7/22/22 Quick Summary

7/22/22 Quick Summary

Quick update on today’s action. Today the market started off to the upside despite the big miss last night from Snap, but following the release of the disappointing (if you like economic growth) US flash PMIs (see that report), markets turned around (that was the peak you see in the one-day chart below). From there they recovered a bit, holding steady until around 11 when the bottom gave way, and from there it was a steady grind down before recovering a bit into the close. That said, it seemed more like buyer’s moving to the sidelines than a lot of sellers coming in, as volumes remained relatively subdued (around the average levels this week). Notably today’s high on the SPX was within 5 points of filling the gap noted yesterday, so not sure if that also created some selling pressure (traders sometimes look for a reversal after a gap has been filled). Positively, the SPX remained above yesterday’s lows but the other indices breached them. All remain above their 50-DMA’s. I’ll put the charts up on Sunday. All of our major indices finished up on the week.

SPX

Argus - Ahead of the weekend, early highs saw the S&P 500 reach 4,012.44. The major indices were moving mostly sideways off their highs until about 11:00 a.m. ET when selling conviction picked up. The market continued a steady decline but lifted off its lows just before the close. Despite the softer finish to the day, each major index is up week-to-date with the S&P 500, Dow, and Nasdaq showing gains of 2.6%, 3.3%, and 2.0%, respectively.

Ahead of the open, there were economic releases that played into the existing global growth slowdown narrative. Preliminary July PMI data from Japan, Australia, France, and Germany all showed weaker-than-expected results. After the open, the July preliminary IHS Markit Manufacturing and Services PMI data for the U.S. also came in weaker-than-expected. The services PMI number clocked in below 50, which is the dividing line between expansion and contraction.

Compounding growth concerns from the economic data was the earnings report and warning from Snap (SNAP 9.95, -6.40, -39.1%). The company had worse-than-expected earnings and declined to provide guidance due to uncertain operating conditions. This dragged down other companies that benefit from online advertising, including The Trade Desk (TTD 47.27, -3.72, -7.3%) as well as mega caps Alphabet (GOOG 108.36, -6.68, -5.8%) and Meta Platforms (META 169.27, -13.90, -7.6%). The mega cap underperformance today, which included Apple (AAPL 154.09, -1.26, -0.8%) and Microsoft (MSFT 260.36, -4.48, -1.7%), was a big directional driver for the broader market. The Vanguard Mega Cap Growth ETF (MGK) closed down 1.8% versus a 0.6% loss in the Invesco S&P 500 Equal Weight ETF (RSP) and a 0.9% loss in the S&P 500. It wasn't all bad today though with American Express (AXP 157.10, +6.92, +4.6%) and Schlumberger (SLB 35.25, +1.62, +4.8%) outperforming after reporting better-than-expected earnings results.

In the early going, buyers weren't completely deterred by the weak economic data and disappointing earnings reports. Shortly after the open advancers led decliners by a 3-to-2 margin at the NYSE while decliners led advancers by the same margin at the Nasdaq. At the close, though, decliners led advancers by a 7-to-5 margin at the NYSE and an 11-to-5 margin at the Nasdaq. Eight of 11 S&P 500 sectors closed in the red with losses ranging from -4.3% (communication services) to -0.3% (industrials). Aside from communication services, the top laggard was information technology, which was dragged down by Apple on the Snap news but also Seagate Technology (STX 76.83, -6.78, -8.1%) after they reported worse-than-expected earnings and issued downside guidance. Communication services was the top laggard due to Meta Platforms but also Verizon (VZ 44.45, -3.21, -6.7%) after the company reported worse-than-expected earnings and issued downside guidance.

Energy futures were mixed at the close. WTI crude oil futures fell 1.8% to settle at $94.76/bbl. Natural gas futures rose 5.2% to $8.20/mmbtu. Unleaded gasoline futures fell 4.0% to $3.02/gal. Treasury yields fell on the heels of the weaker-than-expected global PMI data this morning. The 2-yr note yield settled ten basis points lower at 2.99% while the 10-yr note yield settled 13 basis points lower to 2.78%.

