Small Dip, Big Worries: Investors Face Earnings And Inflation Challenges

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[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The market took a small but widespread dip today, as investors are facing a flood of earnings reports from 160 companies in the S&P 500. The mood was tense, but not hopeless, as most of the firms beat the low expectations that were set for them.

Some analysts think this means the economy can dodge a recession, even though they ignore the signs of inflation and uncertainty ahead.

According to FactSet, analysts still expect a 7.1% drop in earnings from a year ago, marking the third quarter in a row of shrinking profits. How does that square with the high stock prices we see today?

Bond yields jumped, despite weak economic data, and the dollar broke free from its recent range. The usual suspects – short sellers – prevented a bigger sell-off and kept the S&P 500 from losing more than 1% in 40 days.

Banks took a hit, as the 10-year yield rose above 4% again, and the 30-year reached its highest level since last November. Gold didn’t shine either and fell below $2k again.

As for inflation, those who think it’s tamed may have to think again. Crude oil is climbing up from its lows, while wholesale gasoline is ready to burst. In short, it was a rough day for the bulls, but not a disaster. Yet.

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Market Ends July With A Bang, But Will It Last?

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The market was a roller coaster today, but the major indexes still managed to end the month on a high note, even though the Fed has not ruled out further rate hikes.

The S&P 500 gained 2.9% and posted its fifth consecutive positive month for the first time since August 2021. Investors seem to be optimistic about a smooth economic recovery, as recent data shows strong job growth and easing inflation. The second-quarter earnings also beat the low expectations.

However, this rally was driven by only 7 of the S&P 500 stocks, so the rest of the market was not as lucky. That’s why traders are eagerly waiting for Amazon and Apple to report their earnings on Thursday, which could make or break the market mood.

Last week, the Fed increased rates by a quarter-point, to the highest level in more than 22 years. Fed Chair Jerome Powell said the Fed will act based on data, not predictions, but he also hinted that rate cuts are not likely anytime soon.

The US Economic Surprise Index rose for the third month in a row and reached its highest level since March 2021. So much for the landing scenarios. Maybe we are flying high…

Of course, part of the reason for the July surge were some massive short-squeezes, which sparked the biggest 3-month rally since March 2021.

Bond yields were mixed, with the 10-year failing to break above 4% twice. The dollar dropped for the second month in a row but bounced back from its mid-month low.

But one thing that could spoil the inflation party was Crude Oil, which had its best month since January 2022, as it almost hit $82. This could push up the CPI numbers in the future.

Gold also shone brightly, with its best month since March and a 3% gain. It also reclaimed the $2k level again.

Despite the bullish mood on Wall Street, the S&P 500 is way out of sync with high yield bonds, which makes me wonder when this gap will close.

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ETFs On The Cutline – Updated Through 07/28/2023

Ulli ETFs on the Cutline Contact

Do you want to know which ETFs are hot and which ones are not? Then you need my High-Volume ETF Cutline report. It tells you how close or far each of the 311 ETFs I follow is from its long-term trend line (39-week SMA). These are the ETFs that trade more than $5 million a day, so they are not some obscure funds that nobody cares about.

The report is split into two parts: The winners that are above their trend line (%M/A), and the losers that are below it. The yellow line is the line of shame that separates them. You can see how many ETFs are in each group and how they have changed since the last report (240 vs. 240 current).

Take a peek:

The HV ETF Master Cutline Report

If you are confused by some of the terms we use, don’t panic. I have a helpful Glossary of Terms for you.

If you want to learn more about the Cutline method and how it can make you rich (or at least less poor), read my original post here.

ETF Tracker Newsletter For July 28, 2023

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ETF Tracker StatSheet          

You can view the latest version here.

MARKET RALLIES ON POSITIVE NEWS, BUT INFLATION THREAT LOOMS LARGE

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The market was in a good mood today, thanks to some positive news on inflation and earnings. After the wild swings of yesterday, investors breathed a sigh of relief as the Fed’s preferred measure of inflation, the Core PCE Deflator, came in lower than expected at 4.1% year-on-year in June, down from 4.6% in May. The headline PCE also cooled down to 3%, the lowest since March 2021.

But don’t get too comfortable. There’s still a lot of pressure on prices from other sources, such as the a-cyclical component of inflation, which is soaring to record highs and is ignored by the Wall Street cheerleaders.

And then there’s the puzzling data point of the day: Americans’ incomes rose by a modest 0.3% month-on-month, less than the forecasted 0.5%, while their spending jumped by 0.5%, more than the expected 0.1%.

