An unprecedented negative correlation

In the stock market, it’s Nvidia versus everything else

6/21/24 1:50PM

Investors wake up every morning and seemingly have one choice: Nvidia, or everything else?

What was briefly the world’s largest publicly traded company and the broader market have consciously uncoupled.

The 21-session correlation between the daily change in Nvidia and the S&P 500 Equal Weight Index is well in negative territory and recently hit its lowest level on record. The other members of the $3 trillion club have weak, but still positive, relationships with this basket of US stocks.

Nvidia and the equal-weight index have moved in the same direction in about 55% of sessions so far this year. On the surface, that might not sound like they’re behaving that differently. But the majority of the time when they’re moving together, neither is moving that much: by less than 0.5% in either direction.

What’s striking is how little they have shared big moves together. Even compared to 2023, a year when Nvidia certainly distinguished itself from the pack, the divergence is significant.

Despite Nvidia being up 1% or more in 51 occasions so far this year, equal-weight and the chipmaker have gained more than 1% on the same day just twice. That leaves the two on track for 4 such occasions this year, versus 26 in 2023.

The good news is that they’re also suffering big drops in tandem less frequently: the pair is on track for just 11 days where both are down 1% or more this year, compared to 20 last year. A dearth of co-movement – particularly when the moves are large – is something that is critical to keeping overall volatility in the equity market compressed.

This lack of correlation is also telling us a story about investors’ most strongly held beliefs and the narratives that are driving the market at large. So far this year, investors haven’t suffered a coincident, meaningful loss of confidence in the durability of the US expansion or the power of the AI theme as a catalyst for Nvidia’s sustained operating outperformance.

The present backdrop – in which we’re seeing a moderation in economic activity and a very nascent pullback in momentum-centric stocks – appears to leave open the possibility that investors question both of these core beliefs in the near-term.

Momentum – betting that winners keep winning – has been the dominant quantitative factor in the stock market this year, even with a few gut-check moments here and there (early March, mid-April, and late May).

Even if you are a staunch believer in how much and how long AI will drive Nvidia’s bottom line results sharply higher, you have to concede at least a decent portion of its year-to-date advance is momentum-based – there’s really no “good reason” why the stock should be up 125% this year vs 175%.

Momentum can turn for any reason or no reason at all, so there’s always a danger that the nearly 2% decline in the iShares MSCI USA Momentum Factor ETF metastasizes from here.

So then, keeping a lid on equity market volatility from here comes down to investors’ perception of the sturdiness of the economic backdrop. To that end, two indexes bear close attention going forward:

The Citi Economic Data Change Index, which measures data versus its one-year average, and the Citi Economic Surprise Index, which tracks how data evolve relative to analysts’ forecasts. We haven’t had both series in negative territory since May 2023, when they were on their way up as investors shook off recession fears induced by central bank rate hikes and US regional bank failures.

But both series have been dipping sharply lately, which helps explain the underperformance of the S&P 500 equal weight index in relative and absolute terms. If we see some stabilization in either metric, this could go a long way in affirming that the “many” in the stock market – those whose fortunes are more tied to the business cycle than the AI theme – don’t face too much downside risk to earnings.

Nia Warfield

39m

Kenvue plunges after reports suggest RFK Jr. may try to link prenatal Tylenol use to autism

Kenvue sank 15% Friday after a WSJ report said Health and Human Services Secretary Robert F. Kennedy Jr. may attempt to link prenatal Tylenol use to autism in an upcoming government report.

Kenvue, the maker of Tylenol and formerly a division of Johnson & Johnson prior to a 2023 spin-out, pushed back, saying the science shows “no causal link” between acetaminophen use during pregnancy and autism, and pointed to FDA and medical groups that agree on the drug’s safety.

The FDA itself has found no “clear evidence” of harm but advises pregnant women to consult providers before taking OTC meds.

The report is also expected to float a folate-derived therapy as a potential treatment.

Tylenol is just the latest well-established medication to face scrutiny under Kennedy, who has already stirred controversy by reshaping vaccine policy and amplifying doubts about mRNA shots.

Kenvue shares are now down over 18% year-to-date.

