50-DMAs Couldn't Hold Thu, Mar 9, 2023 Worries about banks today left major US index ETFs across the market cap spectrum back below their 50-day moving averages. The uptrend channels that have been formed over the last six months are also getting tested with this week's move lower. You can see the current set-ups in the snapshot from our Chart Scanner tool below. Looking at our Trend Analyzer, every sector ETF except for Technology has now moved back below its 50-day moving average. Six of eleven sectors are actually oversold (>1 standard deviation below 50-DMA), with Financials (XLF) and Health Care (XLV) at "extreme oversold" levels. XLF had been up more than 8% on the year about a month ago, but it's now down 1.93% YTD. Technology (XLK) and Utilities (XLU) are the only two sectors up over the last week. Interestingly, Utilities (XLU) has been one of the worst performing sectors so far this year, while Tech has been the best. With Financials seeing such a sharp decline this week, below is a snapshot of various banks and brokers in the sector with the ones highlighted in red all now trading at least 5% below their 50-DMA. As shown, Charles Schwab (SCHW) is down the most over the last week with a decline of 12.6%, which has left it 16.4% below its 50-DMA and down nearly 20% on the year. Other names like Bank of America (BAC), JP Morgan (JPM), and Raymond James (RJF) are in extreme oversold territory as well. Of the major banks and brokers listed, Goldman Sachs (GS) has actually held up the best over the last week with a decline of just 2%.
This Doesn't Happen Often Fri, Mar 10, 2023 After a surge earlier this week that took the yield on the two-year US Treasury up above 5% for the first time since 2007, concerns over the health of bank balance sheets have caused a sharp reversal lower. From a closing high of 5.07% on Wednesday, the yield on the two-year US Treasury has plummeted to 4.62% and is on pace for its largest two-day decline since September 2008. Remember that? A 45 basis point (bps) two-day decline in the two-year yield has been extremely uncommon over the last 46 years. Of the 79 prior occurrences, two-thirds occurred during recessions, and the only times that a move of this magnitude did not occur either within six months before or after a recession were during the crash of 1987 (10/19 and 10/20) as well as 10/13/89 when the leveraged buyout of United Airlines fell through, resulting in a collapse of the junk bond market. As you can see from the New York Times headline the day after that 1989 plunge, just as investors are worrying today over whether we're in for a repeat of the Financial Crisis, back then they were looking at 'troubling similarities' to the 1987 crash. The year that followed the October 1989 decline wasn't a particularly positive period for equities, but a repeat of anything close to the 1987 crash never materialized.
March Volatility Emerging Mon, Mar 13, 2023 The month of March is nearly halfway through and volatility has begun to pick up. Whereas the S&P 500 was up around 2% month to date as of this time last week, currently the index is down over 2.5%. As shown below, since the end of WWII March ranks in the middle of the pack with regards to the average spread between its Intra month high and low (on a closing basis). That compares with months like October—the most volatile of the year—which has averaged an Intra month range of just under 8%. Although historically March might not be the most volatile month, in recent years that Intra month volatility has kicked up. In the chart below we show the spread between March's Intra month highs and lows for each year since the end of WWII. Over time, there has consistently been some ebb and flow in this reading with some outlier years in particularly volatile times like the late 1990s and early 2000s and then of course 2020. October has historically been known as a month for market turnarounds, but March has become increasingly active on that front as well.
March Triple Witching Week Market Signal Bank shutdowns last week. Feds backstop SVB today. Market performance this week could be a big tell. Triple Witching Weeks have tended to be down in flat periods and dramatically so during bear markets. If the week ends higher or is not down big, it could be an indication we have seen the worst of the regional banking fallout and the end of the correction. Positive March Triple Witching weeks in 2003 and 2009 confirmed the market was back in rally mode. DJIA took out its December Closing Low on February 28, which is a warning sign detailed in the 2023 Stock Trader’s Almanac page 23, and is now trying to find support near the old downtrend line around 31500 with further support around 31000. S&P is also flirting with its December closing low. After taking out support around 3930 the next support level is around 3780. March Triple-Witching Weeks have been quite bullish in recent years. But the week after is the exact opposite, S&P down 27 of the last 40 years—and frequently down sharply. In 2018, S&P fell –5.95%. Notable gains during the week after for S&P of 4.30% in 2000, 3.54% in 2007, 6.17% in 2009, and 10.26% in 2020 are the rare exceptions to this historically poor performing timeframe. Stock options, index options, index futures, and single-stock/ETF futures all expire at the same time four times each year, March, June, September and December. This event is referred to as Quadruple Witching by some. We prefer to call it in the Stock Trader’s Almanac (2023 page 108), Triple Witching as single-stock futures are a tiny market.
