Daily Stock Market Articles

Homebuilder Sentiment and Stocks Trend in Opposite Directions
Mon, Apr 17, 2023

Homebuilder sentiment from the National Association of Home Builders (NAHB) was updated this morning. As expected, the headline index rose from 44 in March to 45. Of the sub-indices, increases in both present and future sales drove the headline reading higher. While those readings remain relatively muted versus most of the past decade, it reiterates the modest improvement in sentiment we have seen this year. In fact, and as shown in the second chart below, homebuilder sentiment's improvement over the past four months marks the longest streak of back-to-back increases since another streak lasting for four months that ended in December 2021.





As for the regional breakdown, sentiment in the Northeast and South were both unchanged versus last month which leaves the indices in the middle of their historical ranges. The Midwest saw more substantial improvement rising by 3 points to the highest level since September. The West experienced an even more substantial increase of five points. That month-over-month increase ranks in the 85th percentile of all moves on record for that sub-index.



Although the NAHB's reading on homebuilders has improved over the past few months, homebuilder stocks as proxied by the SPDR S&P Homebuilder ETF (XHB) have been trending lower since February. Recently, XHB has run up to its 50-DMA (which has begun to roll over), and the downtrend line off the aforementioned early February high. So far, XHB has failed to break out.

 

DJIA Up 33 of Last 41 April Monthly Option Expiration Weeks

April’s monthly option expiration is generally bullish across the board with respectable gains on the last day of the week, the entire week, and the week after. Since 1982, DJIA and S&P 500 have both advanced 26 times in 41 years on expiration day with average gains of 0.23% and 0.18%, respectively. Monthly expiration day was staging a comeback after four or five declines from 2014 to 2018 but took a hit in 2022’s bear market. Expiration week has a bullish track record over the past 41 years. Average weekly gains are right around 1% for S&P 500, DJIA and NASDAQ. The bullish bias of April monthly expiration also persists during the week after although average gains have not been as strong with selling pressure rising recently (since 2014).

 

Historic Divergence in Tech Price and Breadth
Tue, Apr 18, 2023

Each day in our Sector Snapshot, we highlight the overbought and oversold readings of each S&P 500 sector based on price and breadth. For price, we consider a sector to be overbought when it trades at least one standard deviation above its 50-DMA and oversold when it is one standard deviation below its 50-DMA. For breadth, we look at the 10-day advance-decline lines. Again, when the 10-day A/D line rises at least one standard deviation above its historical average it can be considered overbought and vice versa.

The Tech sector is in an unusual place in which price has been overbought for the entirety of the past month while short-term breadth has dropped into oversold territory in the past two sessions.



Taking a spread of the two measures, that is nearly a record divergence. As shown below, there have only been two other times in which there has been a three-standard deviation difference between the overbought/oversold levels of price and breadth. The most recent of these was in July 2011 when similar to now, the sector traded over 1.4 standard deviations above its 50-DMA while the 10-day A/D line was over a standard deviation below its historical average. The other instance was exactly 15 years ago in April 2008. That time was slightly different in that price was extremely overbought trading 3 standard deviations above its 50-DMA while breath was neutral and only slightly negative.

Given the Tech sector has managed to perform well on unimpressive breadth, it would imply mega caps are buoying the market cap-weighted index.

 

Sector Breadth All Over the Place
Tue, Apr 18, 2023

In terms of price, the Industrials sector remains 5.75% below its high from January of last year and has yet to even take out the highs from earlier this year, but breadth has been more constructive recently. Just yesterday, the cumulative advance/decline line hit a new all time high.



Although that measure of breadth is making promising moves, other breadth measures have not exactly echoed that strength. In spite of the record high in the cumulative A/D line Monday, only 37% of the sector's stocks finished above their 50-DMAs. As shown below, of all other instances of a record high in the cumulative AD line, there has never been such a low reading in the percentage of stocks above their 50-DMAs. In fact, no other readings have even crossed into the 30% range! For the vast majority of previous highs, the percentage of stocks above their 50-DMAs has sat at 70% or more.



All that is to say that most Industrials sector stocks are moving higher, but have not yet moved above potential resistance at their 50-DMAs. And even though the reading on the percentage of stocks above their 50-DMAs is low at the moment, that is not to say it is not improving rapidly. As shown below, it has risen sharply from the low of 19.18% on April 6th. Furthermore, whereas Monday's close only saw 37% of the sector finish above their 50-DMAs, as of mid-morning Tuesday the reading is already up another 8.2 percentage points to 45.2% as the average stock in the sector trades just 7 bps below its 50-DMA.

