Hope you had a nice long break over the Memorial Day holiday weekend. Upon our return to the markets, we have the unofficial start of summer although the official start is the end of Spring on June 20th. The ‘Summer Doldrums’, which typically signify low volume participation and tight trading ranges, may turn into ‘Summer Drama’ with Trade Wars, synchronized global slowdown, appreciating US Dollar, yield curve inversions and recession risks growing. As I have written and said repeatedly: I do not expect markets to trade higher after my NYSE price target of $13,000 was firmly tagged and rejected. I contend we trade sideways to lower into the 2020 elections – with a potential flash crash building in my probabilities.
Currently, we are only 5% off all-time highs in SPY, after the strongest 1st 4 months of a trading year, so there is still lots of time and price action to prove/disprove my thesis.
Market Thoughts
There’s macro, then there’s micro… both are bearish in my opinion:
Friday I tweeted: “A lot of stocks have rolled over; we have more stocks down -25% or more in the last 65-days than up. We have more stocks down -13% or more than up in the last 34-days. Very simply, a lot of stocks have rolled over.” @ZorTrades
I have two Macro-themed client posts going out next, so look for my take on Big Trends and my Intermarket Analysis read. For now, here’s the Micro:
Spy is down 5% from highs and toying with a break of $2800. The Dow has fallen for 5 consecutive weeks and sectors of the markets that are most impacted by trade war have been clobbered. Fatigue can just as easily kick in as outright selling. Failure to get a deal further along – the June G20 meeting for example – may be the tipping point for sellers to step up. Until then, here are the low-lights:
- Short term Treasury yields are falling, just like 2000 and 2007, and bonds are screaming higher.
- Transports can’t get moving but Volatility is starting to.
- SKEW is falling much more than the S&P as hedgers hedge.
- Both Growth and Value are selling off.
- Economic leader Semiconductors has been crushed with their 3 week rate-of-change similar to 2008
- Energy sectors XLE (XOP, XES, OIH) are down over 7 weeks in a row.
- My Stock-Bond ratio is at an inflection point warning of a 50% probability of a Flash Crash.
- Yield curve inversion is growing across the board with 3 month treasuries at risk of breaking their 200D.
- MOVE Index is intonating higher at the same time Fed is intonating rate cut – both of which are market bearish.
- My NYSE $13,000 reversal target is working as a presient roadmap to short against.
Economic Calendar
The biggest economic news will come in two weeks: ECB meeting on June 6 and US employment data the 7th.
Coming up this week, China provides the first peek at its May economic performance on Friday with economists anticipating the official manufacturing PMI will contract amid the trade war. U.S. jobless claims and GDP are due Thursday, followed by April consumer spending and the Federal Reserve’s preferred core-price gauge Friday, which forecasts show will increase. Bloomberg
Last week’s highlights:
- Google/Huawei trade war intensification
- USD hits two-year high
- UK PM May resigns
- Equities down all week
The Week Ahead:
Monday May 27
Memorial Day so US markets are closed but Monday kicks off with China’s industrial profits and the release of the leading and coincident indicators of the economy in Japan
Tuesday May 28
The US Commerce department ‘currency manipulation’ study is due to be published while Dallas Fed manufacturing survey and Case Shiller house prices report.
The US Commerce department ‘currency manipulation’ study is due to be published while Dallas Fed manufacturing survey and Case Shiller house prices report.
Wednesday May 29
The BoC is expected to hold interest rates steady. German unemployment before we get a speech from Bundesbank President Jens Weidmann on the ECB’s own financial stability. Mortgage Lending and Richmond Fed reports along with API crude in the US. Another Kuroda speech.
The BoC is expected to hold interest rates steady. German unemployment before we get a speech from Bundesbank President Jens Weidmann on the ECB’s own financial stability. Mortgage Lending and Richmond Fed reports along with API crude in the US. Another Kuroda speech.
Thursday May 30
Markets are closed today in Germany and much of Europe (although not the UK) for Ascension Day. Brazil releases its GDP for Q1. Canada and the US release trade data. In the US we also have the GDP 2nd estimate for Q1 and the PCE along with Pending home sales, EIA crude and US Jobless Claims. Japan reports CPI, Industrial Production, Retail Sales and Unemployment.
