With Fed Ahead and a Big Runup Possibly Behind, Wall Street Takes a Breather
TD Ameritrade | Jun 06, 2023 09:27AM ET
(Tuesday market open) Wall Street’s summer doldrums started early this year. It’s only the beginning of June but it feels like the market is already on summer vacation after all the excitement of recent weeks. Major indexes are also bumping up against old resistance levels on the charts, making the path toward further gains a bit more challenging, especially without fresh catalysts.
The coming days are painfully light in terms of high-profile earnings and economic data, but we’re just a week away from the Federal Open Market Committee (FOMC) gathering to decide next steps on interest rates. The market has built in high expectations of a “skip,” meaning futures prices point toward the Fed doing nothing at this meeting and then potentially raising rates another 25 basis points at its July meeting.
With the Fed meeting a week away, there’s no “Fedspeak” to monitor. The Fed is in its “quiet period,” removing another potential market-moving factor for now.
Data and earnings may be sparse this week, but Campbell Soup (NYSE:CPB) reports tomorrow and DocuSign (NASDAQ:DOCU) releases its numbers on Thursday.
In other corporate news, Apple Inc (NASDAQ:AAPL) Worldwide Developers Conference rolls on today but the biggest headlines came yesterday with the launch of a new “mixed-reality” headset that costs around $3,500. Judging from how Apple shares (NASDAQ:AAPL) hit new highs going into the conference and then fell sharply after the product announcements, it appears to have been a “buy the rumor, sell the fact” event.
There’s a bit of a risk-off mood early today. The dollar and Treasuries are slightly higher, and crude oil slipped.
h2 Morning rush/h2- The 10-year Treasury note yield (TNX) fell one basis point to 3.67%.
- The U.S. Dollar Index ($DXY) rose to 104.19.
- The Cboe Volatility Index® (VIX) futures remained near recent three-year lows at 14.84.
- WTI Crude Oil (/CL) pulled back to $70.53 per barrel after rising on Saudi Arabia’s voluntary output cut.
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With the debt ceiling debate over, some investors wonder about potential market implications as Washington rebuilds its coffers.
One school of thought is that the government is likely to issue a host of new Treasuries, which could increase supply. If demand doesn’t keep up, it potentially means lower Treasury prices and higher yields (yields and the underlying notes move in opposite directions). Higher yields can be challenging for stock market “growth” sectors where companies are more reliant on borrowing to expand their businesses. Info tech, energy, and biotech come to mind. They also can mean more competition for traditional “bond proxy” sectors like utilities and staples.
The actual impact, however, could be less dramatic because it might already be partially built into the Treasury market. Many, if not most, participants never expected a default, and yields on the benchmark 10-year Treasury note finished flat on Monday after an initial rally. If something isn’t a surprise, it’s less likely to cause turmoil.
h2 What to Watch/h2Technical levels are growing more important, as we’ll discuss further below. The S&P 500 Index (SPX) stalled just short of 4,300 on Monday and finished lower on the day after setting a new 2023 high. That’s a technically uninspiring performance that could spill over into trading today.
The 4,300 level remains a resistance spot for the SPX, and above that there’s believed to be technical resistance at last summer’s 4,325 high.
h2 Stocks in the Spotlight/h2The so-called Magnificent Seven stocks—Apple, Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Tesla (NASDAQ:TSLA), Meta (META), and Nvidia (NASDAQ:NVDA)—completely account for the SPX’s gains so far this year, The Wall Street Journal recently noted. Without them, the index would be down since December 31. This shows how market capitalization can influence the performance of a weighted index.
A broader rally that included stocks from across different sectors might boost investor confidence, especially considering the recent rise in Treasury yields and the dollar—both of which traditionally have hurt shares of big tech companies.
Coin charged: In news this morning, crypto exchange platform company Coinbase (NASDAQ:COIN) shares plunged 14% after the Securities and Exchange Commission (SEC) charged it with operating its platform as an unregistered national securities exchange, broker, and clearing agency.
Contrarian play? The May TD Ameritrade Investor Movement Index (IMXSM) showed TD Ameritrade clients increased their overall market exposure but were net sellers of equities in the May IMX period. They primarily reduced their exposure to communication services and information technology. Buying interest was strongest in staples, energy, and financials sectors.
The data suggest that TDA investors tracked by the survey tried to increase their exposure to sectors they saw as oversold and decrease exposure to info tech stocks that carried the market so far this year. Investors were net-sellers of Nvidia, Apple, Meta, and Microsoft. The surveyed group took a contrarian stance in May, but whether it pays off could depend on Wall Street’s ability to develop a broader-based rally, rather than the narrow one seen to date.
h2 Eye on the Fed/h2Chances of an interest rate pause at the June meeting stand at 75% this morning, according to the CME FedWatch tool, which also prices in a nearly 70% chance that rates will rise by July.
