Nvidia (NVDA) beat Wall Street expectations again. After the market close today, November 21, the company reported adjusted earnings per share of $4.02 on revenue of $18.12 billion. Analysts had projected adjusted earnings per share of $3.36 and revenue of $16.1 billion.
Well, you could knock me over with a feather! The House of Representatives passed a clean Continuing Resolution to continue funding the federal government after Friday at midnight. Don’t get all dewy-eyed and start talking about a return of functional government. The House bill, which is expected to pass and Senate in the next day or two and be signed by the White House with well over 10 hours to spare before the government shut down, only extends funding until January 19 (for 20% of the government) and February 2 (for the other 80%.)
One day fluke? The next step in an end of year Santa Claus rally? Huge bear market trap? The beginning of the next big Bull market?Tough questions to answer but important for figuring out an investment strategy for NOW. So here are three things that I’ll be watching in the next few days.
The small-cap Russell 2000 fell today by 1.29% at the close. All the other major indexes were up: the Standard & Poor; 500 gained 0.18%; the Dow Jones Industrial Average added 0.10%; the NASDAQ Composite tacked on 0.30%; and the NASDAQ 100 climbed 0.37%. I find this “interesting.” That’s “interesting” as in “watch out” and not “interesting” as in “I’m buying this rally.”
So you knew that most of this year’s stock market gains came from just a few BIG tech stocks–but did you know the difference was this big?
So how big a difference has market cap weighting made? Remember the market cap weighted S&P 500 is up 14.77% in 2023 as of June 14. And up 12.02% for the last three months. The equal-weighted S&P 500, on the other hand, is up just 4.77% for 2023 as of June 14 and ahead 5.18% for the last three months. To understand what “weighted” and “unweighted” mean read the post
How Long Can a Dangerously Narrow Market Run? Certainly not forever. But longer than you might imagine. The Nasdaq 100 and S&P 500 have increasingly diverged. The week before last, the NASDAQ 100 (which includes the largest technology companies), was up 3.15% and the S&P was up only .28%. Over the last three months, the NASDAQ 100 was up 18.88% and the S&P was up 6.14%. For 2023 to date through May 29, the NASDAQ was up 31%, and the S&P was up 10%. NASDAQ tech stocks, like Nvidia (NVDA), are driving the index up and that is pulling the rest of the market with it. The remainder of the market, however, is weighed down by warnings of a tough retail economy, companies reporting negative growth, and inflation problems. At the moment, investors are betting on technology’s big growth to avoid problems from a slowing economy, prolonged high inflation, and the Fed’s rate hikes. The result is a very narrow market, with a small number of specific stocks propping it up. History says, that eventually, the market rally will either expand, with more stocks participating, or it will fail because you can’t sustain an upward trend with fewer and fewer stocks. Narrow markets can run for longer than you might think. But it’s not too early to locate the exits.
Important observation out of Morningstar on Friday. While the Morningstar U.S. Market Index is up 15.4% from its bear-market low on October 14, the market is only 1.4% higher than it was at the end of November. AND in recent months, the stock market has been moving in tighter and tighter bands. So far in April, the Morningstar U.S. Market Index has only moved up 0.9%. That puts the month on track to show one of the flattest monthly returns since May 2022.
Sell any post-Fed rally–stocks are way ahead of themselves on the Fed, interest rates, and inflation
Here’s what I expect on Wednesday. The Federal Reserve’s Open Market Committee will announce a 25 basis point interest rate increase. In his post-meeting press conference Fed chair Jerome Powell will try to talk the financial markets out of their exuberance by stressing that the Fed doesn’t see a quick end to interest rate increases because at 5% inflation is still running way ahead of the Fed’s 2% target rate. And I expect that investors and traders will ignore Powell’s comments and bid stocks high because a pause in rate increases is just around the corner–maybe as early as March–and financial markets can look for the Fed to begin cutting interest rates in the second half of the year. To which I say, Bushwah! I would sell any post-meeting rally. March increasingly looks like the month where reality will whack the markets on its head.
This should be enough to keep the rally going for another day: Netflix beats on earnings, new subscribers
After the close today, October 18, Netflix (NFLX) reported fiscal third-quarter earnings that beat Wall Street projections and added far more subscribers than analysts had expected. After falling 1.73% in the regular session, the stock added 14.02% in after-hours trading.
I think the markets are getting carried away with today’s CPI numbers–looking to make a sell or two today
As of 2 p.m. New York time, the Standard & Poor’s 500 is up 2.01% and the Dow Jones Industrial Average is ahead 1.53%. The NASDAQ Composite is higher by 2.71% and the NASDAQ 100 has gained 2.64%. The small-cap Russell 2000 index is higher by 2.77%. And all this on a conclusion that the drop in the July headline CPI inflation reading to an 8.5% annual rate from June’s 9.1% rate is enough to make the Federal Reserve decide to raise interest rates by 50 basis points at its September 22 meeting instead of the 75 basis points move so strongly favored yesterday. To understand the size of this shift in sentiment take a look at the odds in the CME FundWatch Tool. Yesterday, the market–this tool uses prices in the Fed Funds Futures market to calculate the odds of a Federal Reserve move–was pricing in a 68% chance of a 75-basis-point increase. This morning, August 10, after the CPI report, the odds of a 75-basis-point increase had dropped to 37.5%.And the odds of the Federal Reserve deciding on just a 50-basis-point increase had jumped today to 62.5% this morning from 32%.That’s quite a shift. And quite frankly I don’t see enough in the data to support this downgrade of the chances of a 75-basis-point interest rate increase on September 22.
I think the next two weeks could bring a test of the bullish argument for stocks to move higher in the near term. I don’t think this is the strongest of arguments but I can see some traders already looking to test it out.
Oatly Group (OTLY) was up 6.92% on Monday. Tuesday the shares gained another 2.67%. It’s a good sign when a beaten down stock doesn’t fall on profit taking the next day. For a day, at least, traders behaved as if they see a longer market recovery in prospect. SolarEdge Technology (SEDG) gained 12.33% on Monday and tacked on 1.35% on Tuesday. Teledoc (TDOC) rose 8.96% on Monday and then climbed 3.15% on Tuesday.