July 10, 2023
Good morning,
Economists and analysts were whipsawed by last week’s various labor-market data releases. An extraordinarily hot ADP employment report for June (+497k) made analysts second guess their estimates for nonfarm payrolls the following day (which ultimately missed expectations). Though the various datasets had a wide variety, the overall message remained clear: The Fed will need to continue pushing against labor demand to sustainably rein in inflation. In response, treasury yields rose to new highs across the entire yield curve (more so on the short-end); 2yr yields are flirting with 5% and 10yr yields have broken above 4%. On the week, stocks were soft but have yet to be hurt by the higher yields in bond land – the S&P 500 Index (SPX) was off -1.16% on the week.
Earning’s season begins in a few days; market strategists are all warning that earnings estimates are too high and to expect disappointments. There is a boy-crying-wolf feel to this narrative that we’ve seen many times for years. While you would expect broad based earnings disappointments to be a headwind for the market, it hasn’t unfolded that way in recent quarters. Nevertheless, we do have an equity market that is overbought (too bullish, complacent at least), a minor mid-June correction followed by a slightly higher high (textbook pattern for the first round of profit taking following a sustained rally), higher yields in bonds for stocks to compete against, and an earnings season that actually may turn into a headwind. In sum, a fairly rich environment for profit-taking.
See the Bloomberg SPX chart below. Unlike the mid-June correction, where there were no natural support levels all the way down to 4200, following the textbook pattern mentioned above, the first level of support, if the market is in a corrective mode now, is 4328 (white horizontal line) – down another -1.6% from Friday’s close – small potatoes. The 50-dma (green) is moving steeply north and would be the next support at about 4250 (down -3.5% vs Friday). Below that is the big support level of 4200 (-4.5%).
I suspect that as the summer progresses, these support levels will be tested, all within the context of a 5% correction – a very normal, even healthy development for a bull market. However, more than that and I believe the market will be signaling what economists have been warning about for months – an economic slowdown or worse. Let’s call 4200, “our line in the sand” for now.
Be well,
Mike