US futures are little changed ahead of the open on Friday.
The S&P 500 booked a 1% gain on Thursday, led by semiconductors amid a big relief rally with the Fed hike out of the way and oil prices falling amid hopes of improved supply conditions.
The benchmark US index hasn’t had a 1% drop in 35 sessions, and yesterday’s advance extended the tally of 1% daily gains since the last 1% loss to five.
The VIX Index has moderated, and the implied volatility of one-month 25-delta calls tied to the “fear gauge” is near its lows of the year:
Robinhood traders largely used yesterday’s session to take profits in some of the big chip winners of the day:
As a subsidiary of Robinhood, Sherwood Media is restricted from writing about any company in which Robinhood is or was a selling group member of the IPO during the regulatory "quiet period" for that company.
Tech(nical) check
In recent media appearances and editions of this newsletter, we’ve been discussing how big pockets of the stock market have either been in no man’s land, or worse.
Has any of this fog lifted following the Fed? To the charts…
Tom McClellan of the McClellan Market Report, who’d been cautious on stocks as recently as September 9, said that he’ll be shifting to bullish from neutral if the S&P 500 closes above 7662.30 today.
“We are in the time window for when the stock market should be bottoming according to the Presidential Cycle Pattern,” he wrote. “So things are looking good for a new uptrend to start. I just want a little bit more confirmation.”
The Roundhill Magnificent Seven ETF are tantalizingly close to an ATH. One under the radar factor that may be helping Mag 7 hyperscalers as of late is that they haven't really tapped US IG markets in September (a month in which there's typically a seasonal bump in issuance).
No doubt, funding needs remain ample, but the lack of headline risk around supply indigestion and relative calming of spreads hasn't hurt, for now.
Through the p(doom) and “pacing the frontier” downdraft, the VanEck Semiconductor ETF never closed below $540. It’s now bumping up against its 50-day moving average.
(Over on X, @P_Remarks has been keeping a running list of indicators that there’s not really any “pacing” to speak of when it comes to the outlook for AI capex.)
Within the space, there are names that are seemingly more encouraging than others.
“Focus longs on the emerging relative leaders in Semis,” wrote Jeff DeGraaf, head of technical research at Renaissance Macro, in a note on Friday.
He flagged Semtech, Intel, Advanced Micro Devices, Skyworks Solutions, and Qorvo as having good trends to own, and highlighted Nvidia, Micron, and Marvell Technology as names to add in the event of relative breakout.
On US tech, BTIG’s Jonathan Krinsky offers something for everyone, noting that the recent set-up bodes well for an extension of gains in the very near term, but a mild drawdown after that.
“Interestingly, when QQQ starts below its 20 and 50 DMA (but above 200 DMA), then opens the next day above its 20 and 50 DMA like it did today, it performs well over the next 5 days (median +1.13% positive 73% of the time), but turns negative looking out 30-40 days (median -1.95% and -1.5%) and negative 70% of the time,” he wrote in a note to clients on Thursday.
Meanwhile, the malaise largely continues for the “many,” with the Invesco S&P 500 Equal Weight ETF mired below its 50-day moving average.
Banks have been bludgeoned. Invesco KBW Bank ETF is poised for its biggest weekly decline since February amid this week’s Treasury curve flattening and updates from big finance execs at a Barclays conference.
And even after a big bounce on Thursday, consumer discretionary has been where positive trends go to die: less than 13% of the sector’s constituents are above their 50-day moving averages, and fewer than 30% are trading north of the 200dma. That obliteration in consumer discretionary breadth is not too far off the lows for this bull market.
If you were running with the nascent thesis that AI tech hardware companies would reassert themselves as leaders — particularly at the expense of other cyclical parts of the market — well, that view looks to be the one in ascendance.
Fed post mortem
By now, you’ve hopefully had the opportunity to read many Fed recaps, so we’ll keep this as brief as possible.
Goldman Sachs flagged how much the market keyed in on Fed Chairman Kevin Warsh’s (repeated) comment, first made in his opening remarks, that the central bank had removed a “dose of accommodation.”
(The implication here is that there are more doses to remove).
If I were to summarize all of the remarks and forecasts, the conclusion would be that the central bank was a little more hawkish on the outlook for policy rates than economists (though not necessarily the rates market) had anticipated — but even more bullish on growth.
