Treading Water: Markets In Consolidation Mode Near Recent Highs As Catalysts Remain Thin

(Wednesday market open) Stocks continue treading water near recent nine-month highs ahead of next week’s Federal Reserve meeting. It’s a quiet period with little economic data or earnings to propel things in any given direction.

Major indexes recently bumped against areas of technical resistance on the charts and don’t seem in a big hurry to mount a test of those levels.

The “easy” part of the long 2023 rally might be coming to an end. Until now, investors could almost count on a handful of heavyweight tech stocks driving up the value of major indexes.

While there’s a chance that could continue, the dramatic gap between 30% year-to-date gains for the tech-focused Nasdaq 100 (NDX) and 11% gains for the S&P 500® Index suggests other sectors need to step up for the rally to achieve more street cred. The SPX wouldn’t be up at all this year if it weren’t for that same handful of tech stocks.

The broader market appears to at least be stirring, with the critical financials sector up over the last week and the last month. Other cyclical sectors like energy, industrials, and materials that sat on the sidelines the last three months also flexed some muscle recently, though energy continues being dragged by a lackluster crude oil market. Consumer discretionary leads all sectors over the last five days and sits behind only info tech and communication services over the last month.

Major U.S. indexes finished mostly higher Tuesday as small-cap stocks started to recoup some of the losses they suffered during the banking-sector turmoil back in March. The small-company-focused Russell 2000® (RUT) rose roughly 2.7% to a three-month high.

Morning rush

• The 10-year Treasury note yield (TNX) was flat at 3.69%.
• The U.S. Dollar Index ($DXY) inched down to 103.89.
• The Cboe Volatility Index® (VIX) futures climbed just slightly to 14.06 and remain near three-year lows.
• WTI Crude Oil (/CL) rose to $72.47 per barrel.

The benchmark 10-year Treasury yield had a volatile May, covering more than 50 basis points between its low near 3.3% and its high above 3.8%. The late May yield rally ultimately fizzled, though yesterday’s closing yield of 3.68% remained above the 200-day moving average of 3.63%. The moving average happens to sit near an interesting area on the chart at around 3.6% that’s served as support and resistance for months and bears continued monitoring for possible direction.

Volatility remains extremely low at present, but Cboe futures for the coming months build in rising levels.

Just in

Treasury Secretary Janet Yellen said in an interview with CNBC this morning that bringing down inflation remains the top priority, but acknowledged potential issues within commercial real estate markets. She also sees a path to bringing down inflation while maintaining a strong labor market.

Yellen added that the level of capital and liquidity in the banking system remains strong.

What to Watch

Perhaps you’ve noticed a lack of major layoff announcements lately after a flurry earlier this year from the tech sector. Though a few companies discussed job cuts during earnings season, job openings continue to grow and unemployment remains historically low under 4%. While no one wants people to lose jobs, this tight labor market could be one reason inflation remains a nagging issue, and tomorrow’s weekly initial jobless claims loom.

Analysts expect claims of 237,000, up from 232,000 last week and near the higher end of the recent range. Claims are up this spring from historic lows below 200,000 earlier this year, but they aren’t near levels that suggest recession. The weekly tally would need to reach 300,000 to paint a truly bearish picture for the roaring labor market.

Talking technicals: The 4,300 level remains a potential technical resistance spot for the SPX, and above that there’s believed to be technical resistance at last summer’s 4,325 high. Yesterday’s SPX close of 4,283 was the highest this year and since last August, but the info tech stocks that that got the SPX here aren’t sizzling like they did in late May.

Stocks in the Spotlight

(Almost) halfway home: It’s hard to fathom, but the year is nearly half over. Itching to know what the second half might hold for investors and the global markets? Schwab Chief Global Investment Strategist Jeffrey Kleintop thinks the coming six months may feature less drama but possibly milder returns for global stocks after their double-digit first-half gains. And a mild recession in corporate earnings could continue, he adds.