Some Good and Some Bad in Small Business Optimism Tue, Mar 14, 2023 Early this morning, the NFIB released the results of its February survey of small business optimism. The headline index rose to 90.9 versus expectations of it remaining unchanged at 90.3. In spite of the bounce, small businesses continue to report some of the worst sentiment of the past decade with the February reading right back in line with the April 2020 low. Diving deeper into the categories of the report, breadth was mixed. Of the ten inputs into the headline number, four were lower month over month, one was unchanged, and the other half were higher. For the most part, these indices also remain in the bottom decile of their historical readings. In today's Morning Lineup, we highlighted how the report's labor metrics have been improving in each of the past four months on an aggregate basis. Plans to increase employment remain healthy in the 77th percentile while the percentage of respondents reporting job openings as hard to fill hit a new record high after rising by a near record 9 points month over month. Although openings were harder to fill, firms also took on more workers. With actual employment changes moving up to 4, it hit the highest level of the post-pandemic period. However, that did clash with hiring plans falling 2 points to match December for one of the lowest readings of the past few years. Likewise, plans to increase compensation are at the lower end of their recent range even while actual observed changes to compensation have improved in the past few months. The same dynamic in which plans are headed in the opposite direction of actual changes can be observed with regards to capital expenditures. Capital expenditure plans were unchanged at 21 last month for the joint lowest reading since March 2021. Meanwhile, actual capital expenditures rose to 60, the highest since March 2020 and credit conditions have improved. Turning to inventories, satisfaction (meaning the net percent of firms reporting if inventories are too low versus too high) fell to the lowest since the spring of 2020. As a result, a net 7% of firms are reporting that they plan to decrease inventories in the coming months. Finally, we would note that on net more firms are seeing lower rather than higher sales in spite of improvements to inflation metrics. The outlook for general business conditions has yet to see any improvement as few businesses report now is a good time to expand. Most firms report now as a poor time to expand due to economic conditions at 36% of responses. The next most commonly credited reason is political climate followed by interest rates, which at 7% match the December reading for the highest since at least 2020.
Nothing SHY About This Tue, Mar 14, 2023 shy /SHī/ - adjective 1. being reserved or having or showing nervousness or timidity in the company of other people. When one thinks about short-term US Treasuries and their traditional day-to-day price action, shy is a pretty good description. Traditionally, short-term Treasuries have not been the place an investor who was looking for action would go to look. That's what tech stocks are for! As the Fed has embarked on what has been the most rapid pace of rate hikes in at least 40 years, though, no type of financial asset, including short-term Treasuries, has been spared. The chart below shows the iShares 1-3 Year Treasury Bond ETF (with the aptly named ticker SHY) over the last year. A year ago, the ETF was trading just above $84, and last week it was down near $80 before rebounding over the past few days to a high of $82.02 yesterday. A one-year range of just under 5% is hardly volatile, but from the perspective of a short-term Treasury investor, it's a gigantic move. The last week has been a period of historic volatility for US Treasuries - at least relative to the last 20 years. The chart below shows the daily percentage changes in SHY since its inception in July 2002. Yesterday, the ETF had its largest-ever one-day gain at just under 1% (0.997%). You can also see from the chart that ever since the FOMC started hiking rates in early 2022, the magnitude of SHY's average daily moves has rapidly expanded. Monday's (3/13) nearly 1% rally in SHY also marked a milestone for the ETF in that it experienced a one-day gain or loss of at least 0.25% for three consecutive trading days. That tied the longest-ever streak of 0.25% daily moves from back in September 2008 just after Lehman declared bankruptcy. With SHY down 0.34% on the day in late trading Tuesday, it is now on pace for its 4th straight day of 0.25% daily moves. Yup, you read that correctly; volatility in short-term Treasuries is greater now than it was during the Financial crisis! When Powell said last Summer that fighting inflation would 'bring some pain', he wasn't kidding. As a result, SHY may want to consider changing its ticker to something more applicable. "BOLD" is available.
