The Morning Call
6/29/26
The
Market
Technical
After marking a
lower high, the S&P continues to decline. The bad news is that it has
pushed through its 50 DMA (if it remains there through the close today, it will
revert to resistance). Plus, the exchange of fire in Iran appears to confirm
that this conflict is not over. While all of this is not particularly positive,
it is too soon to start betting that some kind of top has been made. Because there
is still plenty of good news around: (1) the S&P created a gap down open on
Tuesday [which needs to be filled], (2) it remains above its 100 and 200 DMAs
and (3) it is in uptrends across all timeframes. Further, the (1) economy
continues to perform and (2) with one huge IPO down and two to go, I can’t believe
that the Wall Street bankers are going to allow the Market to go down ahead of
these offerings.
I continue to
focus on the short term follow through. If the Market can regain its former
highs, that is great---I will stay invested, though given the growing number of
potential negatives (valuation, the ‘deal’, direction of monetary policy), I am
now questioning whether to add to my holdings---'questioning’ being the operative
word. If the Market goes on to make a new lower low, I will likely take some
money off the table---some of my semiconductor holdings are well into their
Sell Half Range and I have delayed making those sales because of their strong
upside momentum.
Patience.
The long bond maintained
a strong positive follow through following the more hawkish than expected FOMC
meeting. As I noted last week, usually tighter monetary policy usually
produces higher rates. On the other hand, recall when the Fed started its rate cutting
program (lower rates) the long bond sold off on fears of inflation. The
opposite may be happening now---TLT rallying on hope of a more responsible
monetary policy. However, it seems a bit early in the game to me for investors
to be getting jiggy about a better inflation environment since (1) we don’t
even know if Warch was serious [in particular, now that we have the latest M2
data], (2) whether the rest of the FOMC membership will go along and (3) even
if they do, how hard they are willing to press on the monetary brakes and how
long it will take to break the current inflation psychology.
What we know now
technically speaking is that (1) the long bond bounced off support, (2) it
reset both its 50 and 100 DMAs to support and (3) appears to have made reverse
head and shoulders [a plus].
All that said, I won’t
consider that TLT’s downside momentum is done until it can at the least push
through the upper boundary of its very short term downtrend (green line).
GLD remained in a well-defined
downtrend; it is below all three DMAs; appears ready to challenge its short
term uptrend; and historically, it hates a strong dollar (see below). Let’s see
how it handles the latter.
The dollar remained in a very
well defined very short term uptrend but on a longer term basis is wandering in
the wilderness, i.e., it has a long way to go to get out of its short term
trading range. At the moment, the only thing that I can see that will reset
that to an uptrend is if Warsh is the real deal---and we don’t know that yet.
Friday in the charts.
https://www.zerohedge.com/markets/mega-cap-tech-suffers-worst-week-liberation-day-bond-yields-black-gold-tumble
Summary: Mega-Cap's worst
week since Liberation Day weighed on Nasdaq as dispersion within the AI
ecosystem and broadening outside of it dragged the index down (while The Dow
and Small Caps outperformed). Bonds were bid as inflation fears eased
and oil prices plunged. The dollar ended higher, weighing on precious
metals and crypto. AI 'down but not out' as traders pick winners from losers.. We may
be seeing the flip side of 'one big market.' Mega-cap Tech has done well this
year, but other stocks in the index have done even better -- the equal weighted
S&P is outperforming the S&P 500 ytd. This week we saw more of this
broadening trend with 8 of the 11 major GIC code sectors trading up on the week
even as the broader index traded down. The girth of mega-cap Tech this week was
just too large for the other 490 to overcome. When 30%+ of the market cap of an
index falls more than 5%, that's a lot to overcome. Another issue facing
investors is just the question of how long can this rally last? Ben Snider
pointed out that investors must balance stronger-than-expected AI capex
spending with the risks from a potential deceleration in that spending and
uncertainty surrounding the persistence of recent earnings power. Not much came
out this week that suggests we are seeing any deceleration, but for some market
participants, higher highs may bring on concerns that we are approaching a
peak. And in the meantime, we may see sustained elevated volatility as the
market moves from geopolitical and oil/inflation concerns to the venue of
Corporate America and the AI trade again.
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
The AI trade is
getting complicated.
https://www.zerohedge.com/the-market-ear/ai-trade-getting-complicated
Summary:
The AI trade is starting to fragment. Semiconductors are testing key support,
AI capex is becoming a real debate and China is entering outright capitulation
territory. Korea, meanwhile, continues to remind investors how quickly leverage
can turn into volatility.NASDAQ remains trapped inside the range that has
defined price action since early May. The 29,000 futures level is the key line
in the sand, while the 50-day moving average is now being tested. For now, the
mean-reversion trade continues to win.VXN has already returned to the levels
seen during the recent market lows, indicating volatility is repricing faster
than the index itself.SOX is testing its steep uptrend and is currently trading
just below the 21-day moving average. Since the rally began, the index has
closed below the 21-day average only twice. These are critical short-term
make-or-break levels The AI capex debate could become one of the defining
market narratives of the coming quarters. As Privorotsky argues, markets have
rarely rewarded companies allocating extraordinary amounts of free cash flow to
capex during the build phase. Investors typically reward companies harvesting
returns, not those still building capacity.That is where reflexivity comes in.
