Market Rally Legitimate or a Dead Cat Bounce?

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Commentary

  • Summary Analysis: Was today’s trading session a legitimate rally or a dead cat bounce? There were certainly some notable catalysts supporting its legitimacy: 1) the CDC announcement to lift mask requirements for anyone fully vaccinated; 2) Fed bankers defiantly jawboning for lower interest rates in the face of “transitory inflation” data evident in producer prices; and 3) the ongoing improvement in the US labor market. Does anyone sense a “but” statement forthcoming in this analysis? On the surface, the rally was quite impressive, but the narrow breadth of accumulation buying in big-money stocks, which ultimately drives the market direction, leaves me suspicious. Even though equities are attempting to rebuild support, the endeavor is not yet complete so it is premature to celebrate. The clear dominance of Consumer Staples (XLP) over Consumer Discretionary (XLY) seems to suggest this as well. (Perhaps tomorrow’s Retail Sales data will provide further clues.)
  • Equities:
    • US Markets: Major indices initiated recovery rallies after yesterday’s sell-off. Evidence of strong demand emerged in the Russell-2000 (IWM) and Dow 30 Industrials (DIA). Volume expanded as well on the SP-500 (SPY) and Nasdaq-100 (QQQ), which could be signaling support is building at these levels.
    • Leading Sectors: Utilities (XLU); Industrials (XLI); and Materials (XLB).
    • Lagging Sectors: Consumer Discretionary (XLY); Financials (XLF); and Communications (XLC).
    • Int’l Markets: Weakness in Emerging Markets (EEM); and China (FXI). Strength in Japan (EWJ); Europe (VGK); and Brazil (EWZ).
    • Volatility: Although the VIX (VXX) sharply corrected yesterday’s gains with a -9.60% pullback, the surging volume shows investors are still cautious and willing to insure portfolios despite higher levels for the fear indicator.
  • Large-Cap Volume Surgers:
    • Array Technologies (ARRY): +7.36% on 426% volume surge
    • Vroom Inc (VRM): +2.01% on 289% volume surge
    • American Well Corp Cl A (AMWL): -21.61% on 285% volume surge
    • Lemonade (LMND): +7.56% on 232% volume surge
    • Square (SQ): -4.62% on 94% volume surge
  • Small-Cap Volume Surgers:
    • Fluor Corp (FLR) -20.40% on 95% volume surge
    • Sonus Inc (SONO): +7.43% on 439% volume surge
    • AMC Entertainment Hldgns (AMC) +23.74% on 297% volume surge
  • Market Moving Events:
    • Economy/ Inflation: Apr-2021 PPI y/y (Producer Price Index) @ 6.2% vs estimates @ 5.9% and prior @ 4.2%; and PPI m/m @ 0.6% vs estimates @ 0.3% and prior @ 1.0%. Core PPI (ex-food & energy) y/y @ 4.1% vs estimates @ 3.7% and prior @ 3.1%; and Core PPI m/m @ 0.7% vs estimates @ 0.4% and prior @ 0.7%. As a follow-up confirmation on yesterday’s higher than expected consumer price trends, the report challenges the Fed’s thesis on transitory inflation attributed to economic recovery from the pandemic.
    • Economy / US Labor: Weekly Initial Jobless Claims @ 473k vs estimates @ 490k and previous @ 507k.
    • Central Banks / US: Lending perspective to the latest PPI data, Fed Governor Waller believes any price increases above its 2% target are “temporary” and sees the Fed committed to accommodative policy until full recovery. Supporting his views, Richmond Fed President Barkin sees pent-up demand behind the current higher inflation levels while longer-term inflation expectations have not changed.
    • Earnings / Positive Surprises: n/a.
    • Earnings / Negative Surprises: n/a.
  • Bond Rates: The 10-Year Treasury yield closed @ 1.66 (-0.03bps / -1.78%). Bond prices stabilized with the 20-Yr+ Treasury ETF (TLT) closing up +0.21% for the day and maintaining support levels established in Dec-2019 and Mar-2021.
  • Currencies: Trading in the major currencies was relatively neutral with very little change. The US Dollar (UUP) ceded some of its gains to the Euro (FXE) and Yen (FXY).
  • Cryptocurrencies: Recent resistance has prompted profit taking, but savvy HODLRs are buying Grayscale Bitcoin (GBTC) and Ethereum (ETHE) on the dip, which build new support levels and result in a short-term relief rally. Elon Musk’s bearish comments regarding the negative environmental impact of mining Bitcoin do not fundamentally change the macro landscape for cryptocurrencies and, if anything, will be a boost to alternative energy providers and more energy efficiently mined cryptocurrencies, e.g. Cardano.
  • Commodities: Gold (GLD) is consolidating this week’s breakout and recouped some of the previous day’s losses. As oil comes back online with the reopening of the Colonial pipeline, the alleviation of supply constraints has temporarily pressured US Oil (USO). This may have created a buying opportunity in it and energy stocks as demand will eventually resume alignment with the economic recovery from the pandemic.
  • Real Estate: The Real Estate Index (IYR), Homebuilders ETF (ITB) and Residential (REZ) are finding support at the lower range of their bullish channels.

ETF Daily Market Performance Summary: 13-May-2021

etf daily market summary for stocks, bonds, currencies, cryptocurrencies, commodities, real estate, and equity sectors
Click to enlarge

Market Diary: 13-May-2021

market diary summary for NYSE and Nasdaq exchanges: advancers, decliners, new highs and new lows, plus mega-cap market breadth
(Click table to enlarge)

Covid19 Global Status Update: CDC Policy Changes

While it is often said that a picture can tell a thousand words, today is not the case. In a significant mark of progress against Covid, the CDC revised its guidelines by formally stating that fully vaccinated people can stop wearing masks in the US. This applies to most settings, e.g. indoors and even large group events. Covid vaccinations are proving effective and using the US as a model gives hope to other afflicted areas that eventually the global war against the Coronavirus will be won.

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