RFK Jr., HHS to Link Autism to Tylenol Use in Pregnancy and Folate Deficiencies

The FDA itself has found no “clear evidence” of harm but advises pregnant women to consult providers before taking OTC meds.

The report is also expected to float a folate-derived therapy as a potential treatment.

Tylenol is just the latest well-established medication to face scrutiny under Kennedy, who has already stirred controversy by reshaping vaccine policy and amplifying doubts about mRNA shots.

Kenvue shares are now down over 18% year-to-date.

Max Knoblauch

Lucid surges following 6 days of losses after headlines misidentify Cantor Fitzgerald’s lower split-adjusted price target as a good thing

It’s been a shortened week, but still a rough one for Lucid. Investor blowback to the luxury EV maker’s 1-for-10 reverse stock split has sent shares to all time lows this week.

After six straight days of closing lower, Wall Street appears to have decided enough is enough and is loading up on Lucid shares on Friday, sending them up 13% in recent trading. As of 2:10pm eastern, Lucid trading volumes were at more than 240% of their 30 day average.

Some of the move could be attributed to traders reading headlines that don’t take into consideration Lucid’s reverse split. Cantor Fitzgerald on Friday slapped a new price target on Lucid of $20, compared to its previous target of $3. Some news outlets (not us!) presented that as an increase. The problem: With the 1-for-10 reverse split in effect, a comparable price target would have been $30. The new $20 target is actually... a cut.

Matt Phillips

Palantir slips under 50-day moving average, amid momo reversal

What goes up, doesn’t always keep going up.

Palantir CEO Alex Karp PLTR insane valuation

Matt Phillips

Momentum stocks reverse, weighing on US markets

Momentum stocks dragged the market lower Friday, with stocks like Palantir Technologies, SoundHound AI, Rocket Lab, Robinhood Markets, and GE Vernova continuing a recent slide.

(Robinhood Markets, Inc. is the parent company of Sherwood Media, an independently operated media company.)

The iShares MSCI USA Momentum Factor ETF opened 1% higher and built on those gains before reversing hard early in the session to trade 1% lower as of 11 a.m. ET.

If it closes at these levels, this fund that holds US stocks with the best risk-adjusted trailing returns will have completed a so-called “bearish engulfing candle pattern.” As the name suggests is, this is considered to be a negative technical signal that occurs when, the day after a security rises, it ends up opening above the previous day’s closing price and closes below the previous day’s opening price.

Luke Kawa

US stocks rise as soft job growth fortifies bets on a Federal Reserve rate cut this month

ETFs that track major US stock indexes are higher and short-term yields are falling after the August jobs report continued to confirm the trend of labor market cooling, calcifying bets on a Federal Reserve rate cut this month.

Non-farm payrolls rose by just 22,000 in August, while economists had expected an addition of 75,000. The unemployment rate ticked up to 4.3%, in line with estimates. Revisions to the past two months were also negative, but not as severe as in the July report.

The SPDR S&P 500 ETF was up 0.3% to session highs in the minutes following the release, while two-year US Treasury yields fell below 3.5%.

A report and market reaction like this suggests traders are embracing the idea that the softening in the US labor market is primarily driven by supply-side factors in light of major changes to net immigration, as recently argued by economists at the St. Louis Federal Reserve Bank, and isn’t a worrying sign that the US economy is on the verge of a recession.

With revisions, June’s non-farm payroll growth is now -13,000. That’s the first month of net job losses since December 2020. And the underemployment rate (or U6, which includes the unemployed, those employed part time who want a full-time job, and those who want a job but aren’t looking for one currently) rose to 8.1%, its highest level since October 2021.

Some see this data as much more concerning than the market reaction implies.

“Since a month or two ago, policy hawks, growth bulls (I call them wrong), have been arguing two things. First, sequential growth should perk up because the weakness in the summer was all a function of uncertainty around Liberation Day. Second, focus on the ratios because the unemployment rate is still low,” Neil Dutta, head of US economics at Renaissance Macro Research, wrote. “Both of these views were wrong as we now know. Employment growth is still cooling (there is no uptick in hours either) and the unemployment rate is rising. Bye Felicia!”