Range-Bound: Fear Of Missing Out Keeps Floor Under Market, But Gains Hard To Come By

Wall Street seems a bit out of breath after its fast climb over the last week. There’s a heavy feeling in the air early Wednesday following Tuesday’s lower session.

We’re arguably at a crossroads. Many investors are suffering from FOMO (Fear Of Missing Out) syndrome, meaning they’re afraid of missing possible gains if the trade battle with China is settled. So there’s a hesitancy to sell. 

On the other hand, the market is near the top of its recent range between roughly 2750 and 2950 for the S&P 500 Index (SPX), so new buying interest could be hard to find, and a bit of profit-taking appears to be creeping in. All this means stocks might continue to be range-bound, characterized by back-and-forth, directionless trading. Especially on a day like Wednesday where it’s hard to find any new catalysts.

One possible economic warning sign emerged early this week as crude prices dipped again following a recent rebound. U.S. crude traded back under $52 a barrel early Wednesday as an industry report revealed growing U.S. supplies and the U.S. government lowered its world demand growth forecast. Sometimes softness in the energy market can point toward softness in the overall economy. Weekly U.S. government crude stockpile data come out later Wednesday.

Speaking of data, the May consumer price index (CPI) came out early Wednesday and looked relatively benign, kind of like producer prices the previous day. May CPI rose 0.1%, in line with Wall Street’s expectations. 

Core CPI, which strips out food and energy, also rose 0.1%, a bit below the average analyst estimate. Neither of these data points would appear likely to stand in the way of a potential Fed rate cut, if that’s what the Fed wants to do. The takeaway from this week’s inflation data is that the price environment still isn’t looking like something to worry about.

Volatility Hanging Around

It’s a headline-focused market, with the latest tweet or statement on tariffs likely to move stocks. That explains in part why volatility continues to hang in here. The Cboe Volatility Index (VIX) stayed above 16 early Wednesday, not too far off recent highs despite the market’s comeback over the last week.

The 2900 mark continues to be a barrier for the S&P 500 Index (SPX). An early run above that level on Tuesday met resistance, and stocks fell back, just as we saw on Monday. Meanwhile, 10-year Treasury bond yields slipped slightly on Wednesday, pulling back to around 2.11% from highs of around 2.15% earlier this week.

It wouldn’t be too surprising to see a little consolidation here, when you think about how the market’s acted over the last week. Basically, stocks fell for six weeks, and then recovered about 70% of those losses in six days. It might be getting to the point where it’s tough for some investors to commit capital when the market is within 1% or 2% of all-time highs and a large piece of news (tariffs) continues to hang over everyone’s head for longer than most had expected.

That could be making it difficult for some investors to say, “Hey, I have to buy the market here.” Maybe people are buying individual stocks, but perhaps not full sectors. Contrast that with a week ago, when 10 of 11 sectors were rising on the first two days of the rally.

Sector Picking Not So Simple

Compounding matters might be the fact that sectors themselves seem a bit more differentiated now than they were, say, a year ago. Back then many investors thought they could just buy FAANGs and be OK, but now the FAANGs have all gone off in different directions amid conflicting fundamental factors.

Or there was a time about a year and a half ago when the market was rising and the word on the Street was to just “Buy Tech.” Now you’re hearing analysts who say, “Buy Tech, but we’re not sure about the chip makers.”

All this is can be a way to measure the strength of a rally. Are people buying sectors, or does it seem like just two or three individual stocks in a sector are doing well? It’s an interesting distinction on rally days.

Another factor potentially helping keep things range-bound is the Fed’s meeting next week. As we get closer, volume might look a bit thin, with some traders holding back ahead of the Fed’s decision. Most traders don’t expect the Fed to lower rates next week, with a less than one in five chance of that, according to the futures market. Still, the Fed’s statement and Fed Chair Jerome Powell’s press conference next Wednesday after the meeting are likely to get a very close look. We’ll talk more about that in the coming days.

Banks Start Warning

Speaking of sectors that aren’t performing in sync, consider Financials. Two of the biggest banks—Morgan Stanley MS and JPMorgan  Chase & Co JPM—were having good days Tuesday, even while Goldman Sachs Group Inc GS was flat and Wells Fargo & Co WFC was struggling with issues of its own regarding CEO replacement.

MS was up despite its CFO saying at an industry conference Tuesday that he’d be “surprised” if the company beat its Q1 numbers, Bloomberg reported. The last two weeks have been “very hard,” MS’s CFO said. There were warnings from MS and Citigroup Inc C at the conference that trading has slowed down, according to Bloomberg.

