Anil’s Analysis w/e July 21 2023

With second-quarter earnings season well underway, Investors have been paying attention to company outlooks, with earnings for the quarter expected to decline 8.1%, a bigger decline than the 5.7% fall expected at the start of the month. So far, with 89 of the companies in the S&P500 having reported, 73% have beaten analyst expectations.

The markets already buoyed by the gains in financial and technology shares, started the week with strong Q2 earnings results from Morgan Stanley and Bank of America, sparking a rally in bank stocks that lifted the overall market.

U.S. stocks ran out of steam by the end of the week with the momentum of megacap tech and tech-adjacent stocks which have been under pressure in recent weeks, weighing on the indexes.

A slump in Netflix and Tesla also weighed on technology stocks and the broader market. Netflix having achieved a pre earning spike, fell more than 8% after projecting weaker-than-expected Q3 revenue ending the week down over 3%, and Tesla dropped more than 9% after reporting lower-than-expected Q3 gross margins ending he week down over 7.5%.

To add these these woes; trading activity on Friday was affected by the expiration of July stock options and an out-of-cycle rebalancing of the Nasdaq 100 Stock Index. The realignment of the Nasdaq index, which takes effect on Monday, is designed to reduce the dominance of mega-cap technology stocks in the index and boost the presence of smaller companies.

Weaker-than-expected Econ data and the surprising positive comments from U.S. Treasury Secretary Yellen when she said she sees the U.S. on a “good path” to bringing down inflation without a major weakening in the labor market, eased recession concerns and gave the broader stock market a boost on speculation the Fed may be close to ending its rate-hike regime.

In Econ data, retail sales rose less than expected in June on a decline in building materials and service station receipts, although consumers boosted or maintained their spending levels. In addition, production at domestic factories unexpectedly fell during the month, but rebounded in the second quarter as motor vehicle output accelerated.

U.S. June retail sales rose +0.2% m/m, weaker than expectations of +0.5% m/m, and June retail sales ex-autos rose +0.2% m/m, weaker than expectations of +0.3% m/m.

U.S. June manufacturing production unexpectedly fell -0.3% m/m, weaker than expectations of no change.

The U.S. July NAHB housing market index rose +1 to a 13-month high of 56, right on expectations.

U.S. June housing starts fell -8.0% m/m to 1.434 million, weaker than expectations of 1.480 million. June building permits, a proxy for future construction, unexpectedly fell -3.7% m/m to 1.440 million, weaker than expectations of an increase to 1.500 million

Applications for unemployment benefits in the US unexpectedly fell last week while continued claims increased. The seasonally adjusted number of initial claims decreased by 9k to 228k in the week ended July 15 against the consensus for a 241k level. The dip in initial jobless claims to a two-month low is a surprise but the data should be viewed with extreme skepticism in July and early August because shifts in the timing and extent of the automakers' annual shutdowns play havoc with the seasonal adjustments.

On the global front, China’s Q2 GDP grew less than expected. China's Q2 GDP rose +6.3% y/y, weaker than expectations of +7.1% y/y. China's latest efforts to boost consumption provided a small lift to mainland stocks, but markets continue to look ahead to the Politburo meeting, expected next week, for bigger stimulus announcements. The piecemeal measures unveiled so far suggest there's plenty of scope for disappointment.

While Japan's core consumer price index (CPI) picked up a touch as expected, an underlying measure that's closely watched by the Bank of Japan (BOJ) slowed for the first time since January 2022, matching trends seen in UK inflation this week and in the U.S. last week.

The major indexes closed the week with strange performances with the Nasdaq weighed down by Tech and Comms stocks posting a Red week week but remains over the RN14k, whereas the S&P boosted by the Banking industry within Finance posting a Green week to remain above the RN4500. In both instances the % move is well below their average.

DoW on the other hand posted a another strong week to finally BO of the long term wCAT/RN35k Res/Conso to post the highest weekly close since the 10JAN22.

Volatility remained fairly flat throughout the week dropping the weekly average back below RN14. And after a short stay of one week below the median, Short Selling returned back over this landmark. Stocks above their DVI continues its slow march up to breach the RN60 Res for first time since mid FEB23.

In the UK, the FTSE 100 edged up further to post its second strongest week this year after mixed UK economic data. The June CPI eased to +7.9% y/y from +8.7% y/y in May, better than expectations of +8.2% y/y. June retail sales rose 0.7% month on month, much better than the 0.2% forecast by economists, but Consumer Confidence Index fell to minus 30 in July from minus 24 previously, signaling a potential sign of consumer capitulation in the current environment. The index also broke thru its multi Res zone of DVI/d50MA/RN7600.

CABLE having finally managed to return back above its WVI last week after 16 months, this week PB to return below this zone. Whilst Sterling turned sharply negative midweek following data that showed inflation cooling more than expected in June, prior to this the net longs in the British currency against the US Dollar have been increasing and rose to $5.19bn from $4.69bn the previous week. It is the largest long position since before the Brexit referendum in 2016. There is a neat PB on CABLE to the d20MA with the d50MA Supp just under 200pips below. A dBuRPI at either of these zones and we should be looking out for long set ups on lower time frames.

In the Crypto space, Bitcoin is now on a four week Bear run to close back below the RN30k. Ethereum remains confused.

In the Sector ETF, we had a bullish bias with 8 of the 11 sectors posting a Green week and 6 of the sectors outperforming the S&P, led by the combination of Energy (XLE) and Healthcare (XLV), with the former having arrived to retest its DVI Res.

Communications (XLC) and Discretionary (XLY) were the weeks worst performers with the former falling further away from the S&P into the weakening quadrant and the latter losing steam and hooking down in the Leading.

The sectors to watch remain Finance (XLF) and Industrial (XLI) who retain their momentum in the Improving quadrant and Material (XLB) in the Lagging. However, another of the laggards, Real Estate (XLRE) is losing momentum against the S&P and hooking away from the centre.

Next week reporting season will shift into overdrive, with results from Microsoft (MSFT), Alphabet (GOOG), Meta Platforms (META), Amazon (AMZN), General Motors G(M), 3M Co (MMM), United Parcel Service (UPS) and Boeing Co BA, among others.

Add to that the Fed meeting and the Commerce Department's one-two economic punch of GDP on Thursday and PCE on Friday, and investors could be in for a spin on the roller coaster.

Rate decisions by the U.S. Federal Reserve, European Central Bank and Bank of Japan next week alongside flash PMIs, consumer sentiment, GDP and inflation data will likely add some volatility to the mix.

Have a great weekend.

Anil Dala

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