Ides of March Inflection Point: Beware! Markets are fixated on fallout and contagion from regional bank failures on the eve of the Ides of March. It may have been a dire warning for a triumphant Julius Caesar. But, traders should beware that March has evolved into a market inflection point in recent years. In the old days March used to come in like a bull and out like a bear, but nowadays crosscurrents at the end of the first quarter have turned March into an inflection point in the market where short-term trends often change course. March market trend reversals from extremes are not unusual as we experienced bear market bottoms or notable upturns in 1980, 2003, 2009, 2016 and 2020 as well at the Dotcom top in 2000. Further Fed action to shore up the banking sector as well as limited or no more failures and a more dovish tone next weeks FOMC statement, comments and pressers would likely rally stocks. Headline risk from Ukraine, China and the Mideast on top of fears that sticky inflation will force the Fed to raise higher and longer, pushing us into recession cut the S&P’s gains off the October lows in half and brought the YTD gain to near zero at yesterday’s close with a drop of 7.6% from the February 2 high. Following the rapid rally of 16.9% October low this correction is not shocking. While our annual forecast was and still is bullish we warned back in December to expect a “Choppy Start, Fed Pause Q1, Pre-Election Bull Emerges.” Now that the steep 450-basis-point rate increase in less than a year has begun to pinch the regional banking system the Fed will likely move to pause. CME’s FedWatch Tool is currently showing an 80% probability of a 25 BPS hike. We hit the 50% Fibonacci replacement yesterday on a closing basis and the 61.8% retracement on an intraday basis today. S&P also seems to be finding support at the old downtrend line that served as resistance throughout 2022. VIX also tends to make a seasonal high in March.
Fall of the Empire Fed Wed, Mar 15, 2023 Among the bad news this morning was disappointing economic data in the form of the New York Fed's Empire Manufacturing report. The report was expected to remain in contraction falling to -7.9 versus a reading of -5.8 last month. Instead, the index plummeted to a much weaker reading of -24.6. Although that is not a new low with even weaker readings as recently as January and last August, the report indicated a significant deterioration in the region's manufacturing sector, and whereas weather in January was an easy scapegoat for the weakness, that's not the case for the March report. Given the large drop in the headline number, breath was equally bad with many other significant declines. Like the headline number's 5th percentile reading and month-over-month decline, New Orders and Shipments both saw double-digit declines into bottom decile readings. In the case of Shipments, that low reading comes after an expansionary reading last month. Inventories was the only other current conditions index to move from expansion to contraction leaving Prices Paid and Prices Received as the last expansionary categories. As mentioned above, demand appears weak as New Orders and Shipments are the two most depressed categories from a historical perspective with each index coming in the bottom 3% of all months since the start of the survey in the early 2000s. Six-month expectations are equally low. Unfilled Orders were one of two categories to see a higher reading month over month with the 2.5 point increase much smaller than the move in expectations. Unfilled Orders expectations surged by 12.1 points, ranking in the 95th percentile of all monthly moves on record. That would indicate the region's firms expect unfilled orders to rise at a rapid pace in the months ahead, likely as a result of weakened sales. That does not mean the area's firms are expecting inventory build-ups, though. Inventory expectations saw a modest 1.4-point increase month over month in March, but that remains one of the lower readings of the past decade. The only other current conditions index to move higher month over month was delivery times. Even though it moved higher, the index continues to indicate lead times are rapidly improving and expectations are calling for those improvements to continue. Next to the dampened demand picture, employment metrics were perhaps the next most jarringly negative. Hiring is falling precipitously with the Number of Employees index hitting a new cycle low of -10.1. Average Workweek also is reaching new lows. At -18.5 it has only been as low during the spring of 2020 and during 2008 and 2009.