 

Sell in May and go away – Maybe, it depends



In the above table the “Worst Months” performance of DJIA, S&P 500, and NASDAQ have been separated by year of the four-year-presidential-election cycle going back to 1951 for DJIA and S&P 500 and 1971 for NASDAQ. NASDAQ’s “Worst Months” are July through October compared to May to October for DJIA and S&P 500. Even though pre-election years have historically been the best performing year of the four-year cycle, performance during the “Worst Months” has not been the least bit impressive. In 18 pre-election year “Worst Months” periods, DJIA has averaged a meager 1.14%. S&P 500 is only slightly better +1.81% while NASDAQ’s average is under 1%. Frequency of gains or percentage of time higher in pre-election years “Worst Months” is only slightly better than 50-50.

Because of the elevated level of risk that has been historically observed during the “Worst Six Months” of the year and its historically tepid returns, reducing long exposure and developing a defensive strategy is the approach taken in the Almanac Investor Stock and ETF Portfolios. We do not merely “sell in May and go away.” Instead, we take some profits, trim or outright sell underperforming stock and ETF positions, tighten stop losses and limit adding new long exposure to positions from sectors that have a demonstrated a record of outperforming during the “Worst Months” period.

For those with a lower risk tolerance or a desire to take a break from trading, the “Worst Months” are a great opportunity to unwind some longs and move into the relative safety of cash, Treasury bonds, gold and/or some combination of traditional defensive assets. For the first time in over a decade, cash can currently earn something other than zero. Preservation of capital may be more important than growth and with historical averages and frequency of gains reduced; the “Worst Six Months” are a good time to simply step aside if you prefer. August, September and/or October have provided some excellent buying opportunities over the years and could do the same again this year.

 

Homebuilders Breaking Out Like It's...
Thu, Apr 20, 2023

It's hard to get over how well the homebuilder stocks have been performing lately. As shown in the charts below of stocks in the S&P 1500 Homebuilder group, these names are nearly universally in steep six-month uptrends and breaking out as we type.





Below is another way to see just how crazy the run has been for the S&P 1500 Homebuilder stocks lately. Most names are now up 30-40% year-to-date after rallying 5-10% over the last week. This has pushed them ~10% above their 50-DMAs, and many are trading more than two (or even three for some) standard deviations above their 50-DMAs in extreme overbought territory.

"Mr. Market" has either lost its mind or it's predicting that all the current worries about housing in the months and quarters ahead are misguided.

 

Earth Day 2023: "Invest in our Planet"
Fri, Apr 21, 2023

Tomorrow will mark Earth Day, an annual event in support of environmental protection. Befitting of this year's theme "Invest in our Planet" in the charts below we check in on the performance of clean energy stocks via the iShares Global Clean Energy ETF (ICLN). As shown, ICLN has been stuck in a sideways trend over the past year with the 200-DMA essentially flat since the fall. At the moment, price is sandwiched between the 200-day and its 50-DMA. While time will tell if the 50-DMA provides any support, the past week has seen ICLN fail to break out of the downtrend off of last summer's highs.



That downtrend also traces back even further to the early January 2021 high which was put in place following the massive run in clean energy stocks during the first year of the pandemic.



ICLN is comprised of a number of clean energy stocks from around the globe. In the snapshot from our Chart Scanner below, we show the ETF's eight largest US-based holdings. As the ETF is trending sideways, these individual holdings' trends are all over the place. For example, while Bloom Energy (BE) and Consolidated Edison (ED) are trending sideways, First Solar (FSLR) has been in a steady long-term uptrend. Conversely, Plug Power (PLUG) and Sunrun (RUN) have traded in steady downtrends for some time now with the former near 52-week lows.

 

April 2nd Half Strength After Tax Deadline

1st half of April used to outperform the second half, but since 1994 that has not been the case. Traders are more focused on Q1 earnings and guidance during April than the Tax Deadline nowadays.

Expectations are low for earnings season and next week is a big week with 35% of S&P 500 stocks reporting next week including AMZN, GOOGL, META & MSFT, compared to less than 12% this week and 2% last week (Hat tip @ScottSchnipper @CNBC @CNBCPro). Better than expected results and upbeat guidance could rally stocks into month-end.

These 2 charts show how April is tracking usual performance over the last 21 years as well as during pre-election years. April is clearly weaker than normal, yet the market is still tracking the directional trends.