If hyperscalers continue to underperform while AI suppliers rally, boards may
increasingly question whether ever-higher AI spending is maximizing shareholder
value. Should one major player slow its investment, the market would likely
begin asking whether peers should follow.That leads naturally to the question
raised by Hartnett: How far do hyperscalers need to fall before the market
starts pricing in AI capex cuts?
Hedge funds sold
the most tech stocks on record last week.
Summary:
Some more details: according to the latest Weekly Rundown from Goldman's
trading desk (available
to pro subs in the usual place), this week’s net selling in US
Info Tech by hedge funds – in both $ and % terms – was the largest in more than
10 years, led by selling in Semis & Semi Equip stocks. At the same
time, after several weeks of strong inflows, US Technology Funds saw very large
net outflows this week per EPFR data
- Macro Products (Index and ETF combined) were net bought (+1.3
SDs 1-year), driven almost entirely by short covers as long flows
were muted (as a reminder, hedge funds tend to buy ETFs when they short
single names as these are traditionally the market-neutralizing leg of the
pair trade). US-listed ETF shorts decreased -2% on the week
(-3.5% month/month), led by covering in Corporate Bond, Small Cap Equity,
and Consumer Discretionary ETFs.
- On the other hand, Single Stocks were heavily net sold (-4.2
SDs 1-year), driven by short-and-long sales (1.9 to 1). 8 of 11 sectors
were net sold, led in $ terms by Info Tech, Comm Services, Industrials,
and Health Care, while Staples, Energy, and Real Estate were net bought.
Info Tech was by far the
most net sold US (and global) sector (-3.8 SDs 1-year), driven by
long-and-short sales (1.3 to 1) – this week’s net selling in US Info Tech – in
both $ and % terms – was the largest in more than 10 years (-4.0 z score).
- While all Info Tech subsectors saw
outflows this week, Semis & Semi Equip stocks, which have
been net sold for eight consecutive sessions, made up more than half of
the $ net selling, followed by Software, Tech Hardware, and Comms Equip
Materials was among the most
net sold US sectors this week and saw the largest net selling in more than
three months (-1.9 SDs 1-year), driven by short-and-long
sales (1.5 to 1). Within Materials, Metals & Mining was the most net sold
subsector on the week, partially offset by modest net buying in Containers
& Packaging and Chemicals. Aggregate long/short ratio in US Metals &
Mining stocks now stands at 1.21 (vs. its YTD high of 1.69 seen in early June),
in the 7th percentile vs. the past year and 3rd percentile vs. the past five
years.
Monday morning
setup: US equity futures are higher led by Tech as Mag7 leads the group higher
and points to a reversal of last week’s profit-taking, as traders position for
the end of the first half. A shortened week will likely focus on a speech from
the Fed’s Warsh on Wednesday and payrolls on Thursday. As of 8:30am, S&P
futures are 0.9% higher as traders bought the dip after a rotation out of
this year’s top-performing stocks sent the US benchmark to its second-worst
week of the quarter; Nasdaq futures gain 1.2%, with both Software and Semis higher,
which may be more driven by period-end reshuffling than a shift in sentiment. A
mix of space, software and artificial-intelligence infrastructure names led
premarket gains. Comcast Corp. jumped 23% on a plan to split its business.
Cyclicals ex-Materials are leading Defensives ex-HC with the AI theme bid up
across sectors. Bond yields are +1-2bp higher with the Dollar down a touch.
Commodities are lower but the Energy complex is bid following another series of
attacks between US / Iran; WTI back above $70/bbl, and Brent climbed 0.8% to
$72.59 a barrel following weekend flare-ups between the US and Iran. While the
two sides have since agreed to halt the attacks, the pace of
shipments through the chokepoint has slowed, with shipowners likely to remain
wary of crossing the strait. Gold / silver are down 1-2%, base metals with a
slight bid, and Ags mostly lowers. Today’s macro data focus is on the June
Dallas Fed activity with the balance of the holiday-shortened US week including
June jobs report Thursday and ISM-Mfg, JOLTS and ADP.
Fundamental
Headlines
The
Economy
The
US stats last week were very upbeat as were the primary indicators (four plus,
two neutral, one minus) with one positive inflation number. Overseas, the data
was tilted negative with one neutral price measure.
On inflation
the front, as noted above, we got one encouraging stat. That has some Market
pundits chirping that there may be no rate increases this year---in contrast to
the now widely held belief that there could be one or more. As you know from my
comments last week, I think that there are plenty of reasons to doubt that it
was ever going to happen anyway---Warsh’s FOMC presser notwithstanding.
