Are we overbought?
Well... not exactly. I am hearing everywhere that equity markets are overbought. I think Helene Meisler said it best in the opening of her Top Stocks newsletter Monday evening. Helene wrote: "We had one big up day for the indexes on Friday and everyone is a bit confused, because I said the market is overbought. It is short-term overbought. It is not intermediate-term overbought, It has also been red for three of the last four trading days."
I was trying to figure what folks were looking at that sent an overbought signal, and then it dawned on me that with the Dow Industrials (an index that I have not considered to be a "major" in years) had at the tail end of its recent six-day winning streak (broken on Monday) seen its daily RSI (relative strength index) barely scrape the "70" bound. When speaking RSI-ese, a 50 reading is considered to be neutral, with 70 being the lower bound of an overbought reading and 30 being the upper bound of an oversold reading. Just an FYI, assets can remain overbought or oversold for lengthy periods of time. It does not mean reversal is necessarily imminent.
Because you were going to ask, or at least start pulling up charts, the daily RISs for the S&P 500 and Nasdaq Composite stand at 57.1 and 50.49 respectively. There are many other ways and oscillators that investors can use to try to figure out a condition such as this, but RSI is probably the simplest, and you don't have to figure anything out for yourself.
Grim Grinning Ghosts
Monday was a "down" day for equities, but not nearly as rough as one could have expected going in. It is not uncommon at all for equities in general to move in the opposite direction for the last session of a month or quarter where there has been a big move, and we have been hearing almost constantly that the Dow Industrials at +13.95% had their best month since 1976. The S&P 500 and Nasdaq Composite posted more realistic, but still impressive monthly gains of 7.99% and 3.9% for October, respectively, hence the counter-directional move on Halloween/Monday.
For the session, the Philadelphia Semiconductor Index took a beating of 2.02%, led lower by On Semiconductor ( ON) as that stock gave up almost 9% post-earnings. The two "growthy" type sectors, Technology ( XLK) and Communication Services ( XLC) , were the two worst-performing S&P SPDR sector ETFs for the day, both giving back more than 1% as the Dow Jones US Internet Index sagged another 2.41%. The leading losers there were DoorDash ( DASH) and of course, Meta Platforms ( META) once again. This pushed the Nasdaq Composite and Nasdaq 100 down 1.03% and 1.22%, respectively.
Elsewhere, the pressure was rather mild. Though the S&P 500 surrendered 0.75%, all of the small-to mid-cap indexes closed almost unchanged as did the Dow Transports.
Breadth & Effect
Nothing dramatic here. Losers beat winners at the NYSE by roughly 8 to 7 and at the Nasdaq by about 5 to 4. Advancing volume took a 47.2% share of NYSE-listed trade and a 39.2% share of that same metric for Nasdaq listings. Aggregate trading volume was up about 8% day over day for NYSE names, but as mentioned, the indexes were down only moderately. The Nasdaq twins were both down more than 1%, but aggregate trading volume was lower day over day. Hence, we are not going to view Monday as a day of professional liquidation. The tradable bottom of October 13 that was technically confirmed on October 21 stands firm for now. At least until Jay and the gang re-emerge from their caves.
Don't forget that markets also tend to react well to national elections. especially when the party in power loses, or even better... leave the country with a split legislature. These midterms could be shaping up that way.
Equities were not the only ones losing a little weight on Monday. The dollar increased in value versus a basket of reserve currency peers as Treasury securities sold off as well. The U.S. 10-Year Note went out yielding 4.08%, dropping its spread inversion against the U.S. 3-Month T-Bill to -12 basis points. This has reversed somewhat overnight. I see the U.S. dollar weakening this morning as the Bank of England moved to unwind stimulus. This has also chased some international investors into U.S. sovereign debt, dropping the yield for 10-Year paper back under the 4% level. It does look as if the 10-Year/3-Month yield curve could be trying to un-invert through the zero-dark hours.
On That Note...
The macro remained soft on Monday as the Chicago PMI and Dallas Fed Manufacturing Index both printed well into contraction and below consensus for the month of October. Tuesday morning brings revisions to the Flash PMI print for October, the ISM Manufacturing Index, as well as Construction Spending for September.
The October "jobs week" fun gets started on Wednesday morning with the ADP Employment hitting the tape a few hours ahead of the FOMC policy statement.
Wilson!!
Remind anyone of a floating volleyball?
Mike Wilson of Morgan Stanley ( MS) was back in the news on Monday afternoon. Wilson, readers may recall, famously called this year's market contraction and now when he speaks or writes, he gets a lot of press coverage. Wilson notes that indicators such as that 10-Year/3-Month yield curve inversion (see, I'm not the only one) with a near-perfect record of predicting economic recession "all support a Fed pivot sooner rather than later. Therefore, this week's Fed meeting is critical for the rally to continue, pause or even end completely."