Bulls Back Below 20% Thu, Mar 16, 2023 The fallout from bank failures over the past week has put a major dent in investor sentiment. Since the week of February 23rd, optimism has been muted with less than a quarter of respondents to the weekly AAII sentiment survey having reported as bullish. That includes a new low of 19.2% set this week. That is the least optimistic reading on sentiment since September of last year. The drop in bullishness was met with a corresponding jump in bearish sentiment. That reading climbed from 41.7% up to 48.4%, the highest level since the week of December 22nd. While close to half of respondents are reporting as bearish, that remains well below the much higher readings that eclipsed 60% last year. Last month saw the end to a record streak in which bearish sentiment outweighed bullish sentiment. However, the bull bear spread has now been negative for four weeks in a row once again. In fact, this week was the most negative reading in the spread since late December. Factoring in other sentiment readings like the Investors Intelligence survey and the NAAIM Exposure Index—both of which similarly saw sentiment pivot toward more bearish tones this week—our sentiment composite is once again below -1, meaning the average sentiment indicator is reading extremely bearish sentiment. While prior to 2022 such depressed levels of sentiment were not commonplace, it has been the norm over the past year or so.
End of March Historically Weak Last 3 or 4 days Over the past 33 years the DJIA has declined 22 times and advanced 11 with an average loss of 0.76% near the end of March. S&P 500 has a similar track record. Excluding advancing years, the average decline is right around 1.5% for DJIA and S&P 500. End-of-quarter portfolio restructuring likely plays a role as managers lock in any gains and establish positions for the next quarter. These declines can begin on either the fourth-to-last trading day or the third. As of Friday’s close, DJIA was down this March while S&P 500 was fractionally positive. Historically end-of-Q1 weakness has occurred regardless of how strong or weak the month had been. In 2009 DJIA was up 12.20% and still declined 3.98% over the last three trading days. DJIA was down 11.24% in 2020 and lost another 2.82% at month’s end.
Pending Home Sales Better But Still Weak Wed, Mar 29, 2023 As we noted on Twitter earlier, Pending Home Sales for the month of February came in better than expected, rising by 0.8% compared to forecasts for a 3.0% decline. Wednesday's report also marked the first string of back to back to back positive and better-than-expected readings since the second half of 2020. While the increases are welcomed, we would note that on a y/y basis, Pending Home Sales remain depressed. Relative to a year ago, February Pending Home sales declined 21.1% which is actually an improvement from late last year when they were down over 30% for three straight months. A 20%+ y/y decline in Pending Home Sales is not unprecedented, but it isn't common either. Prior to the current period, the only other times they were down over 20% were in the early months of COVID and in a handful of other months during and immediately after the financial crisis. What has been unprecedented about the current period is the fact that Pending Home Sales has been down 20%+ for nine straight months! Going back to 2002, there was never another period where Pending Home Sales were down 20%+ or more for even three months let alone nine!
What Would Moses Do? Sell Passover If Moses were trading stocks in the 21st Century, he would be wise to the seasonal cycles that move the markets year after year and know that Passover is the time to begin considering some portfolio spring cleaning. The full Hebrew calendar trading strategy is “Sell Rosh Hashanah-Buy Yom Kippur-Sell Passover.” Passover conveniently occurs in March or April, right near the end of our “Best Six Months” strategy and it’s no coincidence that Rosh Hashanah and Yom Kippur fall in September and/or October, two dangerous and opportune months. DJIA is up 81.8% of the time from Yom Kippur to Passover since 1990 with an average gain of 8.1%.On the flipside DJIA is up 62.5% from Passover to Yom Kippur with an average gain of only 1.2% (not shown). DJIA is up 10.3% since Yom Kippur 2022 as of today’s close.
