Live Markets: Short sellers hold their bets against consumer discretionary names

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01/08/2023 18:40

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      S&P 500, Nasdaq decline, Dow slightly positive
    

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    SHORT SELLERS HOLD THEIR BETS AGAINST CONSUMER DISCRETIONARY
NAMES (1335 EDT/1735 GMT)
    Short sellers continue to hold tight on their bets against
consumer discretionary stocks, according to a recent note by S&P
Global Market Intelligence.
    Short interest in the consumer discretionary sector was
5.25% as of mid-July, the note added, as short sellers wager
that persistently high inflation and interest rates will
significantly hinder consumer demand.
    It has been the most shorted U.S. stock sector for 18
months, even as the level of short interest has fallen over the
past year as U.S inflation slides from its 2022 peak.
    Short-sellers aim to profit by selling borrowed shares,
hoping to buy them back later at a lower price.
    Two of the five most-shorted U.S. stocks, Carvana  CVNA.N 
and Fisker  FSR.N , are consumer discretionary stocks. Short
interest in Carvana was 37.39% at mid-July, while short interest
in Fisker was 36.11%, the note added.
    Shares of Carvana, nevertheless, have rallied over 900% so
far this year in what some traders said looked like a short
squeeze. 
    A short squeeze usually happens if a stock - that short
sellers bet would decline - rallies and they are be forced to
buy back shares to avoid losses.
    Apparel and accessories company Ralph Lauren  RL.N  was the
most shorted stock within the large-cap index at mid-July with
14.55% short interest, according to S&P Global Market.
    Other consumer discretionary stocks, CarMax  KMX.N , Pool
 POOL.O , Carnival  CCL.N  and Etsy  ETSY.O , were also among
the top 10 most shorted stocks within the S&P 500.
    
    (Bansari Mayur Kamdar)
     *****
    
    
        LOWER CONVICTION FOR HIGHER EUR/USD, BUT UPSIDE STILL
LIKELY (1330 EDT/1730 GMT)
  
    Nomura Securities FX strategist Jordan Rochester still sees
higher potential in euro/dollar, targeting $1.14 by the end of
September, with $1.16 a possibility next year. But conviction
for his forecasts has gone down.
    The euro is currently down about 0.3% at $1.0966  EUR=EBS .
    Rochester notes there are a ton of challenges for the euro
to reach its upside potential, including the Federal Reserve's
monetary policy. "The volatility in monthly U.S. CPI inflation
surprises determine the narrative. Fed members may take longer
than we expect to turn dovish," says the Nomura strategist.
    Indeed, fed funds futures, which usually moves way ahead of
the Fed, are not pricing in a rate cut until May 2024, which
means a more resilient U.S. dollar against major currencies,
especially the euro.
    Fed Chair Jerome Powell noted last week the central bank's
staff expected a noticeable slowdown in economic growth later
this year but no longer forecast a recession in 2023, as
inflation could come down to target without high levels of job
losses.
    Still another factor against the euro is the possibility of
credit stress events after a series of Fed and European Central
Bank hikes, Rochester writes, causing a flight from risk to safe
havens like the dollar.
    So far in 2023, the euro has gained about 2.5% versus the
greenback.
    
