The Story Beneath the Surface
Tech is back... The story beneath the surface... Market breadth is weakening... Bond traders keep betting on another rate hike... Drama at the oil cartel... Do you think the recession is here?...
The tech buzz is suddenly back...
As the debt-ceiling boondoggle continues toward its likely conclusion (which is... more debt), the U.S. stock indexes continue to drift higher. That's what they've been doing since March, on balance, while climbing the proverbial "wall of worry" of market risks. That's typically a bullish sign for the future.
At least that's what it looks like on the surface. But look a little deeper and you'll find a different story.
I (Corey McLaughlin) will explain what I mean today...
Despite all the worries out there in the world today, the benchmark S&P 500 Index is now up 10% year to date. And the tech-heavy Nasdaq Composite Index is outperforming it significantly... up 25% through the first five months of 2023.
And I probably don't need to tell you that chipmaker Nvidia (NVDA) just became a $1 trillion company by market cap... joining Apple, Microsoft, Alphabet, and Amazon as the fifth publicly traded U.S. business in the 10-figure club.
Nvidia shares are up an eye-popping 166% since the start of the year, with data-intensive artificial intelligence ("AI") services snapping up its chips. That has helped push the Nasdaq higher and higher, given that Nvidia has the fourth-heaviest weighting in the tech index. Apple is first, making up 13% of the index, and is up roughly 40% year to date.
It might feel like nothing's wrong... that it's a full-fledged bull market again. (It certainly seems that way with AI stocks.) But be careful getting swept up in the buzz...
All is not what it appears...
While this is common knowledge among investment pros, it's worth repeating that just four or five stocks have been driving the "market's" rise.
Remember, the Nasdaq is an index led by mega-cap tech companies. It was performing based on its leaders' performance, and there's no getting around the fact that the Nasdaq is up double digits in just a few months.
But things are getting back into "hype" territory in AI and other tech stocks, as far as I'm concerned. That makes it easy to miss how this market isn't as strong as it might appear on the surface.
Look at different indexes and they will tell you different things... The more-encompassing S&P 500 is up 10% this year (still good), yet the small-cap growth-oriented Russell 2000 is even for the year. The Dow Jones Industrial Average is down slightly.
Then look at how all individual stocks are performing, and it's an entirely different story. As our colleague Brett Eversole wrote in today's edition of DailyWealth, "market breadth" has been worsening lately.
Regular readers know we like to track market breadth...
This is a fancy way of saying how many stocks have been going up versus down. It's a valuable indicator of overall market health because the indexes will eventually start doing the same thing. And as Brett explained, a simple tool for tracking market breadth is called the advance/decline line...
This indicator comes from adding up how many stocks were up on a given day and subtracting how many were down. You'd also add that number to yesterday's total... And then you'd do the same thing the next day. So it's a cumulative measure.
The advance/decline line usually rises and falls with the overall market. Here's what it has done in recent years...
The advance/decline line rose consistently during 2020 and 2021 as stocks moved higher. Then it fell with the market in 2022. It has also recovered alongside the stock market in recent months.
But if stocks hit a new high and this measure fails to do the same, that's bearish divergence. And it's a warning that prices could soon drop.
This is precisely what we're seeing now. As Brett continued...
This move is one sign of weakness in the market. And it just happened recently. Take a look...
Both the S&P 500 Index and the advance/decline line hit multimonth highs in early February. The market broke above those levels recently. But the advance/decline line has moved much lower since.
This "divergence" – the index moving one direction and the advance/decline line moving a different one – is telling. It means all is not what it seems, and it was one of the reasons we began sharing bearish market warnings early in 2022. Trouble was afoot...
In short, fewer stocks in the S&P 500 are moving higher...
And while Brett has shared plenty of reasons to be bullish this year, he's also paying attention to signs that the broader market is less healthy than it may appear.
Zooming out even more, I also like to look at the percentage of stocks on the New York Stock Exchange trading above their 200-day moving averages ("DMAs") for a look at market "health." About 40% of NYSE-listed names are trading above their 200-DMAs today.
That's well off a high of nearly 70% back in February. Still, it's significantly above the 15% or so we saw back during the October lows in the markets... Take note.
On its own, weakening market breadth doesn't guarantee a sharp drop in prices. But it does suggest that the rally and drift higher we've seen in the S&P 500 over the past several months could be due for a pause or a pullback, especially if some surprising news strikes.
About that, in case you missed it last week...
The bond market has begun to consider that the Federal Reserve will actually raise its benchmark lending rate at its next policy meeting in a couple weeks.
A lot of folks in the market – me included – had expected a Fed "pause" to begin next month, based off Chair Jerome Powell's comments at its last policy meeting earlier this month. But Fedspeak since then, plus continued strong inflation data and not-so-strong unemployment data, has suggested another rate hike could be in the offing.
As I wrote last Thursday and will repeat today, in case your mind and body were already observing the Memorial Day holiday...
