Stocks went on a roller-coaster rise with the major averages seeing a historical, but epic turnaround. A hotter-than-expected rise in core CPI inflation had all the hallmarks of a huge selloff, but the broader market bounced back more than five percentage points on an intraday level. Shares surged and bulls looked to be back in control, But inflation reared its head again at the last trading day and the University of Michigan’s survey showed inflation expectations one year out rising for the first time since March. When the dust settled, the S&P (SP500) closed down 1.6% and earnings are now likely to drive market direction going forward.
Mr. Market’s Wild Ride
On Friday, S&P futures peaked +1.57% ahead of the CPI release, bottomed out -2.4% and the S&P 500 closed +2.6% with a roundtrip intraday range of 5.52%, according to Deutsche Bank. The Dow rallied +1,400 points from its low. The Tick Index, which compares gainers to losers at any point, went from -1,900 to +1,900, the first time there have been such extreme numbers on either end, according to Bloomberg data going back to 1990. It was just the 11th time since 1993 where SPY made a 52-week low and closed more than 4% above that low while also closing green, BTIG noted.
What sparked the buying?: The rally numbers are clear, but the reason behind the buying is not so much.
Some speculated that algos kicked in to buy when the S&P had given up 50% of its post-COVID rally. Bloomberg reported that options hedgers needed to unwind short positions when booking post-CPI profits on put options. Deutsche Bank’s Reid said there was “no obvious reason” other than stretched bears ahead of the CPI. Yesterday “saw the market turn abruptly at 9:32 am with the S&P at 3491.58 and then, magically, and mysteriously, the entirety of the algorithmic investing community (and red-blooded SPY traders, too) were assured by (Harvard economist) Jason Furman’s third swing at the ol’ horsehide that ‘Today’s report was probably “peak” inflation for the core CPI,'” John Roque, head of technical strategy at 22V Research, wrote.
A blip or a bottom?: The question remains whether this historic reversal signals a base where bulls can gain further traction.
“Many proclaiming that ‘THE’ bottom is in likely have said that many times this year already,” BTIG strategist Jonathan Krinsky said. “From a seasonality standpoint, a low today fits the narrative. On the other hand, the VIX (VIX) is still sitting around 30. Of the prior 10 (big reversal) occurrences … four saw the VIX close below 37 on the day of the reversal. Only one of those (Dec. ’18) marked the final low.”
22V’s Roque noted that the febrile buying was heavily concentrated in the SPY: “Advancing Stocks beat Declining Stocks in the SPY by a ratio of more than 15:1. However, Advancing Stocks beat Declining Stocks on the NYSE only by a ratio of 2:1. If (Thursday) was a full-fledged reversal I think that the Advance Decline Ratios for the SPY and the NYSE would be more alike.”
Yesterday’s action “definitely gives the bulls some ammo they have been lacking much of this year,” Krinsky said. “At the very least, this could give some near-term relief. With that said, it’s far from an all-clear signal and we aren’t yet ready to proclaim that the worst is behind us. There will be a day when a bullish narrative takes hold and the market makes its bear market low, but it’s hard for me to believe that’s happened just yet when private equity parties on the French Riviera are targeting retail investors,” Krinsky added
It’s been a while since trading hinged on events in the U.K., but the sudden twists in Bank of England bond market intervention are reverberating globally. Many countries could soon be facing a similar battle between fiscal and monetary policy and traders said the Bank of England’s credibility could be on the line amid conflicting reports.
Bailey bumble: Speaking after U.K. market hours in Washington on Tuesday, the Bank of England head spooked markets as he warned pension funds that have been struggling to meet margin calls to act fast. “And my message to the funds involved and all the firms involved managing those funds: You’ve got three days left now. You’ve got to get this done,” Bailey said.
But if the liability-driven investment managers, which help pension funds hedge, can’t shore up cash by Friday, another U-turn could be coming. Given that the BoE’s measured gilt purchases (it bought a much smaller amount than authorized) and expansion on types of purchases was quelling a surge in yields, Bailey’s comments looked like a fumble at the goal line (or closer to home, sending the ball over the bar with an empty net). His remarks are likely to go down as an “all-time central banking gaffe,” Bloomberg contributor John Authers wrote.
I “would say with the announcement by Bailey that help ends Friday his future now more in question,” economist Danny Blanchflower, a former member of the BoE’s Monetary Policy Committee, tweeted. “What if they have to step in again he looks like a fool again.” “Where are the MPC what is the point if they are nowhere to be seen in the midst of this crisis?” he said. “Groupthink means they are utterly irrelevant so no point in having them as they are all clones and have nothing to say just appoint 8 sheep cheaper and you get more wool.”
Fed standing firm: Across the pond, the message from Fed officials isn’t wavering from the hawkish stance. The market is still pricing in more than an 80% chance that the FOMC boosts rates by another 75 basis points in November.
