Abby Normal - Brugel's WNWN
What's Now What's Next, 2024-23, July 12
This Week:
1. Abby Normal
2. Role Reversal
3. Mt. Fuji
Weekly Summary:
The wildest dynamic of the week is small cap stocks surging 6.11% on the week while the QQQ declined by 0.27%. More on that below. The S&P 500 ended up 96 basis points on the week.
The big move is small caps was most likely offsides traders being whipsawed by the machines (algorithmic trades) and being forced to cover small cap shorts. IWM spiked 2% in a matter of minutes following the CPI report on Thursday morning. That small cap comeback was also fueled by a sharp decline in the yield in the 2Y treasury which indicates an expectation of rate cuts beyond the one cut that was priced in the prior week. Time will tell. The 2Y yield was down 30 basis points from the highs on Friday 7/5, while the 10Y yield declined by 20 basis points.
With the big drop in interest rates it is not surprising that bond market volatility also declined as the MOVE index is now at 86, down from a recent high of 107. The US Dollar index was off by a point on the week. Commodities were off roughly 2% in sympathy with the declining inflation fears indicated by interest rates. Oil was off 1.5%. However, gold was up 0.81% for the week. Bitcoin joined the small cap stock party, and it is up 7.3% in the last week.
The attempted assassination of former President Trump on Saturday may boost his odds of being elected and that may impact stocks in early trading on Monday.
Abby Normal
Market activity this week brought back memories of the hilarious 1974 Gene Wilder film “Young Frankenstein”. Wilder plays Dr. Frankenstein and his assistant is played brilliantly by Marty Feldman. His experiment has gone awry, and Frankenstein has begun to suspect that Igor did not, in fact, bring him the brain he'd requested for the dead man he's brought back to life. Promising to not get angry if Igor confesses to his mistake, he eventually coaxes out the truth: that the brain came from someone named “Abby Normal.” So, the monster received an abnormal brain and this is an abnormal market.
Tier1 Alpha encapsulated this dynamic well in their morning brief Friday:
· Breadth was STRONG yesterday as 80% of the S&P 500 was in the green for an average advance of nearly 2%.
· However, in the strongest example of market cap distortions we've seen since mid-2020, some broader weakness drove the cash index around 88 basis points lower, while the SPX equal weight index gained 1.2% on the day.
· Not only did this near record divergence rank in the 99%ile over the past three decades, but it drove the correlation between SPX and it's equal weight counterpart into an all-time low, dwarfing the collapse in correlation we saw in in the early 2000's.
· While such extreme moves usually raise a red flag, previous instances of spreads greater than 2% between the two indexes have had mixed results, signaling both market tops in the late 2000s and market bottoms, and potential melt scenarios from 2008 onwards.
· In other words, it's hard to draw any statistical significant from such events, it not something you typically see during a "normal" market.
Role Reversal
I am always interested in days with market dynamics that have never occurred before. Thursday (7/11) was one of those days. I have frequently highlighted how lopsided the major stock indexes have been with the recent Mag7 dominance. On 7/11 day the Mag7 and Small Cap stocks reversed roles in an epic way. The S&P 500 ended down 0.88% on the day despite advancing stocks outnumbering decliners 5:1. That has never happened before. Also, the Russell 2000 (small caps) outperformed the Nasdaq by 5.5%, the largest spread on record. The dominant setup in the market has been to be long Mag7 and short the Russell 2000, so the dramatic move in the opposite direction yesterday spurred a big unwind of those positions and that exacerbated the move. Big moves can mark trend changes so I will be watching to see if this dynamic continues.
Thursday was also remarkable for the share of S&P 500 stocks outperforming the index. 87% outperformed, the most in at least 30 years.
Finally, The Daily Shot highlighted call option volume in IWM, the ETF that tracks the Russell 2000 small cap stock index. This week marked the highest volume ever by a wide margin.
Mt. Fuji
One of the most colorful and insightful commentators on Finance Twitter (FinTwit) was a character who was known as Dr. Jin. Dr. Jin was an astute market observer who often gave name to stock chart formations we was highlighting. One such formation was the “Mt. Fuji” for those charts displaying a parabolic rise and equally parabolic descent.
I was reminded of the Mt. Fuji formation in reverse when I saw this chart of the Five Largest Stocks in the S&P 500. The decline of the top five from 1965 to 1995 is steep, but the climb that started in 2015 to now is even steeper.
What’s Next
1. Heavy week of economic data
2. J Powell speaks on Monday at noon.
3. Retail sales and Business Inventories Tuesday.
4. Housing starts and the Fed Beige Book Wednesday.
5. Leading economic indicators on Thursday.
6. 2Q earnings season ramps up. Big7 reports begin the week of 7/22.
Action items
1. Be cautious about adding to risk exposure at these levels. Both stocks and bonds are at the high end of their respective risk ranges.
2. Buy any meaningful pullback in gold.
3. RIP to my father-in-law Sam Laury. He was a kind and loving man. https://www.moneyandking.com/obits/samuel-j-laury/
4. There will be no WNWN next week.
Please feel free to call me if you would like to discuss any of this and how it might impact you personally.
Stay well!
Eric
703-307-5253
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