I agree, but I also think that's obvious. Nearly all of the macro of late has come in a little sideways, with the exception of the advance print for Q3 GDP, and this is before large numbers of individuals start losing their jobs. I believe that Nick Timiraos at the Wall Street Journal was right back on October 13, and that the FOMC would be close to derelict in its duty to the nation to not express at least some level of flexibility on short end of the curve policy on Wednesday afternoon.
While I expect, like everyone else, a 75 bps rate hike for this meeting, it would not surprise me to see the December 14 meeting put into play. I think it's a bit too early to mention anything like an Operation Twist or something similar, but it is past time to signal an ability to reason as conditions deteriorate and as the Fed's balance sheet and therefore the monetary base and ultimately money supply continue to shrink.
It has become painfully obvious that quickly putting intense upward pressure on short-term interest rates hits the economy more quickly than it does consumer-level inflation. Continuing on with the drawing of liquidity from the economy (about $20B per week of late) should be enough to wither inflation to a point. It is almost imperative to allow the yield curve to try to normalize at this point (perhaps it's too late) in order to avoid a hard or crash landing.
Oil
Readers may have noticed on Monday morning that OPEC projected, at its annual World Oil Outlook, global oil consumption to increase 13% to 109.5M barrels per day by 2035 and then hold that level for a number of years. OPEC sees oil's share of the global energy mix, which now stands at 31%, declining to 29% by 2045. These projections are in contrast to broadly held views across the energy industry that demand will ebb toward the end of the 2020s as that demand starts to skew in earnest toward renewable sources of energy.
Later, also on Monday, President Biden called on Congress to enact penalties against oil and gas companies that do not use their "windfall" profits this year to help reduce costs for consumers. The president said, "Their profits are a windfall of war. At a time of war, any company receiving historic windfall profits like this has a responsibility to act beyond the narrow self-interest of its executives and shareholders."
Well, I see this a little differently. As a shareholder who had the focus to invest in the space when it was out of favor, we took on risk, and I think in the name of free-market capitalism, that matters.
Let's look at Exxon Mobil ( XOM) .
Through the first nine months of the year, XOM has posted net income of $42.99B, on pace for a record. OK. Exxon Mobil posted a net loss of $22.44B in 2020. Never heard a peep about helping out big oil in 2020. In fact, for the five years ending with 2019, XOM averaged net income of $16.159B per year.
After losing $22.44B in 2020, XOM posted net income of $23.04B in 2021. That's virtually two years that cancel each other out. XOM would need to post net income of almost $48.5B in 2022 just to return its average per year income to where it was prior to the pandemic. While the company is on pace to do that, can this really be called a "windfall" when all it really does is do little more than even things up after having suffered heavy losses early in the pandemic?
Anyone Else Notice This?
Last night news broke that General Electric ( GE) had been awarded by the Naval Supply Systems Command, a "not to exceed" $1.09B indefinite delivery performance-based logistics requirement contract for the repair,, replacement and program support of 787 F414 engine components in support of the F/A-18 Hornet fighter aircraft.
The contract includes a five-year base with no options with the work expected to be completed by October 2027. Working capital in the amount of $81+M will initially be issued for delivery. Funds will not expire at the end of the fiscal year. That's a nice contract.
Margin Crunch
How about this one.
On Monday night, medical equipment maker Stryker ( SYK) posted adjusted Q3 EPS that missed on Q3 revenue that beat. In the guidance, the company posted expectations that full-year organic sales would print at growth in a range spanning from 8.5% to 9% versus the 6.9% growth expected on Wall Street. However, Stryker also sees net earnings per diluted share printing in between $9.15 and $9.25, which is below the $9.36 that Wall Street was looking for.
The stock is trading off about 5% in an otherwise strong pre-opening tape.
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last 8.2% y/y.
09:45 - S&P Global Manufacturing PMI (Oct-rev): Flashed 49.9.
10:00 - ISM Manufacturing Index (Oct): Expecting 49.9, Last 50.9.
10:00 - JOLTs Job Openings (Sep): Last 10.053M.
10:00 - JOLTs Job Quits (Sep): Last 4.158M.
16:30 - API Oil Inventories (Weekly): Last +4.52M.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: ( BP) (0.32), ( LLY) (1.93), ( FOXA) (1.14), ( LDOS) (1.57), ( PFE) (1.40), ( SPG) (2.92), ( SYY) (0.99), ( UBER) (0.06)
After the Close: ( AMD) (0.72), ( AIG) (0.52), ( CLX) (0.78), ( DVN) (2.13), L ( THM) (0.39), ( MCK) (6.09), ( MDLZ) (0.69)