Shares of crypto exchange platform company Coinbase (COIN) rebounded 4% in premarket trading a day after the Securities and Exchange Commission (SEC) charged it with operating its platform as an unregistered national securities exchange, broker, and clearing agency. There’s an elevated amount of uncertainty in this space that could lead to more volatility in an already rocky area of the market.

Eye on the Fed

Chances of an interest rate pause at the June meeting stand at 77% this morning, according to the CME FedWatch tool, which also prices in a nearly 66% chance that rates will rise by July. These numbers haven’t moved much the last few days, reinforcing ideas that a pause is likely next week.

The Federal Open Market Committee (FOMC) meeting starts next Tuesday, the very day of the critical May Consumer Price Index (CPI) report. A Fed decision will be announced next Wednesday afternoon.

With the meeting ahead and no major data on this week’s calendar, Treasury yields could trade in rangebound territory the next few days, says Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research.

Thinking cap

Ideas to mull as you trade or invest

Exiting penalty box? As the so-called Magnificent Seven big-tech stocks continue to gallop, where could strength emerge beyond that small group? Some other sectors are stirring awake. Consumer discretionary and real estate were livelier last week, outperforming info tech. The small-cap Russell 2000 did well early this week and recently broke out of a long-term trading range where it had wallowed most of the year.  The financials sector—beaten down by bank failures earlier this year—rose about 1.5% over the last five trading days but remains down more than 5% year-to-date. The KBW Regional Banking Index (KRX) recently hit a six-week high as more signs of banking stability emerged. Credit markets are showing little signs of an economic slowdown and the corporate new issue market has picked up lately. One regional bank even issued debt—the first regional bank to do so since the early March bank failures.

Seven Horsemen: The Magnificent Seven, by the way, are Apple (AAPL), Alphabet (GOOGL), Amazon (AMZN), Meta (META), Tesla (TSLA), Nvidia (NVDA), and Microsoft (MSFT). Together, they account for about 30% of the SPX’s current market weight and are responsible for almost all SPX gains year-to-date. The term was coined by a Wall Street analyst, and the group includes all but one member of the previous high-net-worth club on Wall Street, the FAANGs. Missing is Netflix (NFLX), though shares of the streaming company are up sharply this year. With a market capitalization of under $200 billion, Netflix simply can’t compete for a place in the Seven with the nearly $1 trillion market-cap of Nvidia. The trouble with FAANG was its exclusion of Microsoft, which analysts often described as an “honorary FAANG.” There were other acronyms, too, like MANA (Microsoft, Apple, Netflix, and Alphabet), and BAT, which included a handful of Chinese tech stocks. Also, TINA (There Is No Alternative) became a popular way to describe stocks when rates were zero, but it exited stage Fed about a year ago.

Price check: When the CPI and Producer Price Index (PPI) reports arrive next week, it’s important to focus on the month-over-month data. The year-over-year growth will likely be skewed by last June’s huge inflation jump. Comparisons to a year ago could be easier in June and continue that way at least through the end of this year, causing a discrepancy between annual and monthly inflation growth. The Fed’s annual inflation goal is 2%, and year-over-year numbers now above 4% could slip closer to 3% in coming months simply due to easier comparisons. However, if the monthly core CPI continues to grow by 0.4% or so, as it has most of this year, the Fed might not be done hiking. Many consumer-oriented companies said during earnings season that customers stayed resilient despite rising prices. There may be little keeping companies from ratcheting stickers higher until shoppers balk. That’s bad news if you’re a shopper but potentially good news if you’re an investor hoping for earnings growth through margin expansion. Net profit margin inched up to 11.5% in Q1 for S&P 500 companies, FactSet notes, from 11.3% in Q4. That’s still down from 12.2% a year earlier.

Calendar

June 8: April Wholesale Inventories.

June 9: No major earnings or data.

June 12: No major earnings or data

June 13: May Consumer Price Index (CPI), beginning of FOMC’s two-day meeting.

June 14: FOMC rate decision and May Producer Price Index (PPI).

 

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