BBG- US stocks fell as disappointing results from social-media firms and weak economic data added to recession fears. Treasuries rallied as traders dialed back bets on Federal Reserve hikes, while the dollar retreated. The S&P 500 dropped for the first time in four days, while the tech-heavy Nasdaq 100 underperformed major benchmarks, closing down 1.8%. Snap Inc.’s poor results and Twitter Inc.’s sales miss raised concern about online ad spending and weighed on shares of Facebook parent Meta Platforms Inc. and Google owner Alphabet Inc. Hardware and storage companies including Micron Technology Inc. and Western Digital Corp. fell after Seagate Technology Plc’s earnings miss and weak outlook. Snap’s results have become a barometer for ad spending amid mounting economic concerns. There are growing signs that tech companies are preparing for a recession with some pulling back on hiring, while Meta has lost about half of its value this year after disappointing revenue forecasts. Meta and Alphabet are scheduled to report earnings next week.

Despite Friday’s churn, the equity market posted its best week in a month, paring this year’s market rout to about 17%. Speculation that the worst of the selloff has passed is partly behind the move. But angst about the damage from inflation, rapidly rising interest rates and recession fears is proving hard to shake despite a tempering in expectations for Fed aggressiveness next week. “The Fed meeting is crucial,” Quincy Krosby, chief global strategist at LPL Financial, said by phone. “Does the Fed rhetoric become less hawkish? Because what the market may be expecting that the Fed goes into the summer months and comes out perhaps a little bit less hawkish. But it’s a question mark because it depends on the trajectory of inflation.”

In other earnings news:

• American Express Co. rallied after reporting record revenue and raising full-year forecasts.

• Verizon Communications Inc. slumped after it missed profit estimates and cut guidance.

• HCA Healthcare Inc. soared after an earnings beat.

Underscoring recession fears, Treasuries extended an advance, pushing the 10-year yield to around 2.7%, as US business activity contracted in July for the first time in more than two years, according to the S&P Global flash composite purchasing managers output index.  That prompted swaps traders to pare bets on Fed hikes, shifting toward pricing a 50-basis-point hike in September as more likely than a three-quarter-point move. Swaps targeting next week’s meeting briefly indicated a 75 basis-point increase was slightly less than certain.

Meanwhile, German short-term bonds soared as investors trimmed bets on European Central Bank rate hikes after weaker-than-expected PMI data in the region fanned fears of a recession. Oil posted a weekly loss with softer European economic data and signals of US fuel demand stalling souring the market’s outlook. West Texas Intermediate slipped below $95 a barrel. 

Alicia Levine, head of equities, BNY Mellon Wealth Management, said in an email “The recent earnings in social media are a reminder that there is earnings risk in these pummeled sectors ... which still may not be priced into the market. Further, there is macro risk to earnings in general after weak US and European PMI’s this morning.”

A weak SPX sector flag to end the week with just three defensive sectors able to manage positive sessions. Tech by far took the worst of it today with communications hammered.

Breadth which had been very positive going into yesterday and was mediocre yesterday turned ugly today. NYSE had just 21% positive volume, while Naz was at 28%. Those numbers speak for themselves, but as I noted at the top I think it was more a lack of buyers than heavy selling pressure.

Style box showed the flight from growth today, with the social media stocks and high beta names (PLTR, SHOP, DDOG) that had been leading until today getting the worst of it.

Overseas, major equity indices in the Asia-Pacific region ended the week on a mixed note but up for the week. Japan's Nikkei: +0.4% (+4.2% for the week), Hong Kong's Hang Seng: +0.2% (+1.5% for the week), China's Shanghai Composite: -0.1% (+1.3% for the week), India's Sensex: +0.7% (+4.3% for the week), South Korea's Kospi: -0.7% (+2.7% for the week), Australia's ASX All Ordinaries: -0.1% (+3.2% for the week).

While major European indices finished little changed but also up for the week.

The dollar ended down, at one point breaching its 20-DMA before just recovering it, gold was up for a second day, nat gas pushed higher getting over $8, and crude was weak again with WTI falling back to the 200-DMA again which held again, and the VIX was little changed at 23. I’ll have more on all of them on Sunday.

Overall, I said yesterday

as I’ve said all week, there’s really no reason this shouldn’t continue for the time being absent some sort of negative news catalyst. We’ll have to see if the SNAP miss (shares are down -25% and are hitting other tech shares) qualifies.

I guess it qualified. That said, the damage so far was minimal, and no reason the rally can’t resume next week. I’ll have more on Sunday.

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