Claims Get Revised Thu, Apr 6, 2023 Jobless claims were in focus this morning as seasonally adjusted initial claims were surprisingly high at 228K versus expectations of 200K. Previously, adjusted claims had consistently come in well below 200K with 10 readings below that level in the last 11 weeks. However, that large increase in the most recent week's data was matched with large revisions to the past couple of years' data as the BLS updated its seasonal adjustment methodology. The net impact of those changes was to redistribute claims throughout the year, revising up readings from Q1 and Q4 while Q2 and Q3 were revised down; total or average annual readings were not changed. As discussed in greater detail on the BLS website and we will review in more depth in tonight's Closer, there are two methods for seasonal adjustment: multiplicative or additive. Most of the time the claims data has used multiplicative seasonal factoring, but periods like the first year of the pandemic in which the indicator experiences unusually large level increases means an additive approach becomes more apt. This week, the BLS applied a new hybrid approach with additive factoring applied from early March 2020 through mid-2021 and multiplicative factoring for all other periods. As shown below, that change back to multiplicative factoring resulted in some large revisions for initial claims over the past couple of years. In turn, that has dramatically changed the picture jobless claims have painted. Previously (red line in chart below) claims had been more or less trending sideways after bottoming around a year ago, but after these revisions (blue line) claims are trending upwards and bottomed this past September. In addition, the upward revision to 247K to the print from two weeks ago would mark the highest level since January 2022. As for the non-seasonally adjusted data, the story is much less noisy being unaffected by the aforementioned revisions. In other words, the overall picture for claims hasn't changed when looking at this series. Claims remain near historically healthy levels consistent with the few years prior to the pandemic. Granted, those are off the strongest readings from last year. At this point of the year, claims are also trending lower as could be expected based on seasonal patterns. The next couple of weeks may see claims move higher because of seasonality, though, that would likely prove to be a temporary bump in the road with claims resuming the trend lower through the late spring. The revision likewise impacted continuing claims which rose to 1.823 million in the most recent week. That brings claims back up to the highest levels since December 2021 as they have risen sequentially for three weeks in a row.
Small Business Outlook Cratering Tue, Apr 11, 2023 Small business optimism continued to decline in March with the headline index from the NFIB falling from 90.9 down to 90.1. That headline reading was actually better than the consensus forecast of 89.3, but it was still in the bottom decile of the indicator's historical range dating back to 1986. Looking across individual categories, breadth was weak in the report with only three indices moving higher month over month, three going unchanged, and all the others falling. As with the headline number, many categories are also historically depressed in the bottom decile of readings including a record low. That record low was in the percentage of respondents reporting now as a good time to expand. Only 2% reported now as a good time to expand, down 4 points month over month. Albeit the reading has been at the low end of its historical range for much of the past year, March's reading matched the historical low form March 2009. Given the small business outlook for the economy has soured, fewer firms are reporting plans to increase hiring or capital expenditures. In fact, the index for capex plans fell to 20, which alongside March 2021, is the lowest reading since the spring of 2020. Similarly, hiring plans are at new lows for the post-pandemic period. One factor likely impacting business plans has been financial conditions. The most pronounced decline of any category last month was a record 4-point decline in the availability of loans. While the reading has been rolling over for some time, that drop leaves the index at the lowest level since December 2012.
Claims Resume Their Trend Higher Thu, Apr 13, 2023 Initial jobless claims were expected to tick higher this week with forecasts calling for a rise to 235K. Instead, the increase was even more pronounced moving up to 239K from last week's unrevised reading of 228K. As we detailed last Thursday, the revisions to claims have resulted in a total shift in this indicator of the labor market. After seasonal adjustment, claims are now definitively trending higher since the September low. Before seasonal adjustment, claims were likewise higher week over week as could be expected given seasonal tendencies. As shown below, the current week of the year has often seen claims rise. In fact, historically unadjusted claims have risen 85.7% of the time during the current week of the year. That is tied with three others (the weeks of approximately January 8th, October 1st, and November 5th) for the week of the year to most consistently see claims increase week over week. Given that increase, levels this year are similar to those of the several years prior to the pandemic meaning that claims remain healthy before seasonal adjustment. Whereas initial claims came in higher than expected, continuing claims actually were healthier. Instead of the 10K increase penciled in by forecasters, continuing claims fell by 13K to 1.823 million. Although in the short term that is a stronger-than-expected reading, continuing claims remain in an uptrend since the fall and are now at the high end of the range of readings that were common in the two years leading up to the pandemic.
Jobless Claims Nearing New Highs Thu, Apr 20, 2023 Jobless claims have continued to weaken with this week's release, rising by 5K to 245K versus expectations of no change from last week's upwardly revised 240K print. At current levels, claims sit at the high end of the range since the start of 2022 and only a couple thousand below last month's high. Prior to seasonal adjustment, claims have essentially come in right inline with the reading for the same week last year and the few years prior to the pandemic. As shown in the second chart below, claims tend to experience a little bit of a bounce around this point of the year before resuming a move lower through the late spring. Continuing claims were equally disappointing this week rising to 1.865 million, 40K above expectations. Although the increase to initial claims has not resulted in a new high, the 61K increase for continuing claims leaves the indicator at the highest level since late November 2021.