“The most hawkish element of the day was not the hike itself but rather the fact that only two dots suggested that the hiking cycle would be one and done,” wrote 22V Research economist Peter Williams.
Bespoke Investment Group analyst George Pearkes noted that the central bank has never seen the risks to real growth as being this tilted to the upside!
22V’s Williams, continued:
“It is important to note that the Fed does not see its hikes as risking the cycle, but implicitly playing a bit of catchup to a more hawkish-optimistic reality as the SEP shows a reaccelerating economy. Warsh repeatedly commented on the “strengthening” economy and an ‘an attitude of optimism’ inside the Committee. The use of ‘timelier’ in the statement to guide how quickly they are aiming to see inflation return to target suggests a degree of caution to me.”
Putting a bow on this, from a top-down perspective, I’d suggest the pace of tightening that the Fed has signalled coupled with an acceptance (or even welcoming!) of strong activity means this:
Tightening of financial conditions will need to come more from supply/spreads at the long end than via the higher cost of money at the front end.
That is, hyperscalers would need to starve the rest of the investment world of capital (and/or do more to raise the effective cost of capital for everyone else) before the cost of short term money really serves as a binding constraint.
I wanna be your endgame
“For the first time since the start of the Iran conflict, we don’t have a baseline view. We simply don’t know how to model the endgame.”
With that message on Thursday, JPMorgan’s commodities team sent shockwaves across the investment community and on social media, with legions of armchair geopolitical/oil analysts ruining my mentions in the process.
The strategists note that they anticipated that things like oil, gasoline, or bonds would be enough to force a durable solution to reopen the Strait of Hormuz — but since many of these thresholds have been breached, they can no longer rely on those assumptions.
“With no clear signals from either the US or Iran that they are prepared to de-escalate—and absent a diplomatic breakthrough on September 24, when President Trump and President Xi are set to meet in DC—the assumption that the disruption is temporary is becoming increasingly difficult to sustain,” they write.
Intellectual honesty is refreshing. And having seen how sell side research is used to inform investment decisions, I can confidently say that insight into a team’s thought process is infinitely more useful than their price target.
In any event, what’s a trader to do when the experts are throwing their hands up in the air and saying the potential outcomes are getting more difficult to model and price?
Well, there are two choices, really:
Stay on the side of momentum and cross your fingers; or
Know what you don’t know and reduce positioning.
It doesn’t seem like the latter dynamic had been in force before the start of this week, at least.
Per a JPMorgan report from earlier this week, open interest across commodity futures recently breached $2.1 trillion.
“Similar to last week, energy was the dominant driver of the boost in overall open interest, fuelled by both a rise in energy prices and by $12 billion WoW of contract-based inflows across commodities sectors, also mainly into energy,” they wrote.
In equityland, however, enthusiasm for energy stocks has seemingly moderated. Or, at least, optimism has found a more focused release valve.
In September, both US energy producers and the broad energy sector ETF have materially lagged the move in crude oil futures, while an ETF of refiners (which has 60% of its exposure from stocks outside the US) has fared much better.
Seen on Socials
From Helene Meisler on BlueSky (on Thursday morning):
What to watch
Today:
Fed Governor Michelle Bowman due to speak at 9:30 a.m. ET.
Kansas City Fed President Jeff Schmid slated to speak at 11:45 a.m. ET.
Monday:
Chicago Fed President Austan Goolsbee scheduled to speak at 6:30 a.m. ET.
Tuesday:
Autozone earnings expected premarket.
New York Fed President John Williams slated to deliver remarks at 10:05 a.m. ET.
Richmond Fed President Tom Barkin scheduled to speak at 1 p.m. ET.
Wednesday:
General Mills earnings due out premarket.
Thursday:
NY Fed President John Williams due to speak at 4:10 a.m. ET.
BlackBerry and Darden Restaurants earnings due out premarket.
Richmond Fed President Tom Barkin due to deliver remarks at 8 a.m. ET.
Cleveland Fed President Beth Hammack scheduled to speak at 8:50 a.m.
Philadelphia Fed President Anna Paulson slated to speak at 10:10 a.m. ET.
Costco earnings due out postmarket.
Friday:
NY Fed President John Williams due to speak on a panel at 5:15 a.m. ET.
Cleveland Fed President Beth Hammack slated to participate in a panel discussion at 2 p.m. ET.
