Walking back the rebound effort

We noted yesterday that the market’s nine-week win streak came to an end because of weakness in small-cap stocks and mega-cap stocks. Guess which stocks led yesterday’s rally effort? Yes, indeed, it was the small-cap stocks and mega-cap stocks in what looked to be a mechanically-controlled rebound effort.

We say the latter knowing that the charts for the Nasdaq Composite, Russell 2000, and S&P 500 all tracked on a smooth line up and to the right and finished pretty much at their highs for the day. The Nasdaq gained 2.2%, the Russell 2000 gained 1.9%, and the S&P 500 gained 1.4%.

The good rebound times, however, are not expected to keep rolling at today’s open. Currently, the S&P 500 futures are down 27 points and are trading 0.6% below fair value, the Nasdaq 100 futures are down 140 points and are trading 0.8% below fair value, and the Dow Jones Industrial Average futures are down 198 points and are trading 0.5% below fair value.

This turn of events has some news behind it and some price action behind it.

The news of note includes a Q4 revenue warning from Microchip Technology (MCHP) that was tied to a weakening economic environment, and Samsung Electronics indicating its Q4 operating profit will be down 35% year-over-year and below analysts’ expectations.

The semiconductor space, which had a nice rebound yesterday, should see some selling activity as a result of these announcements, but an important offset will be the continued strength in NVIDIA (NVDA), which is trading 0.3% higher in pre-market action.

NVIDIA is the only Magnificent 7 stock trading higher. The negative price action in the other six is a factor for the weakness in the equity futures. We would add, too, that Netflix (NFLX) is down 1.8% after being downgraded to Neutral from Buy at Citigroup.

Another factor for the weakness is the continued fallout in Boeing (BA) over the 737 MAX 9 plug issue. Shares of Boeing, which dropped 8.0% yesterday, are down 1.1%, this morning.

Some attention is also being diverted to the 10-yr note yield holding stubbornly above 4.00%. It is currently at 4.03% after touching 3.96% at its low in yesterday’s trading session. It would be remiss not to mention that the yield on the 10-yr note was nearly 100 basis points higher less than three months ago. Where it stands today isn’t a major factor in the disposition of the equity futures market, but where it stands after Thursday’s release of the December Consumer Price Index will be.

Treasuries are digesting remarks from Fed Governor Bowman (FOMC voter), who walked a middle ground in saying that it would be appropriate to cut rates should inflation fall closer to 2%, but in her view “we are not yet at that point.” The 2-yr note yield is up three basis points to 4.38% in front of today’s $52 billion 3-yr note auction at 1:00 p.m. ET.

Separately, the November trade balance was better than expected, showing a deficit of $63.2 billion (Briefing.com consensus -$64.7 billion) versus a downwardly revised $$64.5 billion (from -$64.3 billion) in October.

The key takeaway from the report is that exports were $4.8 billion less than October exports while imports were $6.1 billion less than October imports. The drop in both exports and imports fits with a weakening global economic environment.

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Originally Posted January 9, 2024 – Walking back the rebound effort