Wall St closes lower, with S&P 500 down most

Thu, 20th Oct 2022 21:23

Wall Street indexes red, S&P 500 leads declines

Utilities weakest S&P 500 sector; comm svcs leads gainers

Dollar, gold, bitcoin down; crude up slightly

U.S. 10-Year Treasury yield rises to ~4.24%

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WALL ST CLOSES LOWER, WITH S&P 500 DOWN MOST (1605 EDT/ 2005 GMT)

Wall Street's major averages ended Thursday's session lower as investors grappled with labor market data and U.S. Federal Reserve official comments that reinforced expectations for aggressive interest rate hikes even as companies reported solid quarterly earnings.

The S&P 500 was the biggest laggard of the three major indexes, and the consumer discretionary sector and financials were its biggest drags.

Its biggest percentage decliners were Allstate, down 12.9%; Union Pacific, down 6.8%; and Telsa, down 6.7%.

The benchmark's biggest percentage gainers were Lam Research and AT&T, with both closing up almost 8% after they reported solid financial results. Lam Research lead gainsin the Philadelphia semiconductor index.

After peaking for the day firmly in positive territory soon after 1000 EDT, the S&P 500 started losing ground, and its first big slide of the day came in early afternoon.

Around noon, Federal Reserve Bank of Philadelphia President Patrick Harker said the Fed is not done with raising its short-term rate target due to very high inflation and added that it would likely will find space next year to pause tightening.

The benchmark turned red about 25 minutes after the comments were released and never to see green again for the day.

The Dow industrials had some help from IBM, which rallied sharply after it beat quarterly earnings expectations.

S&P growth stocks fared only slightly better than value with a 0.7% decline compared with a 0.9% drop.

Here is your closing graphic:

"THE FEDERAL OPEN MOUTH POLICY" PRESENTS REAL HEADWINDS (1349 EDT/1749 GMT)

Equity investors have been remarkably resilient in the face of an unprecedented Fed fight against decades-high inflation.

In fact, Jack Ablin, chief investment officer and founding partner at Cresset, is noting that over the last 30 days or so, the S&P 500 has moved more than 1% in nearly half of the trading days, with two trading days exceeding 2%. October 13th stands out given it was the day the Dow surged 2.8%, or 828 points, despite a hotter-than-expected September inflation report.

While most investors cheer market surges, Ablin says there’s one constituency, besides short sellers, who’s actively rooting against the market right now and that's "The Fed."

Fed officials, blaming the wealth effect, believe a sustained equity rally would undermine their ability to combat inflation.

Ablin notes that given U.S. households equity exposure there's a behavioral link between how rich folks feel and their spending habits.

"Market gains have historically led to higher discretionary spending which the Fed argues is inflationary. History shows that the relative performance of high-end retailers relative to their low-end counterparts is highly correlated to the markets’ direction. Market gains mean more demand (for) Prada shoes."

Here is a approximate recreation of Ablin's chart showing the S&P 500 vs a high-end/low-end retailer relative strength line:

Ablin believes it shouldn’t come as a surprise that every time the market surges Fed governors come out of the woodwork to bang the drum for higher rates and tighter financial conditions.

It’s a strategy Cresset calls the “Federal Open Mouth Policy" - the market rallies one day and Fed proxies depress investor enthusiasm the next.

The starkest example of this that Ablin cites was after Chair-Powell’s Jackson Hole remarks on August 26, equity markets subsequently lost 15% over the next five weeks.

This leads Ablin to conclude: "While we embrace investor enthusiasm, we have enough battle scars to know not to agitate the Fed. We believe US central bankers will conspire to beat down investor optimism until they believe inflation is under control. Until then, we recommend caution."

EARLY IN THE EARNINGS GAME, BUT SHOWING PROMISE (1226 EDT/1626 GMT)

With 88 S&P 500 companies having reported Q3 results by now, Refinitiv's senior analyst, Tajinder Dhillon, gave a view on how the third-quarter earnings season is looking so far.

As of the time of the report there had been 56 negative preannouncements issued compared with 43 positive for Q3 resulting in a negative to positive ratio (N/P) of 1.3. This compares well with the long-term average of 2.5 from 1997 and the average of 1.8 from the last four quarters.

While the blended growth rate for the quarter is 3.1%, if the energy sector is excluded, the expectation is now for a 3.4% decline.

So far companies have reported earnings 5.7% above expectations comparing well with the average beat of 4.1% going back to 1994, but it is tracking below the average beat of 7.0% for the last four quarters.

And of the companies that have reported, 75% have beaten analyst earnings expectations so far while 22.7% have missed expectations. On average since 1994, 66% of companies have been beating estimates while 20% have been missing. In the last four quarters, 78% have beaten while 18% have missed on average.

Revenue meanwhile is coming in 1.5% above expectations versus a 1.2% average since 2002, and a 2.7% average for the last four quarters. The revenue beats are coming from 68.2% of companies that have reported so far, improving on the 62% 20-year average, while 31.8% have missed revenue expectations, compared with the 20-year average of 38%.

But the trend for the last 4 quarters however is still out of reach so far with 74% beating and 26% missing.

So far in the reporting season, the energy sector is leading with 117.7% EPS growth followed by industrials which is seeing 27.3% growth, while the biggest laggards are financials and communication services tied at a 15.6% decline.

Still the season is young with only ~18% of companies having reported so far.

FED EFFECT: THURSDAY DATA SUGGEST WELCOME ECONOMIC SOFTNESS (1150 EDT/1550 GMT)

Data released on Thursday provided evidence of economic softness everywhere except the labor market, which offers hope that the U.S. could avoid a deep recession as the Fed does battle with the hottest inflation in four decades.

