"Life is like riding a bicycle. To keep your balance, you must keep moving."
-- Albert Einstein
Unleash The Bull?
Equity markets felt a little sleepy on Monday. The major equity indexes advanced quite modestly for the session, adding to Friday's gains. As the S&P 500 added less than two points, or 0.05%, the Nasdaq Composite tacked on a mere 0.18%.
Added to Friday's run of 2.25%, the Nasdaq Composite closed on Monday afternoon at 12,257, or up 20.1% from its recent low of 10,213 (December 28). The index stands 21.5% above its October 13 low, but as the Nasdaq rallied and sold off in pronounced fashion twice in between October and December, that low is not considered the "recent" low.
So, have the bulls been unleashed?
According to the old rules, a 20% move off of the recent high or low signifies a new bull or bear market. These guidelines were created long before algorithms and programmed trading took decision making and the art of price discovery away from human beings, so I really don't see a 10% move necessary to identify a correction or the need for a 20% move to confirm a new market environment.
Market structure has been re-designed to force overshoot since human price discovery was considered to be just too darned slow for the modern era. This has caused a number of fits and starts that may or may not mean as much as they used to.
Perhaps the parameters that determine textbook market trajectory need to be broadened or refigured for the modern marketplace. Perhaps there is no need to determine such things at all, as I think we all know sooner or later whether or not we are or are not in a bear or bull market.
I think most of us expect that equities will rally short-term as long as our legislators avoid a U.S. default. I believe we all expect that equity markets might recede medium to longer-term should the economy move into a contractionary or recessionary period. Though these times we live in are surely different, can they be all that different? We shall find out.
That Said...
It does not take a genius to see that the Nasdaq Composite has spent two days knocking on a door that failed to open upon several occasions already. Open that door and the index will go.
Another failure at this level could see a rapid return to either the 21-day exponential moving average (EMA) or 50-day simple moving average (SMA).
Not Quite Manic Monday
Amid another session of decreased trading volume, none of our mid-major to-major equity market indexes moved very far Monday. The Philadelphia Semiconductor Index led to the upside at +0.56%, as the Dow Transports ended the day as the laggard, at -0.76%.
Seven of the 11 S&P SPDR sector ETFs closed in the red, while three closed in the green. One, Energy ( XLE) , managed to close unchanged, which is difficult to do in a decimalized, fragmented, algorithmic market. Communication Services ( XLC) was the day's sector SPDR winner, up 1.01% as the Dow Jones U.S. Media Agency Index ran 2.61% and the Dow Jones U.S. Internet Index scored a gain of 1.56%. The REITs ( XLRE) finished in last place, down just 0.69%.
Breadth was good and bad. Losers beat winners at the NYSE by an 8 to 7 margin, as advancing volume took a 58% share of composite NYSE-listed trade. Losers also beat winners (by an even narrower margin) at the Nasdaq Market Site, but here, too, advancing volume took a 66% share of aggregate trade. However, as mentioned above, there was a clear lack of trading volume on Monday. NYSE-listed trade contracted 12.5% from Friday, which was a lightly traded session in its own right, as Nasdaq-listed trade contracted 7.8% from Friday's paltry level.
Put plainly, nobody went too far out on a limb on Monday. Traders waited all day for the Fed's SLOOS report, and after a very brief spike in trading after that report, put the marketplace back on auto-pilot. Next up? Maybe Wednesday's April CPI report unless Tuesday's Fed speakers kick some dirt up.
Captain Crunch?
On Monday afternoon, the Federal Reserve released their not usually so focused upon Senior Loan Officer Opinion Survey on Bank Lending or "SLOOS" report. In recent years, this report has been released quarterly, though it can be released more often and has been on occasion, though not recently.
This "April" report was the first survey since January, and the first since the collapse of three regional U.S. banks back in March. The survey was conducted ahead of the collapse of a fourth U.S. bank, First Republic
I think the results of the survey showed an industry that was tightening credit or lending standards, but perhaps not quite in the draconian manner that some had expected. When asked if banks had changed standards for large and middle-market firms (annual sales of $50M+), 54% of respondents indicated that standards remained largely unchanged, while almost 43% said they had tightened conditions "somewhat." Only 3% had tightened conditions "considerably."