Cleveland Fed President Loretta Mester said yesterday that the Fed has more hikes to go before the fed funds rate becomes restrictive, even at the expense of growth. “With growth well below trend over the next couple of years, it is possible that a shock could push the U.S. economy into recession for a time,” she said.
While a surge in gilt yields could translate to higher Treasury yields, that aids the Fed in its primary mission to bring down inflation. Global attention should turn to U.S. prices today with September PPI and especially tomorrow with CPI.
Analysts and investors are not looking for bullish earnings numbers that can give the overall market a boost, with expectations for earnings per share growth consistently coming down into reporting season and an overall sense that the broader market will react badly.
Downward revisions: Third-quarter S&P 500 (SPY) EPS growth is now expected to be 2.6%, down from 9.8% in July, according to FactSet. Analysts have cut profit forecasts by $34B and if the consensus is correct, it would be the worst quarter for bottom lines since Q3 2020, in the depths of lockdown, the FT reported.
What does that mean for stocks? According to the latest MLIV Pulse survey of investors, more than 60% believe this earnings season will push the S&P 500 lower. Among the more than 700 respondents, high-level asset allocators are the most pessimistic about the impact of earnings, while risk managers are the most optimistic.
The BlackRock Investment Institute said it thinks earnings estimates still look “optimistic.” It remains underweight U.S. equities “valuations have not come down enough to reflect weaker earnings prospects.”
“If we are headed into a recession next year, which seems highly probable, earnings uncertainty may replace rate pressure as the chief obstacle to higher equity prices,” MKM strategist Michael Darda wrote. “Thus, the next 10 months could be tricky.”
“Long-term investors should thus have time to build long positions into weakness and volatility during the quarters ahead,” Darda said. “Forward and trailing operating earnings for the S&P 500 have typically fallen 15%-20% in recessions. So far, estimates have peaked and plateaued rather than cratered. However, forward indicators do point to more weakness ahead.”
Key stocks to watch: Apple (AAPL) results will be the most crucial to the market, with 60% of MLIV survey respondents calling it the company that matters most this earnings season. That was followed by JPMorgan at 25% and Tesla (TSLA) at 6%, with Microsoft (MSFT) and Walmart (WMT) generating a significant number of votes, according to Bloomberg.
While shares of Apple have declined fairly steadily since the middle of August, they have managed to stay off the lows around $130 hit in mid-June. At the end of September, the 200-day moving average briefly crossed below the 50-day in a bullish signal. Demand for the iPhone 14 has been questioned and will be closely watched when the company reports. In the last three months, there have been 23 downward EPS revisions vs. 14 upward revisions, giving it a Quant Rating grade of C. BofA recently downgraded the stock to Neutral and SA contributor Albert Lin noted that while Apple is a great business, the stock isn’t always “a no-brainer.” Overall pessimism isn’t universal, though. J.P. Morgan’s data assets and alpha group team said that given “the slew of negative pre-announcements, the hurdle to beat earnings is low.”
“Almost universally, people expect Energy (XLE) earnings to be great and every other sector to be horrible,” they said. “Our view is that earnings will come in better than expected and will not act as a headwind for markets.”
Dow +1.2% to 29,635. S&P 500 -1.6% to 3,583. Nasdaq -3.1% to 10,321. Russell 2000 -1.2% to 1,682. CBOE Volatility Index +2.1% to 32.02.
S&P 500 Sectors
Consumer Staples +1.5%. Utilities -2.6%. Financials +0.2%. Telecom -1.9%. Healthcare +0.8%. Industrials -0.6%. Information Technology -3.2%. Materials -1.9%. Energy -1.9%. Consumer Discretionary -4.1%.
London -1.9% to 6,859. France +1.1% to 5,932. Germany +1.3% to 12,438. Japan -0.1% to 27,091. China +1.6% to 3,072. Hong Kong -6.5% to 16,588. India -0.5% to 57,920.
Commodities and Bonds
Crude Oil WTI -7.7% to $85.55/bbl. Gold -3.5% to $1,650.2/oz. Natural Gas -4% to 6.476. Ten-Year Bond Yield -0.2 bps to 4.023.
Forex and Cryptos
EUR/USD -0.21%. USD/JPY +2.35%. GBP/USD +0.86%. Bitcoin -1.3%. Litecoin -2.9%. Ethereum -1.3%. XRP -6.4%.
Top S&P 500 Gainers
Moderna (MRNA) +12%. Amgen (AMGN) +10%. Viatris (VTRS) +9%. Walgreens Boots Alliance (WBA) +9%. The Kraft Heinz (KHC) +8%.
Top S&P 500 Losers
Wynn Resorts (WYNN) -23%. First Republic Bank (FRC) -18%. Las Vegas Sands (LVS) -17%. Etsy (ETSY) -16%. KLA (KLAC) -16%.
Where will the markets be headed next week? Current trends and ideas? Add your thoughts to the comments section.