    (Gertrude Chavez-Dreyfuss)
     *****
    
    
    BOFA SELL SIDE INDICATOR: THE PERFORMANCE CHASE IS ON (1225
EDT/1625 GMT)
    BofA's Sell Side Indicator (SSI), a contrarian sentiment
measure tracking sell side strategists' average recommended
equity allocation, rose 60 bps last month to 53.5%, which is its
biggest jump since early 2021. 
    In a BofA Securities research note, Savita Subramanian,
equity and quant strategist, says that allocations are back to
last September's levels, while strategists upped their stock
allocations for the second month, marking the first back-to-back
increase since April 2021.
    "The performance chase is on after the S&P 500 posted its
5th month of gains (+3.1%) and has handily beat long-term
Treasury bonds by nearly 20% YTD as economic data has positively
surprised," writes Subramnian.
    BofA says that Wall Street's consensus stock allocation has
been a reliable contrary indicator. In other words, it has been
a bullish signal when Wall Street strategists were extremely
bearish, and vice versa.
    "Despite improving over the past two months, our SSI (still
in "Neutral" territory) is still more than 2x closer to a
contrarian "Buy" signal than a "Sell" (2.1ppt vs. 4.7ppt)," adds
Subramanian.
    She notes that the current level indicates a +15% price
return over the next 12 months (S&P 500 at 4,850 by year-end or
5,300 in 12 months). 
    Historically, Subramanian says that when the indicator has
been at current levels or lower, 12-month forward S&P 500
returns were positive 95% of the time (vs. 81% overall) and the
median 12-month return was 21%.
    
    (Terence Gabriel)
     *****
        
  
        
  
        COULD THE FED CUT RATES AND MAINTAIN QT? (1200 EDT/1600
GMT)
  
    As the Federal Reserve nears the end of its tightening
cycle, analysts and investors are trying to gauge when it is
likely to begin cutting rates.
    They are also exploring the possibility that the U.S.
central bank will adopt a seemingly contradictory strategy, by
continuing quantitative tightening (QT) even as it eases policy.
    The Fed is letting bonds roll off its balance sheet in order
to normalize its size. It is down from a peak of almost $9
trillion, but remains high at $8.2 trillion, around double where
it stood in March 2020.
    Meghan Swiber, an interest rate strategist at Bank of
America, said whether or not the Fed continues QT in this
scenario will depend on why it is cutting rates.
    "If the Fed is cutting rates because of a recession because
they have to ease policy, then it would make sense for the Fed
to stop QT at that point in time too," Swiber said. "But
instead, if it's more so cutting rates to bring policy back
towards a more neutral setting as inflation is moderating, then
you could see the balance sheet runoff continue in the
background."
    Fed officials are also pointing to that possibility.
Chairman Jerome Powell said last week it "could happen," noting
that the two policies are independent things. He added that
rates are the active tool.
    How long the Fed continues to reduce its balance sheet will
also impact how much debt the U.S. Treasury will need to issue
to make up for the Fed's dwindling purchases.
    "It is a big swing component in terms of forecasts," said
Swiber.
    