What we might be seeing here is companies that know most of Wall Street expects them to have a bad quarter simply getting out the news ahead of time. It’s no secret that falling interest rates have been tough on the Financial sector, so maybe we’re seeing some gamesmanship. Banks could be saying, “We know you don’t expect much from us this quarter anyway, so let’s put everything on the table.”

It’s pretty impressive how many bank CEOs are managing these tough times with expense cuts and new revenue sources. However, the interest rate situation could be a big blow to smaller regional banks. That’s something we’ll probably get a better picture of once earnings start.

Weakness in regional banks is one reason why the small-cap Russell 2000 (RUT) continues to lag its SPX and Dow Jones Industrial Average DJI cousins.

From a sector viewpoint, it was mostly a flat Tuesday, though Industrials fell nearly 1% after a Wall Street Journal article implied that Pentagon spending could fall.

It’s been quiet on the earnings front this week, but athletic wear company Lululemon Athletica Inc LULU reports after the close today and Broadcom Inc AVGO reports Thursday. LULU’s stock has been on a run over the last 12 months, climbing about 40%. Shares got a boost after the company’s Q4 earnings report back in March. Still, it’s been tough for many retailers lately, so LULU’s earnings and call might help provide more insight into that market.

Looking ahead to data later this week, investors are gearing up for Friday morning’s report on May retail sales. Analysts expect a solid 0.7% rise, according to Briefing.com, compared with a 0.2% drop in April.

Figure 1: RATES DOWN? NO PROBLEM: Despite 10-year yields (purple line) dropping dramatically over the last month, the Financial sector (candlestick) has performed pretty well. That’s especially true in the last week. Data Source: Cboe, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Could Yields Be Looking Up?: It’s probably too early to talk seriously about any sort of “bottom” in Treasury yields, especially with the benchmark 10-year yield still near 20-month lows at around 2.11%. However, one analyst speaking on CNBC Tuesday pointed out what appears to be a “double bottom” in the 10-year yield chart earlier this month when yields fell to 2.07% one day and then 2.05% a few days later. They’ve since bounced nearly 10 basis points from the low. This rise in yields might be one reason some of the so-called “defensive” sectors, including Utilities, have come under pressure this week. Typically, Utilities do better when yields are low because investors often flock to dividend-paying sectors at such times. Yields might also have already built in chances for a near-term Fed rate cut, which have grown significantly over the last few weeks according to Fed funds futures.

Fed Funds Futures Say?: Speaking of rate cut chances, they diminished slightly for next week’s meeting after President Trump announced he’d suspend plans to immediately slap tariffs on Mexico. Chances for a rate cut at next week’s Fed meeting recently stood at 19%, according to CME futures trading, down from highs above 25% at times last week. Chances for a 25-basis point cut in July are steady near 66%, but the odds for two rate cuts between now and July—something one analyst surprised many on Wall Street by predicting recently—are only 14%, according to the futures market. Last week’s soft jobs number might give the Fed some additional cover if it wants to cut rates, and producer prices released Tuesday for May also looked mostly benign. Whatever the case, the futures market as it stands now is predicting a better than 75% chance that rates will be lower by the end of July than they are now. 

Dollar Eases As Rate Cut Odds Increase: Recent weakness in the dollar index might reflect increased rate cut chances, with the dollar consistently trading under 97 lately after spending most of April and May above that level and even climbing to nearly two-year highs north of 98 at times. Lower rates often weigh on the dollar because they tend to increase the risk of inflation. Another weight on the dollar right now could be the euro, which hit three-month highs vs. the dollar earlier this month and remains near those levels at 1.13. That’s still down from highs above 1.24 early last year, but shows a renewed energy in the euro. The euro seemed to perk up a little after the European Central Bank’s (ECB) recent meeting where ECB President Mario Draghi said the ECB would consider lowering rates and renewing stimulus if the European economy continues to stumble. Hopes of a stimulus improving Europe’s economy could be helping the euro, and that in turn might be weighing on the dollar. 

While the dollar looks softer, its relative weakness might come too late to really give U.S. multinationals much assistance during the three weeks left of Q2. The greenback’s pop earlier this quarter potentially made U.S. goods more expensive for overseas customers, which might hurt companies in the Industrial, Materials and Info Tech sectors that depend on exports for big chunks of revenue. Many U.S. companies expressed concern about the strong dollar’s impact in their Q1 conference calls, and it wouldn’t be all that surprising to hear more of the same in Q2 earnings calls.