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(Free) Powell on Tap; S&P Endures Much-Needed Dip
We’re finally getting a little reprieve after a big rally
Danny Riley
June 21, 2023
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Our View
Depending on who you ask (and thus, based on some measures) we’re back in a bull market. Whether that’s the case or not, you cannot argue that sentiment has turned around significantly.
While just a handful of stocks drove a bulk of the gains in the first five months of the year, we’re starting to get more participation from more stocks. Whether that lasts, I don’t know, but you can’t argue with the fact that people are feeling a lot better about the market right now.
Morgan Stanley’s chief US equity strategist Mike Wilson notes that “sentiment and positioning has turned outright bullish as both retail and institutional investor sentiment has reached its highest levels in over 2 years and registered readings in the top quintile of the past several decades. However, given his fundamental view on growth, he finds it hard to get on board with the current excitement and narrative supporting it.”
While many equity investors were cheering the weaker than expected PPI release last week, he sees risk that lower prices translate to falling revenue growth over the next 4 months. Mike notes that perhaps the most important reason for the resilience in consumer spending this year comes down to the exceptionally strong incremental fiscal support provided by the government.
Based on the CBO projections, he points out that this fiscal support is likely to turn into a 2% drag over the next 12 months. Such a change would amount to an approximately 6% drag to nominal GDP growth over the next 12 months, supporting his below consensus earnings forecast. Between MS rates strategy team and QDS, Mike has been highlighting the risk to markets from the $1.2T in Treasury issuance he expects over the next 6 months. This should begin to hit asset prices by the end of this month and carry into the fall.
Our Lean — Danny’s Trade
This is Danny Riley’s personal trading plan for the day.
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MiM and Daily Recap
ES - 15 min recap
The ES sold off down to 4432 on Globex and opened Tuesday's shortened holiday week at 4435. After the open the ES traded 4441.75 and sold off down to 4410.50 at 10:31 and then started grinding higher and traded up to 4440.75 at 12:53, pulled back down to 4434.75 and then traded up to 4444.75 at 1:24. From there, it dropped down to 4432.25 at 3:40 and then rallied up to 4438.50 at 3:46.
The ES traded 4440.50 as the 3:50 imbalance showed $79 mil to sell then widened out to $1.2 bil to sell. The ES traded 4434 on the 4:00 cash close then sold off down to 4428 at 4:06, traded in a narrow trading range and settled at 4430.50 on the 5:00 futures close, down 23.25 points -0.52% on the day.
In the end, the ES followed one of PitBull’s rules — it started out weak and closed weak. In terms of the ES’s overall tone, there were some short-covering rallies that we sold. In terms of the ES’s overall trade, volume was on the low side at 1.48 million contracts traded.
Technical Edge
NYSE Breadth: 26% Upside Volume
Advance/Decline: 31% Advance
VIX: ~$14
Not crazy to be on the lookout for an undercut of yesterday’s low to run some stops, then a potential bounce if we can reclaim that low.