The sales of previously-owned U.S. homes fell by 1.5% last month to 4.71 million units at a seasonally adjusted annualized rate (SAAR), according to the National Association of Realtors (NAR).

The number landed just north of the 4.70 million unit SAAR predicted by consensus estimates, and provides further evidence of softness in the housing market, battered in recent months by rising home prices and the highest mortgage rates since the housing bubble burst.

"The housing sector continues to undergo an adjustment due to the continuous rise in interest rates, which eclipsed 6% for 30-year fixed mortgages in September and are now approaching 7%," writes Lawrence Yun, chief economist at NAR.

While the dip was largely inline with expectations, home sales are down 23.8% year-on-year, a reflection of evaporating affordability.

The number of U.S. workers filling out first-time applications for unemployment benefits dipped by 5.3% last week to 214,000, landing below the 230,000 consensus.

While ordinarily a drop in jobless claims is considered good news, these days its a sign that the labor market remains tight, suggesting the Fed's interest rate hikes, begun in earnest six months ago, have yet to show their intended cooling effect.

"While there have been some signs of a loosening in labor market conditions, the job market overall remains tight," writes Nancy Vanden Houten, lead U.S. economist at Oxford Economics. "Even as the economy slows, employers appear to be reluctant to lay off workers that they have struggled to hire and retain."

Ongoing claims, reported on a one-week lag, inched up to 1.385 million, still well below the 1.7 million pre-pandemic level.

Mid-Atlantic factory activity continues to run in reverse.

The Philadelphia Federal Reserve's business index (aka Philly Fed) landed at -8.7 this month, recovering some ground from September's -9.9 reading.

The report echoes Monday's Empire State print, showing a contraction in the east coast manufacturing sector.

A Philly Fed/Empire State reading below zero signals a monthly decrease in activity.

"A gradual easing of prices pressures and supply chain disruptions will be supportive of activity," says Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "But softening demand as the Fed continues to hike rates is a headwind for the sector going forward."

Finally, a basket of forward looking indicators showed a 0.4% decline for September.

The Conference Board's leading index (LEI) is an amalgamation of ten discrete metrics, including jobless claims, new orders for manufactured goods, building permits, the S&P 500 and others.

"The US LEI fell again in September and its persistent downward trajectory in recent months suggests a recession is increasingly likely before yearend,” said Ataman Ozyildirim, senior director of economics at The Conference Board.

Wall Street is last a solid green, with investors quickly recovering from the shock of British Prime Minister Liz Truss' announced resignation and turning their focus to a spate of generally upbeat earnings.

U.S. STOCKS RISE, EYE EARNINGS, YIELDS (0954 EDT/1354 GMT)

Wall Street is gaining in the early throes of Thursday's session after the resignation of Liz Truss as prime minister of the UK added a layer of uncertainty to markets struggling to hold on to gains from a set of positive earnings forecasts from U.S. companies.

Indeed, positive forecasts from IBM and AT&T are helping offset declines in Tesla.

In any event, the main U.S. indexes are posting modest gains, though a majority of S&P 500 sectors lower.

Among sectors, communication services, and tech are out front of the gainers, while utilities , and consumer discretionary are among those taking the biggest hits.

Chips are up more than 2%, while transports are down more than 1%.

Meanwhile, the U.S. 10-Year Treasury yield hit 4.18%, or its highest level since June 2008.

At 10:00 EDT, U.S. September housing starts are expected at 4.7 million units. September leading indicators are expected at -0.3%.

Here is a snapshot of where markets stood about 20 minutes into the trading day:

NASDAQ COMPOSITE MOMENTUM PATTERN MAY TRICK BEARS, TREAT BULLS (0900 EDT/1300 GMT)

Like the S&P 500, the Nasdaq Composite recently used a significant retracement level of its advance off its March 2020 low as support.

Meanwhile, an IXIC weekly momentum pattern, similar to what developed in late 2008 into early 2009, also has bulls taking notice:

Last week, the Nasdaq found support at the 61.8% Fibonacci retracement of its March 2020-November 2021 advance at 10,291.289.

Early in last Thursday's session, the IXIC fell as low as 10,088.828, putting it down more than 37% from its November 2021 record close. However, it quickly reversed and ended that day at 10,649.152. Into Tuesday's high of this week, the IXIC rallied as much as 8.7% off that intraday low before dipping back on Wednesday.

The IXIC is also churning near several longer-term moving averages. The 200-week moving average (WMA), now around 11,170, is acting as resistance, while the Fibonacci-based 233-WMA, now around 10,655, is proving to be especially sticky.

In two of the past three weeks, the IXIC's weekly close has deviated from the 233-WMA on an absolute basis by 0.4% or less.

Another Fibonacci-based moving average, the 55-month, now around 10,595, is also proving to be sticky.

On the plus side, a weekly momentum study is showing a positive convergence. For the bear-market so far, the low in the 9-week RSI occurred the week ending May 20 at 21.5. Last week, or 21 weeks later, in what stands as the IXIC's low weekly close, the RSI ended at 31.3. It is ticking up so far this week.

Of note, in the 2007-2009 Nasdaq collapse, this oscillator recorded its low in the week ending October 10, 2008 at 13.5. The IXIC's low weekly close for that bear market occurred 21 weeks later in the week ending March 6, 2009, when the RSI showed a bullish convergence, and troughed at 28.3.

Thus, given the eerie similarity in time between troughs in 2008-2009 and what has occurred so far in 2022, traders are on alert for an upside turn that could prove be surprisingly strong.

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