How did they manage that? Did they raid their piggy banks? Did they max out their credit cards? Did they sell their kidneys?

We may never know.

Bloomberg had this to say:

US inflation indicators have eased a bit lately, but they will heat up again as the economy picks up steam. That will push short-term rates higher. Investors shouldn’t get too excited by the recent softening in some key indicators like CPI, PPI and ISM prices paid indexes.

That’s a temporary blip, not a trend reversal. Many Fed and PMI surveys are warning that inflation will come back with a vengeance in the coming months.

Japan’s bond rout didn’t spread much today, and the US 10-year yield fell back below 4% after spiking above it yesterday. That triggered a rally in the S&P 500, which reached its highest level since 2022. This chart shows how dramatic the moves were in the past two days.

But this rally may be short-lived, as higher energy prices will soon bite into consumers’ wallets and corporate profits. Gasoline prices hit a 2023 high today, along with Brent Crude oil, which means the Fed will have to tighten more and faster than expected to keep inflation under control.

That means it’s only a matter of time before investors wake up to the reality that inflation is not going away, and that Powell will have to “go big or go home.”

Watch out below!

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 07/27/2023

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ETF Data updated through Thursday, July 27, 2023

How to use this StatSheet:

  1. Out of the 1,800+ ETFs out there, I only pick the ones that trade over $5 million per day (HV ETFs), so you don’t get stuck with a lemon that nobody wants to buy or sell.
  1. Trend Tracking Indexes (TTIs)

These are the main indicators that tell you when to buy or sell Domestic and International ETFs (section 1 and 2). They do that by comparing their position to their long-term M/A (Moving Average). If they cross above, and stay there, it’s a green light to buy. If they fall below, and keep going, it’s a red light to sell. And to make sure you don’t lose your shirt if things go south, I also use a 12% trailing stop loss on all positions in these categories.

  1. All other investment areas don’t have a TTI and should be traded based on the position of each ETF relative to its own trend line (%M/A). That’s why I call them “Selective Buy.” In other words, if an ETF goes above its own trend line, you can buy it. But don’t forget to use a trailing sell stop of 12%, or less if you’re feeling nervous.

If some of these words sound like Greek to you, please check out the Glossary of Terms and new subscriber information in section 9.

  1. DOMESTIC EQUITY ETFs: BUY— since 12/01/2022

Click on chart to enlarge

This is our main compass, the Domestic Trend Tracking Index (TTI-green line in the above chart). It has now broken above its long-term trend line (red) by +6.41% and remains in “Buy” mode.

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Honeywell, Japan, And Bond Yields Spoil Dow’s Party

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]
  1. Moving the markets

The Dow Jones Industrial Average was on a roll this week, hitting new highs on hopes of a strong economy, tame inflation and solid earnings. But the party came to an abrupt halt on Thursday, when the index reversed course and plunged into the red. What happened?

One culprit was Honeywell, whose shares dropped after the company reported lower-than-expected revenue and cut its full-year outlook. Another was the 10-year Treasury yield, which jumped above 4% for the first time since 1999, spooking investors who fear higher borrowing costs and lower profits.

But the main trigger for the sell-off was a rumor that Japan might adopt a policy of yield curve control (YCC), which means capping long-term interest rates by buying bonds. This sent the dollar tumbling against the yen, which in turn pushed up the US bond yields.

The irony is that the US economy is actually doing quite well, as evidenced by the latest data. The second-quarter GDP growth came in at 2.4%, beating expectations and showing no signs of a recession. The inflation gauge also eased to 2.6%, down from 4.1% in the first quarter. And Meta Platforms, formerly known as Facebook, posted stellar results and guidance, lifting its shares by 5%.

The Federal Reserve also seemed to strike a balanced tone on Wednesday, when it raised its key interest rate to 5.25%, the highest level in 22 years. Fed Chair Jerome Powell said the central bank could either hike or pause depending on the data, leaving some room for flexibility.

But none of that mattered to the market on Thursday, as investors focused on the rising bond yields and the potential impact on corporate earnings and valuations.

Precious metals also took a hit, as gold and silver prices fell sharply after the strong GDP report. The data suggested that the Fed’s tightening campaign has not slowed down the economy as much as expected, raising the possibility of more rate hikes in the future.

So, what’s next for the market? Will it bounce back or continue to slide? That may depend on how the bond market behaves, and whether Japan will indeed adopt YCC or not. Stay tuned for more updates.

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