 

Lithium: The Cycle Continues
Fri, Apr 21, 2023

If you haven't checked the price of lithium lately, you might be in for a surprise. Spot prices for lithium carbonate in China have collapsed by two-thirds since hitting record highs in November of last year. Prices have gone from $84k per ton to $25k per ton. That unwinds the vast majority of a spectacular surge that played out from 2020 to 2022. Lithium initially surged 1,279% from July 2020 to March 2022 as part of the broader explosion of commodity prices and booming demand for electric vehicles, eventually peaking up 1,387% from the post-COVID lows. It's easy to forget that this critical battery input had already gone through one such cycle. A 224% rally in 6 months during late 2015 and early 2016 before a long, slow bear market that saw prices down 78% over several years.



In the equity market, the price cycle hasn't been as dramatic in percentage terms, but there has still nonetheless been a double cycle of surging stock prices in 2016 followed by a grinding bear market, and then an even more dramatic surge through late 2022 that is now sliding into reverse. On Thursday, Chile's government announced reforms to its lithium extraction policy. While existing contracts with firms that operate in the rich lithium brine deposits of the Chilean Atacama desert will be honored, the market is looking at weaker lithium prices and the fact that existing contracts will be replaced by less favorable ones 10+ years down the line and hitting lithium players. SQM is off 21% today while ALB is 10% lower.

 

Is the Housing Market About to Give the Economy a Boost?
Posted on April 21, 2023

Housing was the biggest drag on economic growth last year. The economy grew by 2.1% in 2022, but that overcame a 0.93%-point drag from residential investment, i.e. housing. In fact, it’s been a drag on GDP growth for 7 straight quarters now (through the end of 2022). It got worse over the last 3 quarters of 2022 as mortgage rates surged from below 3% to just above 7% thanks to an aggressive Federal Reserve. Housing is likely to be a drag for the 8th quarter in a row in the first quarter of 2023.



But things may be looking up for the rest of 2023.

People want houses but there aren’t many
Existing home sales fell 34% in 2022 but are up 10% over the first three months of this year. Some of that is because mortgage rates have pulled back a bit from the peak level of 7%+ we saw last fall. However, rates are still high, and significantly higher than over a year ago when 30-year mortgage rates were around 3%.



In fact, based on the median price of an existing home, and assuming a 20% down payment, the monthly mortgage payment has jumped from about $1,200 at the end of 2021 to $1,900 as of March. That’s not because of an increase in home prices – the median price increased about 5% to $376,000 during this period. It’s because the 30-year mortgage rate jumped from about 3.1% in December 2021 to 6.5% in March 2023! In short, affordability is truly low.



Nevertheless, as we saw from rebounding home sales, there’s still pent-up demand. A big factor is that there are a record number of people in the 25-34 year age cohort, which is prime-home-buying age. For perspective, the number of potential first-time homebuyers is up from 39.5 million in 2006 to 46.1 million today.

The problem is that there aren’t many homes for sale. Inventory of existing homes, in terms of months-of-supply at the current sales pace, is currently at 2.6 months. Well below a normal range of 4-6 months.

You can probably guess why inventory is low. Most homeowners are “locked-in” to their homes since they got their existing mortgage at ultra-low rates. As a percent of disposable income, mortgage debt service payments were just 4% at the end of 2022. That’s lower than it was pre-pandemic, and lower than at any point during the last four economic expansions. This is great from a consumption point of view, since it means households are less financially constrained. However, it also means a lot of homeowners are unlikely to move – who would want to sell and buy a new home at a mortgage rate of 6.5%?



Pent-up demand was evident in the latest existing home sales report. Properties typically remained on the market for 29 days in March, and 65% of homes sold in March were on the market for less than a month. So there clearly is demand despite high mortgage rates.

New buyers pushed to new homes
At the end of the day, if you have to buy a house, you go out and buy a house. And if there’s not much inventory in the existing home market, you look at the market for new houses. Which is why new home sales are up 16% from last September (through February). There’s relatively more inventory in this market, about 8-months of supply at the current sales pace. Though on an absolute basis, I do want to point out that the inventory of new homes is under 450,000, which is less than half that of existing homes (close to 1 million).

Also, the inventory of completed homes is rising while homes under construction are falling, as supply-chain issues fade. Homebuilders are also starting fewer homes than they are completing – this is not a problem now but that does mean supply next year is likely to be constrained. The good news is that new housing starts may have bottomed – starts are up 7% over the past 5 months through March.



Homebuilders are feeling good, and the market likes that
Combine the high pent-up demand picture with relatively low supply, and builders are feeling good. As witnessed by a rebound in homebuilders’ confidence.