    (Karen Brettell)
    *****
    
    
    TOO COOL FOR SCHOOL: PMI, JOLTS, CONSTRUCTION SPENDING (1125
EDT/1525 GMT)
    Tuesday offered something cool to market participants in the
form of generally weaker-than-expected, but far from
catastrophic economic data.
    Taken together the numbers could - counterintuitively - be
taken as a positive sign that the Fed's restrictive stance is
having its intended, inflation-curbing effect.    
    First, U.S. factory activity continues to shrink, but
appears to be tapping on the brakes.
    The Institute for Supply Management (ISM) purchasing
managers' index (PMI)  USPMI=ECI  landed at 46.4, a paltry 0.4
point monthly improvement and weaker than the 46.6 consensus.
    The report marks the eighth straight month below 50, the PMI
dividing line between contraction and expansion.
    Breaking things down, declining new orders decelerated a bit
and the employment segment unexpectedly slid to a dismal 44.4.
    Production, inventories and order backlog all improved but
remained in contraction. And prices paid, an inflationary
marker, decelerated but remained well in contraction at 42.6.
    "The July composite index reading reflects companies
continuing to manage outputs down as order softness continues,"
writes Timothy Fiore, chair of ISM's Manufacturing Survey
Committee. "Amid mixed sentiment about when significant growth
will return, panelists’ companies reduced production and
continued to manage head counts down, to a greater extent than
in previous months."
    Comments from survey participants are peppered with remarks
like "customers are reducing or not placing orders as forecast,"
"demand is softening," and "no upturn is expected until at least
the fourth quarter."
    Here's a breakdown of select ISM PMI components:
    Everyone wants to get in on the act, so S&P Global also
issued its final take on July PMI  USMPMF=ECI , repeating its
"flash" reading of 49, a 2.7 point improvement over June.
    "Manufacturing continues to act as a drag on the US economy,
the recent spell of malaise persisting at the start of the third
quarter," says Chris Williamson, chief business economist at S&P
Global. "However, producers are clearly shrugging off recession
fears and planning for better times ahead."
    ISM and S&P Global PMIs differ in the weight they allot to
their various subcomponents (new orders, employment, etc.).
    Below we see how closely the dueling PMIs agree (or not):
    Turning to the labor market, job openings 0.4% lower in June
to 9.58 million - a two year low - from May's downwardly revised
9.62 million.
    The Labor Department's job openings and labor turnover
survey (JOLTS)  USJOLT=ECI , which measures labor market churn,
also showed a slowdown in hiring as layoffs held steady.
    And the quit rate - often viewed as a yardstick of consumer
expectations, as workers are less likely to walk away from a gig
in times of economic uncertainty - dipped to 2.4% of the
workforce from 2.6%.
    Taken together, the data point to a mild loosening in the
labor market, 15 months after the Federal Reserve embarked on
its policy tightening odyssey.
    "The U.S. labor market continued its graceful return to more
normal turnover patterns in June," says Julia Pollak chief
economist at ZipRecruiter. "Competition for workers and labor
market churn remained historically high ... but conditions have
normalized substantially since the peak of the Great Resignation
from mid-2021 to mid-2022." 
    Finally, expenditures on U.S. construction projects
 USTCNS=ECI  increased by 0.5% in June, according to the
Commerce Department.
    The number was a tad below the anticipated 0.6% growth, it
stands on the shoulders of May's upwardly revised 1.1% spurt.
    Below the headline, a solid 0.9% increase in spending on
residential projects drove the gain, as builders struggle to
fill the inventory gap caused by a dearth of existing homes on
the market.
    Even so, it marks a sharp deceleration from the 2.9% jump in
May, and expenditures on residential builds remains down 10.4%
year-on-year.
    (Stephen Culp)
    *****
    
    OPPENHEIMER ASSET MANAGEMENT SEES S&P 500 RALLYING ANOTHER
7% BY YEAR-END (1035 EDT/1435 GMT)
    Oppenheimer Asset Management raised its year-end target for
the U.S. benchmark stock index S&P 500  .SPX  to 4,900 points,
citing a peak in sight for the Federal Reserve's tightening
cycle and resilience of the U.S. economy. 
    The new target, up about 11% from the brokerage's previous
forecast and among the most bullish on Wall Street, represents a
7% upside from 4,574 as of 1015 am ET. 
    So far this year, the index is up around 19%.
    "A broadening of the current rally into "growthier" value
stocks of the S&P 500 as well as into mid- and-small
capitalization equity benchmarks could help underpin the
sustainability of the upside move," said Opennheimer's chief
investment strategist John Stoltzfus in a note on Tuesday.
    The case for a soft-landing for the U.S. economy has been
strengthening. 
    Citigroup on Monday raised its 2023-end target for the S&P
500 target to 4,600 from 4,000 on soft-landing hopes, while
Goldman Sachs recently reduced its probability of a U.S.
recession in the next 12 twelve moths to 20% from 25%.
    A JP Morgan client survey showed 43% expect the S&P 500 to
hit a record high this year. The index would have to top Jan
2022's intraday high of 4,818.62 - about 5% from current levels
- to notch a new peak. 
    But some forecasts imply a possible downside by year-end. 
    Goldman Sachs sees the index ending the year at 4,500, while
BofA Global Research, as of May, saw it ending at 4,300 points. 
    Wells Fargo in June said it sees a year-end range of
4,000-4,200.  
    
