It was a rally. The S&P 500
starts the week at a seven-week high, buoyed by hopes for a less hawkish Fed and a sense that earnings pessimism has been overdone.
The benchmark stock index is up 12.6% from a recent low reached in mid-June, after posting its best performance in July since 1939, according to Dow Jones Market Data. Last week’s 4.2% pop took it through resistance at 4,000, moving even further above its 50-day moving average in the process. Etc.
But, of course, some are not convinced.
With the S&P 500 Relative Strength Index now at 74 and in “overbought” territory, short-term bearish traders can expect a slight pullback.
And Kevin Smith, chief investment officer of hedge fund Crescat Capital, thinks the issues are bigger than just an overextended momentum gauge.
“Last week looked like a short-seller capitulation for the market in general and for mega-cap tech stocks in particular. Crescat is not capitulating at all. There were a lot of “buy the news” headlines that could mark the peak of another bear market rally,” Smith explains in a note to clients.
He cites three elements of what he calls really bearish news in recent days; the Fed’s 75 basis point interest rate hike; a consecutive negative impression of real GDP; and the “ugly” tech earnings of mega-caps.
“Yeah, that was really bad news, but short-term positioning was offside waiting for all that bad news, so there was a technical upheaval from short sellers,” Smith believes.
When it comes to the economy, investors are mistaken if they point to a strong labor market as evidence of a soft landing as the Fed tightens policy.
“It is sad to see how many people, including policymakers, seem oblivious to the fact that labor markets are always a lagging indicator ahead of economic downturns. Because inflation is so high today and the Fed is so behind the curve, the current period of negative real growth is expected to be very long and just beginning,” Smith says.
And on big tech earnings, he’s particularly dismissive: “There’s been a massive deceleration in revenue, earnings, and free cash flow from all of the FAANG+ stocks that have recently released reports, and they’re all still very valued… The truth is that high multiple growth stocks traditionally fare poorly in an inflationary environment, and these stocks don’t even go up anymore, especially on an inflation-adjusted basis.
FAANG stands for Facebook, Amazon
and Google (although the first and last are now listed as Meta
Smith concludes that because the FAANG+ results weren’t as strong as the market interpreted, he’s adding to his bearish bets. “We increased our shorts there in this recent short cover rally. We believe the equity bear market will soon resume in earnest with the Fed still in tightening mode and the yield curve now well inverted.
US stock index futures are a little weaker after their recent strong run, with the S&P 500 futures contract
down 0.3% to 4,122. and the Nasdaq 100
future sliding 0.2% to 12,948. The dollar index
fell further from recent 20-year highs, down 0.3% to 105.61. The 10-year Treasury yield
is up 2 basis points to 2.671%.
jumped more than 4% after the aerospace group obtained FAA clearance to restart deliveries of its 787 Dreamliner.
U.S. Crude Futures
Hong Kong: 9988
shares fell further in Hong Kong on Monday after US regulators last week added the e-commerce giant to a list of Chinese companies that could be delisted.
U.S. Wheat Futures
remain near their lowest for five months after Ukraine was able to send its first cargo of grain from Odessa since the Russian invasion.
In earnings, Loews
publishes its results before the market opens while Activision
come after the closing bell.
Shares in HSBC
United Kingdom: HSBA
are up 8% after the Asia-focused but London-listed bank delivered earnings above expectations.
US economic data Monday: ISM manufacturing for July and construction spending, both due at 10 a.m. EST
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