Sector Rotation: Reading Market Group Moves

Key Concepts

• S&P 500 Earnings: Performance of companies within the S&P 500 index regarding their reported earnings.
• CPI (Consumer Price Index): A measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
• Crude Oil Market: Dynamics and price movements of crude oil, influenced by geopolitical events and supply/demand.
• VIX (Volatility Index): A measure of the stock market's expectation of volatility based on S&P 500 index options.
• Gold Market: Price movements and sentiment surrounding gold as an investment asset.
• Skew: A measure of the asymmetry of a probability distribution. In finance, it often refers to the skewness of option prices, indicating a preference for downside or upside risk.
• FOMC (Federal Open Market Committee): The principal monetary policymaking body of the Federal Reserve System.
• PCE (Personal Consumption Expenditures) Price Index: Another measure of inflation, often preferred by the Federal Reserve.
• Rare Earth Metals: A group of 17 chemical elements with unique properties crucial for many modern technologies.
• Quantum Computing: A type of computation that harnesses quantum mechanics to perform calculations.
• Prediction Markets: Markets where participants trade contracts whose payoff depends on the outcome of future events.
• Zero Days to Expiration (0DTE) Options: Options contracts that expire on the same day they are traded.

Market Performance and Earnings

The S&P 500 has seen approximately 22% of its companies report earnings so far, with a significant 85% beating forecasts. Despite this positive earnings trend, stock performance on the day after reporting has been mixed, with some shares underperforming even when estimates are met. Misses have resulted in even worse performance. Notable earnings reports this week included Tesla and Netflix, both of which saw their share prices fall. For Netflix, the decline was attributed to a "Brazil tax issue," while Tesla's drop was linked to missing earnings expectations.

Inflation and Commodities

The delayed CPI report released this morning indicated that inflation has returned to 3%, its highest level since January. Concurrently, crude oil experienced its best week since June. The speaker and Mikey had been closely monitoring crude oil, anticipating a lower range around the $55 handle, especially given its contango state. However, the market surprised by jumping higher over the last two days. This surge is partly attributed to the Trump administration's sanctions on Russian oil companies, stemming from perceived insufficient action to prevent the war in Ukraine. Following last week's close at 2078, the VIX fell to 17 yesterday and is expected to continue falling, now back below 100.

Gold Market Volatility

Gold experienced a massive move, with a 7% high-to-low range on Tuesday. The speaker had "pounded the table" on this move on Monday, finding it "nuts." Prior to this surge, the previous two Fridays had been the only significant down days in the preceding three weeks. On Monday, gold "moon-ed" to almost 4,400 before a two-day downturn, suggesting a potential breakdown of previous upward momentum. The market is now stabilizing, and its future movement post-CPI is of interest. The speaker also highlighted a previous observation that stocks had experienced nine consecutive up weeks, and the tenth consecutive up week had never occurred, a prediction that proved accurate and timely.

Skew and Market Sentiment

The S&P 1-month skew has steepened to one-year highs, as reported by CBOE. This indicates an increased "bid to the downside" to some degree. A similar phenomenon was observed in gold, where skew became flat, which is unusual as it typically leans to the upside. This flatness in gold skew suggested an impending market event. In contrast, the SPXQ skew is currently around 154, which is in the middle of its range, not exceptionally high. However, the recent pop in volatility during the sell-off did "juice up the tails," and it remains to be seen if this effect will dissipate.

Upcoming Economic Calendar and Earnings

The economic calendar is becoming busy. Following the CPI report today, next week features the FOMC meeting with a widely forecasted 25 basis point rate cut on Wednesday. Earnings reports are scheduled for BA, UNH, Meta, and Microsoft mid-week, followed by Amazon, Apple, and Exxon Mobile towards the end of the week. The end of the month often sees significant "wild flows." The PCE price index is also anticipated, with the market seemingly considering it a major event, as indicated by its chart appearing equivalent to CPI. The week after, more earnings are expected from Palantir, Uber, Humana, Robinhood, AMD, and MP. The government's involvement in purchasing rare earth metal companies like LAC and potentially US is noted. Kico Phillips is also on the earnings radar. The speaker expresses uncertainty about the release of ADP or non-farm payroll data, as a recent announcement indicated no further CPI reports. Disney earnings are scheduled for the week after that.

Washington's Investment and Sectoral Trends

The overarching theme of "Washington buys it all" is reinforced by ongoing news of government investments. Beyond the previously mentioned rare earth metals, there are rumors of the government purchasing stakes in quantum computing companies. This trend extends to other sectors, with companies like Alcoa and FCX (metal plays) and coal companies also experiencing significant moves. The speaker notes that coal companies were frequently mentioned during a previous administration with the goal of making coal viable again. Specific coal names like CNR have been moving. The speaker finds comfort in observing large groups of names moving together, such as rare earth metals, nuclear, and quantum computing companies, which have provided ample trading opportunities.

Notable Corporate and Market Developments

IBM, Honeywell, and Intel have been significant movers on positive earnings. Target is reportedly laying off 8% of its workforce and eliminating 800 open roles, a story the speaker finds surprisingly under-discussed given the week's events. The NHL has struck its first deal with prediction markets, including Couchy and Polymarket. This development is seen as significant, especially in light of DraftKings' recent decline, which is partly attributed to news surrounding these prediction markets. The 15-minute binary Bitcoin up or down markets on Polymarket are viewed by the speaker as potentially "gone too far," questioning the direction of market innovation. The speaker draws a parallel to sports, where allowing a G-League player to return to NCAA basketball is seen as pushing boundaries too far. The NHL's deal with Polymarket is praised for circumventing jurisdictional issues faced by traditional bookmakers like DraftKings, FanDuel, and Flutter. The speaker humorously notes the proliferation of apps and the potential for losing track of deposited funds across various platforms.