Have you ever been alone at night
Thought you heard footsteps behind
And turned around and no-one's there?
And as you quicken up your pace
You find it hard to look again
Because you're sure there's someone there
- "Fear of the Dark" Steve Harris (Iron Maiden), 1992
Until Morale Improves
How long might the beatings continue? How far might the indexes drop?
On Thursday, one day after equity markets reacted favorably to the FOMC's 75 basis point rate hike, the pressure created by sellers was far greater than the head fake created the day prior by an algorithm-led spate of short-covering. I think most of us sniffed that one out. The degree of the Thursday selloff may have taken a few of us, yours truly included, by some surprise.
Seems simple, really. There was plenty of ammo for those feeling some negativity. First, the Swiss National Bank surprised European economists by increasing their benchmark interest rate by 50 basis points (to a still negative -0.25%), the first increase made by Switzerland's central bank in 15 years. Then it was the Bank of England that stepped to the plate. The BOE raised the Officials Bank Rate by 25 basis points to 1.25%. That move had been expected, but was the fifth increase of its size in as many meetings. The BOE postured itself hawkishly moving forward.
It was at that point that the action hopped the Atlantic Ocean. It was then that May Housing Starts in the U.S. dropped 14.4% from April, badly missing expectations, as the Philadelphia Fed Manufacturing Survey printed in a state of contraction one day after the Empire State Manufacturing Survey had done the same. It was then that the weekly Initial Jobless Claims printed above consensus, bringing with it an upward revision to the week prior as Continuing Jobless Claims expanded for a second consecutive week and a third week in four.
A U.S. economy that only a few days/weeks earlier had allowed a few politically driven economists to pretend that a recession was nowhere in the data, suddenly forced all, including market participants to accept the fact that the U.S. economy was either already in recession or banging on the door. The Atlanta Fed's GDPNow model "reiterated'' it's real-time 0.0% snapshot for second-quarter economic growth (after the Housing Starts print) that it had been revised down to on Wednesday after May Retail Sales had disappointed (even though left unadjusted for inflation).
Pricing in the Darkness
How does one price in the darkness? What lives where no one has ever gone? With the U.S. economy having contracted (-1.5% q/q SAAR) in the first quarter, and currently showing no growth for the second quarter... and a Federal Reserve forced to not cause a recessionary environment (as we are already there), but tighten monetary conditions into a recessionary environment?
According to its own projections, as well as the needs of an overtly inflationary present caused through both heightened demand in some pockets (driven by fiscal irresponsibility, enabled through monetary permissiveness) as much as various crucial scarcities (created through pandemic and geopolitical unease), the Fed is only now, just getting started.
In times like these, one does not increase short-term interest rates (especially rapidly), while embarking upon an expected to be long-term program designed to reduce the monetary base, unless one's hand is forced by something more terrifying. Hence, inflation is that which can not easily be tamed. Inflation has been the tormentor that had been underestimated early on. (Not throwing stones, this author is among those who expected inflation to peak in March and peak at a considerably lower level.)
Thor's Day
Norse god of thunder! Wielding his mighty hammer!
The S&P 500 gave up 3.25% on Thursday and is now down 23.07% for 2022. The Nasdaq Composite and Nasdaq 100 gave up 4.08% and 4.02%, respectively, and now stand a respective 31.95% and 31.82% lower year to date.
It was worse for smaller-cap stocks. The S&P Mid-cap 400 was slapped around for 4.73%, the Russell 2000 beaten for 4.7% and the S&P SmallCap 600 roasted for 4.89%.
Ugly does not describe what happened down on Wall Street and up at Times Square on Thursday, or Thor's Day.
All 11 S&P sector-select SPDR ETFs were taken out to the woodshed for the session. Consumer Staples ( XLP) performed best, as readers might have suspected, though it still closed down 0.76%. Even for Staples, where revenue can be more predictable during tough economies, inflation still squeezes margin, not to mention supplies.
