[Chart courtesy of MarketWatch.com]

1. Moving the markets

The Dow managed to squeeze out a tiny gain for the 9th day in a row, but the rest of the market was not so lucky. The S&P 500 fell, and the Nasdaq took a big hit.

Johnson & Johnson’s strong earnings helped the Dow, but there was no sign of a short squeeze to boost the stock further. The market was weighed down by mixed earnings results, as Netflix lost 8% and Tesla dropped 9% due to production woes.

The Nasdaq also suffered from the news that Taiwan Semiconductor, the world’s biggest chipmaker, cut its revenue forecast for 2023 by half.

The economic news was not much better, as US home sales plunged in June, the Philly Fed index showed another month of shrinking manufacturing activity, and jobless claims rose to their highest level since January.

Commercial real estate continued to struggle, as another office tower in Baltimore was sold at a huge discount. This was not surprising, as many downtown buildings are losing tenants who prefer to work from home or elsewhere.

The Economic Surprise index fell again, while bond yields rose and lifted the dollar to a one-week high. Gold slipped but stayed above $1,970.

It seems like the market is ignoring the bad news and hoping for the best, but how long can this last?

1. Moving the markets

The Dow Jones Industrial Average had another good day on Wednesday, rising for the eighth day in a row with some help from the short squeeze crowd. That’s the longest streak of gains since September 2019, as investors celebrate the strong earnings season, ignoring the fact that the expectations were low to begin with.

The Dow didn’t care about Goldman Sachs’ disappointing earnings report, which showed losses in real estate. The bank had already warned that the quarter would suck, so no one was shocked.

Meanwhile, most of the companies in the S&P 500 that have reported results have beaten the low bar, according to FactSet data. This makes some people think that the economy is slowing down gently, rather than crashing hard.

The inflation data last week also calmed some nerves about rising prices, even though that might have been a fluke. Bank earnings have been less bad than expected and have helped us to forget the spring meltdown. The market is hoping that the banking sector is out of the woods, and that history won’t repeat itself. Yeah, right.

On the flip side, the housing market cooled off a bit in June, as both housing starts and building permits fell from May. Housing starts also got a downward revision for May. The only silver lining was single-family building permits, which rose for the sixth month in a row. Multi-family permits and starts, however, dropped in June.

That dragged the US macro data index down another notch, which was the biggest 2-day drop since January 2022. But the KBW banking index kept climbing out of its hole and scored another win.

Both Apple and NVDA had a brief scare when news of Apple building an AI platform turned out to be a lame imitation. The stock ripped and dipped but recovered for the day. Sometimes you just have to laugh…

Bond yields were mostly lower, the dollar was stronger, and gold wandered around but ended up slightly higher.

The gap between the S&P 500 and High Yield Credit (HYG) has widened even more, as this chart shows.

What could possibly go wrong?

[Chart courtesy of MarketWatch.com]

1. Moving the markets

Bank stocks BoA and NY Mellon beat earnings expectations and lifted the market mood, while the short squeeze craze fizzled out. Morgan Stanley and PNC Financial also impressed investors with strong results, especially in wealth management for Morgan Stanley.

According to FactSet, the earnings season is off to a flying start with 84% of the S&P 500 companies that have reported so far surpassing profit estimates. Even a disappointing retail sales report for June, which showed a paltry 0.2% MoM increase vs a forecast of 0.5%, could not dampen the optimism.

The Dow led the way, but all major indexes posted solid gains, as traders believe that the economy is in a “Goldilocks” zone—not too hot and not too cold. Weak industrial production data was also shrugged off, even though the US Economic Surprise Index took a hit.

As a result, traders are confident that the Fed will hike rates by 0.25% in July, as expected, but will not need to tighten further after that. Sure, whatever.

The most dramatic action of the day was between value and growth stocks. Value had the upper hand early on, but then growth staged a comeback, after Microsoft announced new pricing for its AI products. NVDA followed suit and soared higher as well.

Bond yields were mixed with the 10-year Treasury yield slipping slightly. The dollar bounced back from an early dip and closed slightly higher, while gold was the star performer of the day with a 1.28% gain and a 6-week high.

Looking at the global picture, it’s no secret that liquidity is the main driver of all equity markets. Major stock indexes, like the S&P 500, tend to move in sync with liquidity, but that correlation has broken down for the first time in 10 years, as this chart shows.

Hmm, will this alligator jaw snap shut soon? Or is this time different?

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The bulls were in charge as the market awaited earnings reports from big banks like BofA, Morgan Stanley and Goldman Sachs.

The major indexes ended the day in positive territory, thanks to another round of short squeezing. Even tech giants like Apple, Tesla and JPMorgan saw their shares rise, despite the gloomy outlook for the earnings season.

Analysts expect a 7% drop in S&P 500 earnings compared to last year, according to FactSet. So how can stocks keep soaring at these lofty levels?

Maybe it’s because of the wishful thinking expressed by Yardeni Research:

“I think the market is kind of overjoyed with the disinflationary, soft-landing scenario. I’ve been thinking for quite some time that we’re in a recession, but I argued that it’s a rolling recession, not an economy-wide recession. Now I think we’re in a rolling recovery.”

Sure, buddy. This week also marks the start of the Fed’s blackout period when Fed officials and staff zip their lips about the economy and monetary policy. The idea is to avoid messing with the market’s expectations or confusing anyone about the Fed’s plans before and after the FOMC meetings, where the Fed decides on interest rates and other monetary tools.

Bond yields were mixed, the US Dollar spiked and then dropped, Gold slid lower but recovered in the end.

Billionaire investor Seth Klarman is not buying into the current hype:

“You had a bubble, it was really a credit bubble, which became an everything bubble, and super-low interest rates, at times zero rates, made capital easily available and incredibly cheap.

That fueled frenzy over startups, SPACs, meme stocks and crypto, and all kinds of risky bets. I’m just not sure why you couldn’t have more trouble.

We haven’t seen a lot of casualties yet, I don’t know what that means, but I’d be worried.”

In other words, don’t get too greedy and be ready to bail if this bubble pops.