The FOMC meeting is June 13–14, beginning on the very day of the critical May Consumer Price Index (CPI) report. However, unless the CPI is off-the-charts hot, a pause might not surprise many.
The term “pause” doesn’t mean “end.” Instead, the word of the week is “skip.” Fed officials hinted recently they might want to take June to assess the impact of more than a year of rate hikes on the economy. Recent data, especially jobs growth and job openings released last week, suggest the labor market continues to hum along.
However, there’s an undercurrent of softness in manufacturing, where last week’s data disappointed and jobs growth in the sector was minimal. New orders in May’s ISM Manufacturing Index last week reversed an upside trend, and it’s hard to have an expansion if new orders data are contracting. Keep an eye on this statistic when the June report comes out. It’s a leading indicator and it now shows potential weakness down the road.
ISM Services data yesterday showed sluggish trends, too, with new orders, employment, and business activity falling to the lowest levels since the Fed began tightening. It looks like the lagged effect of tighter monetary policy is working its way through the economy, according to Schwab’s Chief Fixed Income Strategist Kathy Jones.
CHART OF THE DAY: MEETING OF UNEQUALS. The S&P 500 Index (SPX—candlesticks) continues to far outperform the equal-weight SPX (SPXEW—purple line), showing how a handful of heavyweight tech stocks continues to dominate index performance. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim ® platform. For illustrative purposes only. Past performance does not guarantee future results.
h2 Thinking cap/h2Ideas to mull as you trade or invest
Apple eyes milestone: One early 20th-century pundit said the age of the millions is over and the age of the billions has begun. Apple long ago entered trillions in terms of market capitalization and is on the cusp of $3 trillion after shares jumped to all-time high above $183 yesterday. If the stock hits $189, the combined value of its shares would return Apple to $3 trillion for the first time since it briefly crossed that barrier early last year before shares dropped more than 25%. To put $3 trillion in perspective, it’s about 3% of the world’s 2021 gross domestic product, according to the World Bank, and above the GDP of all but six countries that year. Shares of Apple trade at a price-earnings ratio near 30, which is well above the stock’s average since 2010 and the 22 level it began the year at, but below the peak of 35 in late 2020.
SPX concentration: You knew this would come next. At its current market cap of $2.88 trillion, Apple represents about 8% of the entire SPX’s market capitalization. That means if you buy shares of a mutual fund trying to mirror SPX performance, 8% of that fund would be exposed to a single stock. And 25% of your investment would be in Apple and four other big-tech companies that spiked the index since January with little participation from most SPX companies. As some analysts point out, the top handful of SPX stocks have a higher market cap between them than the bottom 200 companies by market cap in the index. Any hiccup in big-tech companies like Apple, Nvidia, Microsoft, and a few others has the potential to quickly end the SPX and Nasdaq 100® (NDX) rallies. We saw a similar dynamic play out in late 2018. Of course, some analysts have run the numbers and say there’s no ironclad rule that a market dominated by a handful of stocks can’t keep rallying. Others disagree and say historically, major indexes have underperformed in periods following this sort of concentration at the top. One impartial referee that can flag whether some stocks are getting over their skis is earnings, but the big tech names don’t report for more than a month.
Chart check: The SPX is rapidly approaching last August’s intraday high of 4,325. That level has significance beyond being a convenient point of reference. It also means something for technical traders who follow so-called “Fibonacci retracement” levels. These are designed to locate areas of support and resistance on the charts based on a sequence of numbers originally identified by mathematician Fibonacci. One number on the sequence is 61.8%, known as the golden ratio. If you subtract last October’s closing SPX low of 3,577 from the peak SPX high close of 4,796 early last year, and then divide the difference by the gains the SPX has made since the October low, you find the 61.8% retracement level is just a bit above 4,325. Meaning the SPX will be 61.8% back from the October low to the January 2022 high at that chart level. The market isn’t required to obey anything Fibonacci said, but the line-up of last summer’s high with the 61.8% retracement level is eye-catching, at least, and may be a point where some participants have placed stops. Meaning there could be a flurry of buying, selling or both when the SPX hits that level. It’s something to be aware of if you trade regularly, but if you’re a long-term investor, you can return to your regularly scheduled programming.
h2 Calendar/h2June 7: April Trade Balance and April Consumer Credit and expected earnings from Campbell Soup (CPB).
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,
Happy trading,
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