The Morning Call
6/1/26
The
Market
Technical
There
is just no quit in this Market. The S&P was up for the week (again). The technicals
remains full steam ahead with the S&P (1) above all three DMAs and (2) in
uptrends across all timeframes. This is a three year chart and, as you can see,
the index is now (1) bumping up against the upper boundary of its short term
uptrend and (2) is in a Titan III surge off the May 30 low. The technical question
for this week is, which trend is the stronger? Given my dismal record narrating
this latest surge, I won’t even try to answer that question. But the good news
is that the S&P is at a point where we will soon find out.
Skew is broken.
https://www.zerohedge.com/markets/skew-broken-goldman-vol-desk-says-there-no-fear-downside-left
Summary:
1. S&P vol skew trading at an 18 month low: this is being
driven both by the “cheapness” of the put wing, and the “expensiveness” of the
call wing, GS panic index closed Friday at a 1 handle (2y lows): reminder
this is 2y pct rank of VVIX, VIX, skew, and ATM vol. Outsized wings are
priced the same: priced equivalently for a 10% sell off or 10% rally, aka, "broken
skew", both priced ~8% probability. Outsized wings are priced
the same: priced equivalently for a 10% sell off or 10% rally, aka, "broken
skew", both priced ~8% probability. This is a long way of saying
the bear themes are well known, and those who want to hedge correlated risk
off, it does not cost much.
The long bond
chart is also for three years. I thought that it illustrated nicely that TLT seems
to have found a home on the low of last January---which it bounced off of six
times. That said, it is below all DMAs and in downtrends across all major
timeframes. So it has a lot of work to do just to establish a trading range---it
needs to reset its very short term downtrend to a trading range as a first step
to halt its downward momentum. With stagflation still the most likely result of
the destruction wrought on the oil infrastructure and a spendthrift government
(see below for an update), I am hard pressed to think that bond prices are
going to improve markedly. The only question is when, as and if they impact
equity prices.
Gold continues to
behave poorly in the short term, remaining in a very short term downtrend
marked by the January 29th top and now three lower highs. Disappointing
but with investors convinced that nothing can go wrong, it is not surprising.
The dollar continued its meandering.
Technically, it is in a bit of a no-man’s land (i.e., directionless) with the
fundamentals basically supporting this uncertainty (higher inflation but also higher
growth).
Friday in the charts.
https://www.zerohedge.com/markets/rampant-retail-hormuz-hopes-spark-stocks-best-win-streak-2023-oils-biggest-monthly-drop
Summary: A sustained retail bid combined with hopes
of a deal to reopen Hormuz sent oil prices notably lower in May (WTI's
worst month since Apr 2025), providing further support for the AI-led surge in
stocks (S&P up 9 weeks in a row). Bonds were mixed with the
long-end outperforming (inflation angst lifted short-end and rate-hike
odds). Gold was modestly lower in May (3 months in a row) with the dollar
stronger and bitcoin down. Today
is the largest SPX call volume session of all time, according to top
Goldman quant, Brian Garrett. Calls have made up 70% of every option traded
today... as FOMO smashes into YOLO before FAFO mean-reverts Such a
set-up leaves the market much more sensitive to exogenous shocks, as
happened last October. In the current set-up, the market making new highs
is not a sign of strength, but one of instability. showers, May
flowers... June gloom?
Friday in the technical stats.
https://www.barchart.com/stocks/momentum
https://www.barchart.com/stocks/market-performance
https://www.barchart.com/stocks/sectors/rankings
https://www.barchart.com/stocks/signals/new-recommendations
Nobody
wants protection, nobody wants gold. Nobody wants software.
Monday morning
setup: Futures are positive and at session highs even as the a lack of a US /
Iran deal pushes oil prices, bond yields, and volatility higher. As of 8:00am
ET, S&P futures are up 0.3% to a new all-time high of 7620; Nasdaq futures
rise 0.2%: the Computex AI Conference kicked off; biggest news is NVDA
to enter PC space with a new chip challenging AMD / INTC, helping send its
stock up 2.3%. Microsoft shares gain 3.1% after Jensen Huang dismissed
concerns over disruption from artificial intelligence. Geopolitics was in
focus: in addition to a lack of a deal, there were renewed "kinetic
skirmishes" that made headlines. Aside from Tech, Energy is the only
sector seeing a uniform bid with elements of both Cyclicals and Defensives
weaker highlighting concentration risk. WTI is above $91 as the Energy complex
is rallying with Ags catching a bid and Metals mixed as Copper / Silver lead.
USD is higher after 2 weeks of losses with bond yields 2 - 3bps. In equities,
tech is leading with strength in Mag7 and Semis. Today’s macro data focus is on
ISM-Mfg. with ISM-Srvcs on Weds and NFP on Friday.
Fundamental
Headlines
The
Economy
The
US stats last week were a mixed lot. Overall, they were balanced as were the
primary indicators (three plus, one neutral, three minus) but with the inflation
numbers tilted to the positive side (two plus, one minus).
