Publication notice: I will be starting a two-week holiday this weekend, and here is my planned publication schedule. Weekend publications will be condensed from two publications to one. Barring significant market volatility, there will be no mid-week market update. Regular service will resume after the U.S. election.
Mid-week market update: We are in the heart of Q3 earnings season. Based on the number of companies in the S&P 500, this week is peak earnings reporting week.
But by capitalization, next week will be the peak. Tesla is only Big Tech stock that reports this week.
By its very nature, daily market volatility during earnings season will react to the headline reports of the day. So far, these are the trends that I am worried about, and what I am not worried about.
The stock market
First of all, I am not overly concerned about the technical structure of the U.S. stock market. Take a look at market leadership. The Magnificent Seven is in a narrow trading. It remains to be seen whether it breaks up or breaks down. I pointed out in the past that earnings guidance for technology stocks has been strong, which makes me constructive on these stocks (see A buy signal, but with a *). I am also watching NVIDIA as a bellwether, which staged an upside breakout to an all-time high, and it’s pulled back to test resistance turned support.
FactSet reported that estimated earnings growth for the Magnificent Seven during Q3 is strong, while the growth for the rest of the S&P 500 is weak.
However, earnings growth for the S&P 493 is expected to recover in Q4 and beyond.
As for relative leadership, large cap and small cap relative leadership has gone sideways in the past two months. I am on record as interpreting this as broad leadership (see Some preliminary thoughts on Q3 earnings season).
Similarly, neither growth nor value has been able to become dominant in the past two months. That’s what broad leadership looks like.
If the market is on the verge of a correction, we would see the relative performance of defensive sectors improve substantially, which they’re not.
A bond market tantrum
Here is what’s bothering me. Bond yields have risen significantly since the Fed cut rates by 50 bps. The 10-year Treasury yield is now above 4.2%, which is starting to pressure equity valuation (note inverted scale on 10-year yield).
Prominent hedge fund managers like Stan Druckenmiller and Paul Tudor Jones gave interviews expressing bearish opinions on bonds and bullish opinions on inflation, which has served to exacerbate the damage to bond prices. The one silver lining is the short-term decline in bond prices may be overdone. The 5-day RSI of TLT, the long Treasury bond ETF, is exhibiting a bullish divergence.
Defensive sectors are not showing strength but Low Volatility Factor is leading the other three Value Growth and Small Cap. This is a sign of caution when stocks are peaking
10yr yield moves in lock step with betting odds of Trump’s win in Nov, currently at about 65%. I am an independent voter. I just observe that a lot of trend following algos are joining the up move bets. Of course we don’t know who will win. Market interprets a Trump presidency would help econ growth and hence higher yields. Other related charts are cryptos and DJT stock. A lot of machinations behind the scenes.