Last week was quite the wild ride, with the markets clocking in significant upside. Leading the S&P 500 to close up 5.9% and the NASDAQ up 6.6%, which were both the largest gains since November of 2022.
The Big Picture
Across the world we're seeing global central bank rate cuts at the fastest pace since August of 2022. If past is anything resembling prologue, then the weakening of the global economy may be leading us down the path towards some turbulence here at home.
Rate cuts are often a reflexive response towards a weakening local economy, and we can certainly see that weakness in global PMI data as well as Europe and China's wobbly economic situations.
Looking at rates in the US on the longer-end of the curve we can see that the drop in 10s helped to drive a bid in US stocks last week. Rate sensitivity was a big driver of the mark down of risk assets as rates were rising, so seeing them fall gave stocks an opportunity to bounce as the cost of capital dropped.
We're also seeing lower core inflation and wage growth, though still nowhere near the Fed's goal. Though there are some signs of the labor market beginning to soften, with non-farm payrolls coming in below expectations at 150K, the unemployment rate ticking up to 3.9% and wage growth decelerating to 0.2% month-over-month. JOLTS, however, remains elevated suggesting that there's about 1.5 jobs available for every unemployed and insured person seeking work.
Shifting over to the earnings picture, we're seeing downward revisions in materials, real estate and healthcare and positive revisions in communication services and energy. I continue to favor energy plays as I believe there are opportunities in the sector, particularly after oil's recent sell-off.
Markets and Mayhem
Last week was one of the most dramatic changes in one measure of breadth that I've ever seen in such a short time, with less than 20% of NYSE-listed stocks above their 20-day moving average to start the week and nearly 75% of the same above their 20-day moving average to end it.
This led the NYMO to showing a significant breadth thrust into overbought territory, which may provide an opportunity for the market to cool off a bit, but often is the case that when we see a strong rally on Friday, it carries through to Monday. Perhaps that brings us to SPX 4400 / ES 4417.75, where there's a large amount of net call positioning. More on that later!
Last week was also the first week about two months that we saw new highs outpace new lows on the NYSE. Looking below, we can see that 2023 hasn't really looked much like the bull market we experienced in 2021, where new highs consistently outpaced new lows as upside participation was much more broad-based.
This strong push higher was, in part, led by some of the lowest quality components of the market. The most shorted basket of stocks rallied up 13%, clocking their most impressive gain in almost a year. I identified the aggressive flows from hedge funds into shorting single stocks last week, now we're seeing the unraveling of some of those bets. Probably a good time for traders that were agile enough to take advantage of this rally to book gains (if not already).