The market is sensing this as well. The SPDR S&P HomeBuilders ETF is up almost 16% year-to-date (through April 20th) versus 8.1% for the S&P 500. Since September 30th, the HomeBuilders ETF is up 28%, versus 16% for the S&P 500.

This was validated by D.R. Horton’s earnings report on April 20th. They beat revenue and earnings estimates by wide margins, sending the stock up by 5.6% over the day. But it was forward looking guidance that was especially positive: they see higher revenue in 2023 and expect to close on 77,000 to 80,000 new homes. Well above estimates for 71,000. Quoting management:

” Although higher interest rates and economic uncertainty may persist for some time, the supply of both new and existing homes at affordable price points remains limited, and demographics supporting housing demand remain favorable … Started less homes than they completed in the quarter, but do expect starts to increase each quarter.”

All of which is good for the economy. None of what you read above is what we’d be seeing if the economy was in a recession, or close to one. If households’ employment situation was looking shaky, we would expect housing demand to crater. The fact that the housing market, especially starts, appears to have found a floor, indicates that the labor market is expected to remain strong.

In fact, more activity in the new home market is even better for GDP growth. It involves activities like design and construction, as well large household appliance purchases – which is not the case for existing homes.

Single-family home construction makes up almost 40% of residential activity within GDP. And over the last 3 quarters of 2022, it crashed 23%, which is why housing was such a big drag on GDP last year.

The good news is that we may have seen the back of that, with single-family construction no longer sinking. That by itself would be a positive for the economy. And any rebound, if it happens, will be even better.

 

Fed Blackout Begins
Mon, Apr 24, 2023

Saturday began the FOMC's blackout period meaning there will be no communication from Fed officials for the next several days until the May 3rd meeting (Hooray). As of Monday afternoon, the CME's FedWatch Tool is pricing in a nearly 90% chance of a 25 bps hike at that meeting.

In the chart below, we show the performance of the S&P 500 from the end of a Fed day until the start of the blackout period for each inter-meeting period since 1994 when the FOMC began announcing its rate decisions on the same day as the meetings. Since the current tightening cycle began a little over a year ago, most periods between meetings and blackouts have seen the S&P 500 turn lower with a median decline of 0.53%. One notable exception to that weakness was after the meeting last November when the S&P 500 went on to rally over 8% leading up to the blackout period. That was the strongest run for the S&P 500 from meeting to blackout since June 2009. As for more recently, the 5% gain from the March meeting through last Friday again stands out ranking as the second strongest of the current tightening cycle (out of ten).



In the chart below, we show the performance from the start of each past blackout period up through the last close prior to the FOMC meeting. Again, the current tightening cycle has tended toward weak performance for the S&P 500 with more declines than gains. However, the last blackout period in March saw the strongest gain for the S&P 500 since the runup to the June 2020 meeting.



Although there has been some strength during and leading up to blackout periods more recently (especially relative to earlier this tightening cycle), over the full history of the data, strong performance ahead of the blackout period is not a good explainer of performance during the blackout period itself. As shown below, there has historically been a wide dispersion of results without much in the way of a trend. In other words, the strong performance headed into the blackout period in and of itself does not mean it will continue as Fed speakers go quiet.

 

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.

 

Fed Days Flipping Script
Tue, Apr 25, 2023

The FOMC blackout period is now underway meaning there will be no communications from FOMC members until the day of the May meeting. As we detailed yesterday, performance outside of and during blackout periods has been pretty weak during the current roughly year-long tightening cycle. However, things have been improving more recently. As for Fed days themselves, the opposite has been true.

In the chart below, we show the performance of the S&P 500 on the day of FOMC rate decisions going back to 1994. Earlier in the current tightening cycle, Fed days offered the market a brief respite from selling. In fact, some of the strongest Fed days (in terms of S&P 500 performance) of the past few decades occurred last year as the rolling 10-meeting average hit a more than decade-long high in July. With that being said, that average has been rolling over with weaker reactions to the FOMC in the past few meetings. In other words, to some extent, S&P 500 performance during and outside of blackout periods and on Fed days has begun to flip the script in the past few FOMC meetings.

 

S&P 500 Futures Historically Shorted
Tue, Apr 25, 2023

As we do each Monday, in last night's Closer we highlighted the latest futures positioning data from last Friday's release of the CFTC's Commitments of Traders report. Of all assets, perhaps the most striking number was in S&P 500 futures. In data as of last Tuesday, a net 15.11% of open interest among speculators was positioned short. That marked the most bearish positioning for this class of investors since September 2007. Prior to that, there have been relatively few instances of speculator positioning exceeding 15% net short. Most of those occurred in the late 1990s and early 2000s when positioning readings were far more volatile on account of open interest being much smaller than it is today. With that being said, we would also note that open interest has been trending lower in the past few years with recent readings being some of the lowest since 2008 on a 52-week moving average basis.