Markets are closed today in Germany and much of Europe (although not the UK) for Ascension Day. Brazil releases its GDP for Q1. Canada and the US release trade data. In the US we also have the GDP 2nd estimate for Q1 and the PCE along with Pending home sales, EIA crude and US Jobless Claims. Japan reports CPI, Industrial Production, Retail Sales and Unemployment.
Friday May 31
The final day of the month may see some rebalancing so expect volatility. Globally we get the release of South Korean manufacturing and retail sales data, with the highlight being the China NBS PMI data. German retail sales and inflation is also due as well as Indian and Canadian GDP for Q1 along with US PCE income, prices and expenditure data. Chicago PMI is also out.
The final day of the month may see some rebalancing so expect volatility. Globally we get the release of South Korean manufacturing and retail sales data, with the highlight being the China NBS PMI data. German retail sales and inflation is also due as well as Indian and Canadian GDP for Q1 along with US PCE income, prices and expenditure data. Chicago PMI is also out.
Earnings Calendar
#earnings for the week $NIO $MOMO $GOOS $COST $PANW $ZS $OKTA $WDAY $NTNX $ULTA $DKS $VEEV $ANF $BZUN $DG $DLTR $BNS $YY $MRVL $ASND $CSIQ $CPRI $BAH $BURL $VMW $AMWD $KEYS $ZUO $BMO $PLAN $JT $HEI $GPS $NXGN $PVH $QTNT $NM $EXPR $SAFM $BITA $CMCO https://t.co/lObOE0dgsr pic.twitter.com/PUFf3OoDPF
— Earnings Whispers (@eWhispers) May 25, 2019
Some implied moves for earnings next week:
$NIO 15.3%
$MOMO 12.9%
$WDAY 8.0%
$YY 9.2%
$DKS 9.7%
$BZUN 15.9%
$PANW 8.2%
$VEEV 10.3%
$PVH 9.4%
$SMTC 10.9%
$BURL 6.4%
$DLTR 7.0%
$COST 3.7%
$OKTA 10.2%
$ZS 14.0%
$UTLA 7.4%
$VMW 6.6%
$GOOS 15.1%
$CSIQ 10.2%
$ZUO 14.4%
Brexit Update
EU Parliament Elections that took place over the weekend have not destabilized the European block but Italy is trying. As for Brexit, the greatest risk is of a no-deal exit given May’s resignation. Whoever is chosen as successor will most likely be someone who wants to renegotiate the Withdrawal Agreement, which the EC rejects, and will thus end up leaving the EU in any event at the end of October.
Talk about timing!! By the end of October, there will be a new European Commission and a new ECB President. And you know how volatile October can be even without Brexit drama!
Trade War Update
The retaliatory tariffs Trump set into motion will become effective on June 1. Perhaps the market hasn’t sold off harder in anticipation Trump would walk back his threats.
Perhaps Beijing is waiting as well. Although they have not formally responded with counter measures against Tariffs in general and Huawei in particular, China seems to be casting a wide net:
A new draft regulation on cybersecurity could set the stage for Chinese regulators to take necessary action against US technology companies if their products and services are found to pose a threat to China’s national security, an industry analyst said on Sunday. h/t @ABartonMacro
Rare Earth Tremors
China is considering quotas and export curbs on rare earth elements as retaliatory measures against the US.
And this after Chairman Xi and Vice Premier Liu visited a rare earth facility last week. This is a reminder of the advantage China can exploit that which is not currently reflected in the data and cause all kinds of trouble to the US.
AAPL An Embarrassment
Anti-American sentiment has been growing in China – fueled by propaganda and shaming:
iPhones Are Now “Embarrassing” In China As Trade War Deepens
“It’s kind of embarrassing to pull an iPhone out of your pocket nowadays when all the company executives use Huawei,”
So much so that CITI has just slashed their iPhone estimates:
“Our independent due diligence now shows a less favorable brand image for iPhone. We are materially lowering our estimates.”
USD Update
Marc Chandler On USD performance Friday when folks got all excited dollar was reversing:
The dollar remains supported by wide interest rate differentials and an economy that still appears stronger than Japan and most of Europe. It strikes us that this is a short-covering correction for the major currencies rather than a turn in the underlying trend.
King Dollar is back on its throne.
Yield Update
Careful: The gap between 10-year & 3-month U.S. yields just went the most negative since 2007.
For Conspiracy Lovers
June 1 short VIX mastermind from “plunge protection team” leaves feds’ employ.
I wish you a great shortened trading week!
Samantha