    (Subhadeep Chakravarty and Susan Mathew)
    *****    
    
    
        S&P, NASDAQ FALL AS INVESTORS LOOK TO THIS WEEK'S SLEW
OF DATA (1015 EDT/1415 GMT)
  
    The S&P 500  .SPX  and the Nasdaq  .IXIC  are on the
defensive early on Tuesday ahead of key jobs data this week that
could determine whether the U.S. economy may avert a recession
or not. Recent data has been upbeat, supporting equities and
affirming expectations for a soft landing for the U.S. economy 
    "The rush to declare a soft landing for the U.S. economy has
bolstered confidence in financial assets but the data on the
ground matters," writes BNY Mellon in a research note.
    Data on Tuesday showed U.S. manufacturing stabilized at
weaker levels in July amid a gradual improvement in new orders,
but factory employment dropped to a three-year low, suggesting
layoffs are accelerating.
    Investors are also digesting mixed earnings from
pharmaceutical giants Merck  MRK.N  and Pfizer  PFE.N . Merck is
up on the day after it raised its full-year profit forecast
following a narrower-than-expected second-quarter loss, while
Pfizer is down  as it missed estimates for quarterly revenue.
    That said, U.S. Q2 earnings are now expected to fall just
6.4% from a year earlier, compared with forecasts of a 7.9% drop
a week ago, according to Refinitiv data.
    Here is an early snapshot of financial markets:
    
    
    (Gertrude Chavez-Dreyfuss)
     *****
    
    
    AFTER GETTING DRILLED, ENERGY SECTOR FLOWING AGAIN (0900
EDT/1300 GMT)
    Oil prices are dipping on Tuesday on signs of profit-taking
after rallying in July when investors wagered on tightening
global supplies and demand growth in the second half of the
year. 
    NYMEX crude futures  CLc1  rose nearly 16% in July for their
biggest monthly gain since a 17.2% jump in January 2022. This
after hammering out a floor on the daily charts in early May.
    And even with Tuesday's early dip, the futures are still on
track to rise for a sixth straight week. Crude rose seven weeks
in a row from late-April to early-June last year.
    Meanwhile, energy stocks are enjoying a resurgence. Energy
 .SPNY  was the best performing S&P 500  .SPX  sector last month
with a more than 7% gain. That was energy's biggest monthly gain
since October 2022.
    Indeed, after selling off as much as 21% from its November
2022 high into its March 2023 low, and ultimately scoring two
closes below its rising 12-month moving average (MMA), the
sector is attempting to get back on track to the upside:
    
         
    With July's gain, SPNY, which ended at 668.98, reclaimed its
12-MMA, which finished at 643.14.
    Although, the moving average convergence/divergence (MACD)
crossed bearishly in May, and is still negative, its decline is
quickly easing. Of note, the bearish crossovers in 2008 and 2014
proved forthright, leading to severe selloffs.
    In any event, the sector faces major resistance in the
678.84-724.74-738.71 area, which includes its 2008 and 2022
peaks, as well as its 2014 record high.
    To add confidence in energy's resurgence, traders will want
to see the 12-MMA now contain weakness, the MACD to cross
bullishly, and the group to achieve a relative strength breakout
vs the SPX.
    Despite energy being the best performing SPX sector last
year, the SPNY/SPX ratio failed to breakout above the resistance
line from its 2008 high.
              
    (Terence Gabriel)
     *****
 
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    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
SPNY08012023B    https://tmsnrt.rs/43OgpeP
US morning snapshot    https://tmsnrt.rs/43PAzoD
ISM manufacturing PMI    https://tmsnrt.rs/3q3TAGo
ISM v SP Global PMI    https://tmsnrt.rs/44N4lMf
JOLTS    https://tmsnrt.rs/3QlJgnR
Construction spending    https://tmsnrt.rs/44PtFBg
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Terence Gabriel is a Reuters market analyst. The views
expressed are his own)