 

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.

 

Don’t Be Fooled by the Headline GDP Number
Posted on April 27, 2023

The Bureau of Economic Analysis just reported that the U.S. economy expanded by only 1.1% in the first quarter. By the way, that’s an annualized rate – the actual quarter-over-quarter increase is just under 0.3%. This was well below expectations for 1.9% growth.

More fodder for recession calls?

Short answer, no.
GDP can basically be broken down into 5 components:

• Personal consumption (68% of GDP)
• Business Investment (13%)
• Residential investment, i.e. housing (4%)
• Government spending and investment (18%)
• Net exports, i.e. exports minus imports (-3%)
• Change in private inventories

The last two components are extremely volatile and can create significant volatility in the headline data. Note that net exports are “-3%” of GDP because the US exports less than it imports, and so “net exports” is negative.

Here’s how the various components contributed to the headline number in Q4 2022 and Q1 2023. The last two columns show the pace at which they increased (or decreased). As you can see, change in private inventories pulled GDP growth down by a whopping 2.3%-points in Q1.



Private inventories are the physical volume of inventories businesses maintain to support their production/distribution activities. Private inventories were actually more or less unchanged in the first quarter. But private inventories increased significantly in Q4, and so “change in private inventories” showed up as a massive drag on GDP. Yeah, if you’re confused, don’t worry about it.

The good news is that we have a measure of economic growth that excludes this, which is shown in the last couple of lines of the previous table. Ultimately, when thinking about economic growth, we want to look at domestic demand, a good measure is “Real final sales to domestic purchasers”, which is simply the sum of the contributions from the top 4 components. And we can calculate private sector demand by excluding government.

There was no “slowdown”
Domestic demand rose by 3.2% in Q1. That’s the fastest pace of growth since the second quarter of 2021. By the way, the average over the last decade (2010 – 2019) was 2.3%.



By the way, this wasn’t boosted only by government, though we shouldn’t really ignore the government sector because it makes up close to a fifth of the economy.

Private sector demand rose 2.9% in Q1, which is the fastest pace we saw since the second quarter of 2021.

Consumers powering the economy
As you may have noticed from the GDP contribution table, domestic demand was boosted by personal consumption, which surged at a 3.7% pace. A lot of this came from a rebound in goods consumption, mostly thanks to increased vehicle purchases. But even services spending, which makes up 45% of the economy, rose 2.3%.

For perspective on the consumption numbers from Q1, the pace of growth was a lot faster than the average pace of 2.3% we experienced during the last decade, and the fastest since Q2 2021. Though back in early 2021, consumption was boosted by stimulus checks.



What’s driving strong consumption now? Two things:

• Strong employment
• Lower inflation, especially gas and food prices, which is boosting real incomes, i.e. incomes adjusted for inflation

What next?
Of course, all the above data is for the last quarter and we’re already a month into the second quarter. It’s hard to imagine consumption, and domestic demand, growing at the torrid pace of Q1. However, if you’re predicting a recession, then the onus is to explain what leads to a crash in employment, and/or raises inflation going forward.

On the employment front, the latest news is good. Initial claims for unemployment benefits dropped last week, from 246,000 to 230,000. This means fewer workers were laid off and filing for benefits. Even continuing claims, which represents the total number of people who are continuing to receive unemployment benefits, were unchanged at about 1.86 million.

Beyond the actual numbers, what really matters is the trend. And to that end, we’re not seeing a pickup in initial or continuing claims. In fact, the current levels are in line with what we saw just before the pandemic hit, when the employment situation was strong. Of course, with job growth already hitting 1 million plus in the first quarter, and the unemployment rate close to 50+ year lows, I think its safe to say we currently have a strong labor market.

Another potential positive going forward: housing. Residential investment has dragged on GDP growth for 8 straight quarters now. But as we wrote about last week, we see relief coming from this sector of the economy. Which would be more than welcome.

Of course, we’ll continue to track the data, including inflation and payrolls. Those will tell us a lot about how things are looking in Q2, and just as important, what that means for monetary policy.

The other side of strong domestic demand is that It’s hard to imagine Fed officials looking at these numbers and thinking “the job is done, and now we can cut rates”. But we’ll see.