Almost half [of futures traders] now expect the fed-funds rate to increase by another 25 basis points rather than staying where it is (a range of 5% to 5.25%) after the Fed's next meeting on June 13 and 14.
At the same time, bond yields have been moving higher again across the curve, signaling the same idea.
Bond yields have pulled back a little since then, but federal-funds futures traders have driven the odds past 60%. And mind you, these guys are trading contracts worth $5 million each, so they have a lot at stake with their bets – which is one reason we follow them.
One thing that is also getting overlooked... the Fed's next meeting is also one of those four each year where it will publish updated projections for gross domestic product, inflation, and unemployment. These numbers could include surprises.
Keep an eye on oil prices, too...
The next OPEC+ meeting is in a few days, and it might include some fireworks.
We wrote last week that the Saudi energy minister was warning oil bears against their speculative bets on lower oil prices. "Watch out," he said, suggesting something that could spike prices coming out of the meeting.
At the same time, it looks like the Saudis have beef with Russian President Vladimir Putin. Turns out, those oil-supply cuts that Russia allegedly agreed earlier this year that stoked global inflation fears... well, they haven't happened. From OilPrice.com...
Days ahead of the key OPEC+ meeting on June 4, the leading producers in the group, Saudi Arabia and Russia, are at odds about output policy.
Riyadh has grown increasingly frustrated with Russia, which apparently hasn't kept its end of the deal and isn't reducing oil production as pledged, complicating the Saudi efforts to lift oil prices to at least the Kingdom's oil price breakeven level of $81 per barrel.
In other words, there's drama brewing in the oil cartel. Prices of Brent and West Texas Intermediate crude oil are both down about 5% in the past 24 hours.
And finally, two parting stories, a data point, and a question...
We're careful not to make too much of anecdotes, and we look to back them up with data. But the stories we hear can often be an indicator of broader trends happening in real time. Over the Memorial Day weekend, I heard two relevant stories about the economy...
One friend in the commercial real estate biz told me that it's impossible for him to get financing for new construction projects right now. That's because of higher rates and more expensive money, generally speaking. These projects can take years to complete, so consider how we'd see this lag hit the economy... with new construction sites failing to materialize as workers finish existing job sites.
Then, the next day, my wife was at the checkout counter at a local grocery store when some cherries rang up at $14.99. She left them behind at the checkout... which she doesn't do often. That inflation was just too much.
And finally, we read a report this morning saying travel on U.S. passenger airlines over the past four days topped 2019 pre-pandemic levels. That means summer holiday travel could be back to "normal" in 2023.
It got me wondering: Is the recession here... or is it not?
What do you think? What are you seeing, hearing, or feeling in your community? Let us know with an e-mail to feedback@stansberryresearch.com.
America in Ruins
"We're going to face a far worse crisis than what we're going through this moment," says Peter Grandich, founder of Peter Grandich & Company, highlighting the massive national debt and its resulting interest. "We have half our total revenue going just to pay the interest on our debt, which is unsustainable."
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In today's mailbag, feedback on Dan Ferris' latest Friday essay about the latest example of speculative excess... and thoughts on Sunday's Masters Series from Gold Stock Analyst's Garrett Goggin... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"[Dan's] article discussing speculative excess and the attendant risks is worth the annual subscription price to me. I feel like Dan is at my side helping me protect my retirement savings. Thanks." – Paid-up subscriber John C.
"Dan, Wise men will admit they don't know the future, like you have, but you are more prescient than anyone else! Thanks for the wise leadership through the economic chaos!" – Paid-up subscriber Larry N.
"Happy to say I sold all my Nvidia Thursday after purchasing it around $80. The wife was thrilled. Didn't have a giant position but the new car in the driveway today (already planned before Thursday) was not as big a hit as previously budgeted for. I'd like to comment on ChatGTP or whatever it is. I played with it for about 10 minutes. It tapped out with me, finally just saying that it would be here if I had any further questions in the future. If this thing is being used to help write college papers we are in serious trouble with higher education in this country. It says it doesn't have opinions but clearly has no problem saying an opinion from somewhere...
"I'm no super genius but if people are seriously enamored with that thing I can now understand the world much better. I will say it can't relate or equate history to current times. It also sidesteps law that is fact. I was laughing heartily. It's going to take a long time in my opinion to be able to have a serious factual conversation with someone who actually knows factual data and history, that's for sure. Have a wonderful but somber Memorial Day weekend as we pay homage to all who fell for us to live in what still is the greatest country on the planet." – Paid-up subscriber James S.
"Good story Garrett [in Sunday's Masters Series]! It should also be noted that the ONLY team to beat Da Bears that season was the (My) mediocre Miami Dolphins. It was a crazy, event-filled game. This victory is the ONLY reason the Dolphins remain the ONLY undefeated NFL team in history!
"Keep up the insightful writing!" – Paid-up subscriber "Florida Man" Rob F.
All the best,
Corey McLaughlin
Baltimore, Maryland
May 30, 2023