Concerning smaller firms (annual sales of <$50M), 50% of respondents had left lending standards "basically unchanged" while 45% had "tightened somewhat." Just between you and me, I expected worse. While this may be less of a current negative for the economy than some of us were bracing for, the report also shows weaker demand for C&I (commercial and industrial) loans from borrowers of all sizes for the first quarter amid softer demand for CRE (commercial real estate) loans across all categories. Demand weakened across all RRE (residential real estate) loan categories as well.
In short, the SLOOS report told us that lending standards had tightened, but not as much as what might have been expected. This is not positive, it's just less negative. Then again, this is ahead of the First Republic collapse.
The reduction in demand for credit is precisely what the Fed was shooting for when the FOMC aggressively increased short-term interest rates for more than a year. How much this slows the economy, we just don't know yet. We still have to wait on more than half a year's worth of lag effect even if the FOMC is already on "pause" mode.
Austan Powers
Chicago Fed President Austan Goolsbee appeared at Yahoo Finance on Monday. Goolsbee seemed much more concerned with the debt-ceiling issue than with tighter lending standards and reduced demand for credit.
I must admit as a life-long economics nerd to enjoying Goolsbee as the head of a regional district branch of the Federal Reserve Bank more than I ever anticipated. Goolsbee has often sounded quite sensible in his consideration of future monetary policy implementation, which immediately puts him ahead of many of his colleagues.
On Monday, Goolsbee got right to the point. He said: "This whole argument about the debt ceiling comes at the worst possible time. It just makes it extremely difficult to figure out what will be the conditions for economic growth and the job market."
Goolsbee went on: "We're more than a month away from the next FOMC meeting, I don't think we can decide what we should do with rates now, we have to see what's happening with these conditions."
On That Note...
Those readers who are my age, give or take a few years, can remember a time before the financial media unofficially proclaimed Jeffrey Gundlach of DoubleLine Capital this era's "Bond King."
The "Bond King" before Gundlach was Bill Gross, then of PIMCO. Gross retired from the asset management business in 2019, but he did appear on Bloomberg Television on Monday. I quickly saw that at least part of my thinking on what to do with cash was in line with the way Gross was aligned.
On the show, Gross said, "It's ridiculous. It is always resolved, not that it is a 100% chance, but I think it gets resolved. I would suggest for those who are less concerned, similar to myself, that they buy one-month, two-month Treasury bills at a much higher rate (yield) than they can get from longer-term Treasury bonds."
Gross pointed out that yields for short-term U.S. debt have typically soared ahead of a potential default and have done so again this time. The retired "king" added, "The problem in the past has resulted in Treasury bill rates close to the point of potential default, moving higher by 50 to 100 basis points."
For those who do not watch T-Bills all that closely, 30-day U.S. paper pays 5.35% this morning after paying as much as 5.397% on Monday and as little as 4.47% as recently as this past Thursday.
PayPal Weakness
PayPal ( PYPL) reported first-quarter results on Monday evening. Adjusted EPS beat consensus. Revenue grew 8.3% and also beat consensus. Transactions grew 13%. Transactions per account grew 13%.
The stock trades at 15 times forward-looking earnings. The overnight weakness was not the result of quarterly performance or overvaluation.
The guidance was a little soft, but not weak. Full-year adjusted EPS is seen growing roughly 20%. This was up from prior guidance of 18%.
Current-quarter adjusted EPS was projected at $1.15 to $1.17. Wall Street was looking for $1.17. The year-ago comp was just $0.93.
The weakness is probably more technical than fundamental.
Take a look at this:
PayPal came into earnings with a nearly nine-month-long descending triangle close to coming to completion. This is a basic bearish technical pattern for those uninitiated.
The stock has given up its 21-day EMA and 50-day SMA overnight. I currently see a $72 handle (-4.5%), but that line of support, while undergoing another retest as I type, has yet to break. That $72 support level cracks? The low $60's are certainly possible/maybe probable.
Economics (All Times Eastern)
06:00 - NFIB Business Optimism Index (Apr): Expecting 89.8, Last 90.1.
08:55 - Redbook (Weekly): Last 1.3% y/y.
16:30 - API Oil Inventories (Weekly): Last -3.939M.
The Fed (All Times Eastern)
08:30 - Speaker: Reserve Board Gov. Philip Jefferson.
12:05 - Speaker: New York Fed Pres. John Williams.
