A new day has dawned and the same conjecture has risen with the sun: the stock market is short-term overbought, the mega-cap stocks are the most crowded trade, and a pullback for the market and those stocks is in order.
Other verbal variations of this line of thinking are that investors should “trim positions” in stocks that have made outsized moves and that they shouldn’t chase stocks higher.
Well, as prudent and practical as all that sounds, the stock market and the mega-cap stocks have continued to march higher. The Dow Jones Industrial Average has logged seven consecutive winning days; Microsoft (MSFT) hit a new record high yesterday; the S&P 500 hit a new 52-week high yesterday; the Dow Jones Transportation Average set a new 52-week high yesterday.
The pullback that a lot of pundits think should be happening has still not happened with any conviction. A down day here and there has been met quickly with buying interest that has resulted most weeks in an up week.
The resilience to selling interest is exactly why the stock market has kept pressing higher. A pullback of any note has been elusive, and, consequently, short sellers have been forced to cover positions and sidelined investors have felt compelled to put cash to work in a so-called “flat squeeze,” as part of what everyone considers to be a pain trade.
The pain seeps in when the stock market does the opposite of what many think it should be doing. In this case, the pain trade is witnessing a market that won’t succumb to selling interest, leaving sidelined participants unable to bear the pain of watching stocks continue move higher without them.
This pain is starting to feel palpable watching the tape, which is oftentimes the point — or very close to it — that the fever breaks. Notably, this palpability has arisen in front of earnings reports tonight from Tesla (TSLA) and Netflix (NFLX), which are up 12% and 7.8%, respectively, this month, and up 138% and 61%, respectively, this year.
Alas, both stocks are indicated higher in pre-market trading; whereas, the major indices themselves are not indicated to be at risk of any concerted selling interest to start the session.
Currently, the S&P 500 futures are up one point and are trading fractionally above fair value, the Nasdaq 100 futures are up 32 points and are trading 0.2% above fair value, and the Dow Jones Industrial Average futures are down two points and are trading fractionally above fair value.
Goldman Sachs (GS) has been a drag on the Dow futures. It is indicated 1.5% lower after coming up shy of the consensus Q2 EPS estimate. The financials of course had a very good outing yesterday following better-than-expected results from Bank of America (BAC), Morgan Stanley (MS), and Charles Schwab (SCHW), so we’ll have to wait and see if Goldman’s weakness ends up as a company-specific issue today or an industry issue.
Several regional banks, including U.S. Bancorp (USB), Western Alliance (WAL), and M&T Bank (MTB), also reported results that have been met with mixed reactions.
In other news, the FTC and DOJ have issued a draft update laying out new guidelines for their approach to merger reviews, JPMorgan upgraded Cisco (CSCO) to Overweight from Neutral, and Carvana (CVNA) is surging on word of an agreement with noteholders that will reduce its total debt outstanding by over $1.2 billion.
On the economic front, the UK reported some weaker-than-expected June CPI data, which is good news, and housing starts and building permits for the U.S. in June were also weaker than expected, which is regarded as good news for the interest rate outlook.
The 2-yr note yield is down three basis points to 4.73% and the 10-yr note yield is down five basis points to 3.74%.
Total housing starts declined 8.0% month-over-month to a seasonally adjusted annual rate of 1.434 million (Briefing.com consensus 1.475 million), with single-family starts down in all regions except the West (+4.6%), following a downwardly revised 1.559 million (from 1.631 million) for May. Building permits decreased 3.7% month-over-month to a seasonally adjusted annual rate of 1.440 million (Briefing.com consensus 1.472 million), with permits for single-family units flat to positive in all regions, following an upwardly revised 1.496 million (from 1.491 million) for May.
The key takeaway from the report is that higher financing costs are creating headwinds for builders and preventing activity from being stronger in a supply-constrained housing market.
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Originally Posted July 19, 2023 – Feeling the pain
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