May Almanac: Second Worst S&P 500 Month in Pre-Election Years May has been a tricky month over the years, a well-deserved reputation following the May 6, 2010 “flash crash”. It used to be part of what we once called the “May/June disaster area.” From 1965 to 1984 the S&P 500 was down during May fifteen out of twenty times. Then from 1985 through 1997 May was the best month, gaining ground every single year (13 straight gains) on the S&P, up 3.3% on average with the DJIA falling once and two NASDAQ losses. In the years since 1997, May’s performance has been erratic; DJIA up fourteen times in the past twenty-five years (four of the years had gains exceeding 4%). NASDAQ suffered five May losses in a row from 1998-2001, down –11.9% in 2000, followed by thirteen sizable gains of 2.5% or better and seven losses, the worst of which was 8.3% in 2010 followed by another substantial loss of 7.9% in 2019. Since 1950, pre-election-year Mays rank poorly, #10 DJIA, #11 S&P 500, #8 NASDAQ, #8 Russell 1000 and #7 Russell 2000. Historically bullish pre-election forces do not consistently lift May. Four of the nine S&P 500 pre-election year May declines exceeded 4%, the worst was a 6.6% loss in 2019. Russell 2000 gained 10.6% in May 2003, notably boosting its average gain and ranking.
S&P 500 April Loss Historically Bearish for Rest of Year April has been the second-best performing S&P 500 month since 1950 based upon average percent gain. As of today’s close, S&P 500 is down 1.3% this April. Should S&P 500 close out April in the red, the outlook for the balance of the year diminishes notably. In the included table all S&P 500 down Aprils since 1950 appear. Performance in May, during the “Worst Six Months” (May to October), the rest of the year, and the full year is also included. When comparing S&P 500 down Aprils to all Aprils and positive Aprils there historically has been a sizable reduction in average performance and frequency of gains following a down April. Average performance for the rest of the year after a down April was a loss of 0.49% compared to a gain of 7.30% after an up April and 5.06% after all Aprils. Full year S&P 500 performance also dropped significantly following a down April, –1.36% versus 13.31% in years with a positive April. But, with two trading days left, there is still a chance S&P 500 avoids an April loss.
10 Weeks of Bearish Sentiment Thu, Apr 27, 2023 As the S&P 500 broke down to the lowest levels of April this week, bullish sentiment according to the weekly AAII survey came in at a new short-term low. After rising to 27.2% last week, only 24.1% of respondents reported as bullish this week, the lowest reading since the end of March. That resulted in rising bearish sentiment which rose 3.4 percentage points to 38.5%. Conversely, to bullish sentiment, that is the highest reading since the end of March. With inverse moves in bullish and bearish sentiment, the bull-bear spread has fallen deeper into negative territory meaning bears continue to outnumber bulls, and by a wider margin, although nowhere near the degree as levels seen in 2022. As we noted throughout 2022 and earlier this year, bears have consistently outnumbered bulls. In fact, this week marked the tenth in a row in which the bull-bear spread was negative. While that is one of only a handful of other streaks lasting for ten or more weeks going back through the history of the survey, it comes on the back of the record 44-week streak that ended this past February. That was only shortly after another 12-week streak ending in March of last year and the second longest streak on record (34 weeks long) that ended in the fall of 2020. In other words, the story remains in which sentiment has been unshakably bearish.
May Monthly OpEx Week Weak - DJIA Down 12 of Last 14 May’s monthly option expiration has been mixed over the longer-term since 1990. DJIA has been up eighteen of the last thirty-three May monthly expiration days with an average loss of 0.07%. Monthly OpEx week has a slight bearish bias with DJIA and S&P 500 down 18 and up 15. More recently, DJIA has suffered declines in 12 of the last 14, monthly expiration weeks. S&P 500 has one additional weekly gain since 2009, down 11 of the last 14. NASDAQ has declined in 9 of the last 14. The week after has been best for S&P 500 and NASDAQ. The week after options expiration is more bullish with S&P and NASDAQ up 11 of 14. Last year DJIA, S&P 500 and NASDAQ all gained over 6% in the week after.