The
minus in the inflation reading.
Overseas,
the data was very upbeat as were the price measures (two positive).
Despite
the ever louder narrative of rising inflation, last week’s numbers don’t bear
it out---for the second week in a row. This along with the long bond seemingly
trying to stabilize (see above) suggests that I get a bit more circumspect
about my inflation call. I don’t think that we will see a significant drop in
the inflation rate but perhaps we are at the point where it ceases getting any
worse. Of course, two weeks numbers are not sufficient to alter my forecast but
they also can’t be blindly ignored. Bottom line, I am standing pat for the
moment but more cautiously so.
Here
is part of the reason for varying inflation stats.
https://econbrowser.com/archives/2026/05/eight-measures-of-the-us-price-level
On
the other hand, the economic growth in the US remains on track with only a
smattering of data points suggesting otherwise. However, if the price data regains
momentum, I don’t see how the Fed can avoid tightening monetary policy and that
historically opens the possibility of an economic slowdown at the least.
The
producer segment of the economy is doing just fine.
https://bonddad.blogspot.com/2026/05/the-producer-part-of-economy-is-doing.html
Bottom line: the economy is performing well and will likely continue to
do so at least in the short term, given (1) US energy independence, and (2) the
level of AI spend. On the other hand, I remain firmly convinced that
above average inflation is part of our near/intermediate term future.
US
From Friday afternoon:
The May Chicago PMI surged to 62.7 versus predictions
of 50.5.
https://www.advisorperspectives.com/dshort/updates/2026/05/29/chicago-pmi-surges-to-4-year-high
International
April German retail
sales fell 0.3% versus consensus of -0.4%.
The April EU unemployment rate was 6.3%
versus expectations of 6.2%.
The May Chinese
manufacturing PMI was 50.0 versus estimates of 50.1; the nonmanufacturing PMI
was 50.1 versus 49.5; the composite PMI was 50.5 versus 50.3; the May German
manufacturing PMI was 50.1 versus 49.9; the May EU manufacturing PMI was 51.6
versus 51.4; the May UK manufacturing PMI was 53.9 versus 53.1.
Other
Economic charts of the week.
https://www.carsongroup.com/insights/blog/charts-of-the-week-may-18-22/
Update on big four recession indicators.
https://www.advisorperspectives.com/dshort/updates/2026/05/28/the-big-four-recession-indicators
GDP per capita.
https://www.advisorperspectives.com/dshort/updates/2026/05/28/gdp-per-capita-q1-2026-second-estimate
Europe is edging closer to a trade war with
China.
Iran
Overnight news.
Monetary
Policy
The Fed’s powers are a fiscal time bomb.
https://www.cato.org/blog/feds-post-2008-powers-are-fiscal-time-bomb
Fiscal
Policy
Two
ugly paths now facing America.
(3)
The Two Ugly Paths Now Facing The U.S. Economy
AI
The impact of AI on the economy.
https://www.apollo.com/wealth/the-daily-spark/the-impact-of-ai-on-the-economy-and-markets
Investing
The pros and cons of having a portfolio with a large
number of small holdings.
https://www.carsongroup.com/insights/blog/how-many-positions-in-a-portfolio-is-optimal/
If AI learns how
to pick stocks from humans, then it will make the same mistakes.
https://backofmind.substack.com/p/stochastic-collywobbles
What
to trade when the bubble bursts.
https://www.zerohedge.com/markets/hartnett-how-trade-when-bubble-bursts
Summary:
And as traders merrily front run the bubble as the Fed sits and does nothing
ahead of what will one day be a brutal reckoning, in his tale of the tape,
Hartnett notes that while the S&P 500 index is at new highs, just
21 stocks (4% of SPX) are actually making new highs (by comparison this number
was just 20 stocks at the internet bubble Mar 2000 top). In Emerging
Markets, leadership is even more narrow: just 2% of stocks (21 of 1224) are
currently at all-time highs. Back to the S&P, where 222 stocks are
currently trading more than 20% below their highs, 109 are trading
more than 40% below highs... which sets the ground for Hartnett's first
post-bubble prediction, namely that the "best performers next 12
months likely to be unlevered, opportunistic, “diamonds-in-rough.” We'll
get back to that in a second. Taking a look at this week's "biggest
picture", Hartnett says that the post-bubble investor roadmap
since 1929 is long bonds (10-year yield down ~50bps in 6
months after big market tops), and long defensives and/or
equity sectors/styles which dramatically underperformed in last months of the
bubble – the classic “long humiliation, short hubris” trade.
What
breaks the parabolic semiconductor trade?
https://www.zerohedge.com/markets/parabolic-semiconductor-rally-what-breaks-trade
News on Stocks in Our Portfolios
What
I am reading today
America’s
hegemonic glory is under threat.
https://giftarticle.ft.com/giftarticle/actions/redeem/00fb0fd7-fc41-4bba-ac71-132e1c874fba
Three
debates Americans have had for 250 years.
https://www.zerohedge.com/political/three-debates-americans-have-had-250-years
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