a handle. I think it OK to buy this name down to where the 21-day EMA and 50-day SMA are running together.
You do what you want. That's what I am doing. Sarge out.
Economics (All Times Eastern)
06:00 - NFIB Small Biz Optimism Index (Apr): Expecting 100.1, Last 98.2.
08:55 - Redbook (Weekly): Last 14.2% y/y.
10:00 - JOLTs job Openings (Mar): Last 7.367M.
16:30 - API Oil Inventories (Weekly): Last -7.7M.
The Fed (All Times Eastern)
10:30 - Speaker: New York Fed Pres. John Williams.
12:00 - Speaker: Reserve Board Gov. Lael Brainard.
13:00 - Speaker: San Francisco Fed Pres. Mary Daly.
13:15 - Speaker: Atlanta Fed Pres. Raphael Bostic.
14:00 - Speaker: Philadelphia Fed Pres. Patrick Harker.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (PLTR) (0.04)