First,
Warsh may sound hawkish, but until we see action, I remain a skeptic. Plus, as I
pointed out last week, he is a Trump appointee and we all know Trump’s position
on monetary policy. And finally, so far, the only hard evidence we have regarding
Fed policy is an increase in the growth rate of M2 (which I also noted last
week) and that’s clearly not an indication of tighter monetary policy.
To
be fair, it may be too soon for Warsh to have exerted influence on money supply
growth….which only emphasizes the need to adopt a ‘wait and see’ position on
Fed policy/inflation.
So
for the moment, my ‘inflation is as good as its going to get though it may not
get any worse’ position remains.
Keep in mind if Warsh is the second coming of Volcker, both the economy
and the Market are in for the pain necessary for correcting the excesses of the
past. If he is bulls**ting us, then inflation is as good as it is going to get
(lower oil prices will certainly help in the very short term), the economy will
continue to grow but at a slower secular rate than in the past and the Market
will likely continue to award excessive valuations to equities until someone recognizes
that the emperor has no clothes.
https://www.capitalspectator.com/core-inflations-persistence-raises-questions-for-the-feds-strategy/
Regarding
the end of the war, the Market is clearly accepting it as a given in particular
with regard to lower oil prices (this weekend flares up notwithstanding). In
that respect, it is probably correct though I would add the caveat that many
oil experts that I have read indicate that it will take longer to (1) rebuild
damaged oil related infrastructure and (2) return traffic in the Strait of
Hormuz to prewar levels than seems to be reflected in current oil prices. That
said, price is truth. So, I can hardly argue with the conclusion that lower oil
prices are going to positively affect inflation.
Of course,
if Iranian propaganda (operative word) means anything, the current ‘deal’ is
not what Trump says it is (as I pointed out previously, he has done it 39 prior
times) and that could lead to an ultimate hitch in the Market/oil’s gitty up’.
Bottom
line: the best we can be is cautiously optimistic...but color me underwhelmed.
Finally,
there is just no quit in the AI investment cycle. That is clearly a plus for
economic growth. On the other hand, if the spending cycle is indeed a bubble,
then the fallout for the economy and the Market is likely negative. Of course, ‘if’
is the operative word. And I am not
smart enough to know how this spending cycle ends; though history and valuations
suggest that one’s investment strategy should include a healthy dose of skepticism.
https://bonddad.blogspot.com/2026/06/real-personal-spending-on-durable-goods.html
US
International
May Japanese retail sales grew 1.9% versus
forecasts of +0.7%.
The June EU
economic sentiment index came in at 95.0 versus expectations of 94.3; the June industrial
sentiment index was -7.7 versus -7.2; the June services index was +3.2 versus
+3.0; the June consumer confidence index as -17.7, in line.
Other
Iran
Update on the ‘cease
fire’.
Investing
The latest from BofA.
https://www.zerohedge.com/markets/hartnett-if-mag-7s-drop-any-more-it-will-be-risk-summer
Summary:
“How far do hyperscalers need to fall for market to start trading
capex cuts?” That's the key "zeitgeist" quote from
the latest Flow Show by BofA's Michael Harnett, and it captures not only a
recurring question that Hartnett has been posing for much of the past month,
but also reflect the dramatic divergence between hyperscalers (check/capex
payers) and chip stocks (check/capex receivers) we have been highlighting for
the past month. Here, Hartnett offers an answer.The BofA
strategist notes that there are three key catalysts for a "proper risk-off
summer", namely the MAGS (Mag7 ETF) trading <$60... ... UDJPY
trading <110... ... and the yield curve inverting. In the meantime sticky 16%
margins...
The latest from Goldman.
Summary:
The AI trade is "getting more complicated", according to
Goldman Sachs head of hedge fund coverage, Tony Pasquariello, noting that every
day remains its own distinct adventure, and yet S&P ex-AI and
equal-weighted S&P are quietly making higher highs... They
say one should start these things with a bang, so here goes: a
basket of the core hyperscalers is DOWN 18% so far in June, which tracks as the
worst single month for this cohort since the IPO of META. Now, here’s
where it gets a little interesting: in the immediate aftermath of blowout
earnings from MU, one could once again argue that those who are
COLLECTING the checks still have plenty of runway in front of them -- yet, the
AI infrastructure names got hit very hard on Friday (witness
the SOX index) and our franchise saw a very significant dose of
supply last week (hedge funds sold US equities at the fastest pace since
Liberation Day). At this point in the note, I admit to wondering if the
underperformance of the hyperscalers has gone a bit too far, at least
tactically. I received a lot of questions on the Fed while on the
road - mostly along the lines of “why weren’t stocks more bothered by the
hawkish flavor of the FOMC.” Perhaps the Fed is simply not a primary
driver of stocks right now (I have this view)......perhaps the anchoring in of
inflation breakevens - and the long end - is a comforting backdrop (I have this
view)......or perhaps the market is naïve to the prospect of a July hike.
News on Stocks in Our Portfolios
What
I am reading today
Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and
Subscriber Service.
No comments:
Post a Comment