Eight of the 11 SPDRs surrendered 2.39% or more. Six closed off 3.34% or more, while three gave up 4.07% or more, and Energy ( XLE) became a source of funding for traders and investors needing to raise cash and closed -5.63%.
Energy was led lower by Diamondback Energy ( FANG) , APA Corp. ( APA) , and Devon Energy ( DVN) , as the pain was focused upon U.S.-based drillers with large operations in the Permian Basin. Technology ( XLK) lost 4.07% on Thursday, as the Philadelphia Semiconductor Index took a 6.24% beating. Wolfspeed ( WOLF) and Marvell Technology ( MRVL) were hit the hardest among large-caps, down 9.52% and 8.46%, respectively.
Breadth was about as awful as it has been all week into last week. Losers beat winners at the NYSE by roughly 9 to 1, while the ratio was 9 to 2 at the Nasdaq. Advancing volume took a 6.5% share of composite NYSE trade and a whopping 24.3% share of that metric for Nasdaq listings.
Aggregate trading volume increased slightly for NYSE-listed names, more significantly for Nasdaq-listed stocks and across membership in the S&P 500, Nasdaq Composite and Russell 2000. In short, there was a high level of professional participation on Thursday and almost all of it was on the same side of the market.
Sign of Relief?
Despite all of this negativity and the extreme volatility in both debt and currency markets, the spread between the yields of the U.S. 2-Year and 10-Year Notes actually expanded on Thursday and has reclaimed some of the ground lost earlier this week:
Does that mean that net-long investors catch a break on Friday? Hard to say. It looks as if there will be a rebound on the opening bell, at least. That said, stock markets are closed this Monday for the Juneteenth National Independence Day holiday, and today is a "triple witching" expiration event. That will jack up the trading volume as well as the potential for dislocated closing prices.
One note, and it's become a pet peeve of mine. Today is a "triple witching" like it was when I was coming up and not a "quadruple witching." There has not been a true "quadruple witching" expiration event in this country since OneChicago, which was a futures exchange closed in September 2020. Single stock futures have not been "a thing" in this country since, and had been the fourth horseman among expiring investment products along with single stock options, stock index options and stock index futures. Hence, though, "quad-witch" has remained part of market vernacular, the term has become technically inaccurate.
Trading
Semiconductors took a walloping on Thursday, especially after it was learned that Samsung had asked suppliers to delay or reduce shipments of components, according to Nikkei Asia. Samsung had apparently taken this action in response to rising inventories and inflationary pressures. This suggests reduced delivery and/or ebbing demand for everything from home appliances to consumer electronics including smartphones.
Late Thursday, in response to what I see as short-term oversold conditions across the group, I greatly increased my stakes in Advanced Micro Devices ( AMD) and Marvell Technology ( MRVL) , at average prices of $81.61 and $45.05, respectively. These positions are now too large (AMD is way, way too large) to wear into a three-day weekend. My intention is to return these two positions to core size (hopefully at a nice profit) well ahead of when the rest of the crowd gets the same idea.
Right now those look like overnight winners. I did get long a series of Nvidia ( NVDA) puts (expiring today) as a hedge against my potential for misreading market direction going into the closing bell. Yes, this was/is an expense and I normally like being short options not long, but these are not normal times and I felt the necessity to spend on some insurance.
Economics (All Times Eastern)
09:15 - Industrial Production (May): Expecting 0.5% m/m, Last 1.1% m/m.
09:15 - Capacity Utilization (May): Expecting 79.3%, Last 79.0%.
10:00 - CB Leading Indicators (May): Expecting -0.4% m/m, Last -0.3% m/m.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 733.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 580.
The Fed (All Times Eastern)
08 :45 - Speaker: Federal Reserve Chair Jerome Powell.
Today's Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings scheduled for release.
(AMD, NVDA and XLE are holdings in the Action Alerts PLUS member club . Want to be alerted before AAP buys or sells these names? Learn more now. )
