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STOCKS – V, MA, AAPL
MACRO – SPY, QQQ, VIX, TIP
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MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN AAPL, V, MA
There may be a video later today, but I am running behind schedule this weekend, so that video may not come until tomorrow.
It will be a hectic week for stocks, with an FOMC meeting and all of the mega-cap stocks reporting results. The market seems overly complacent at this point, with a VIX index trading at 23 and a VVIX index at 84.5. With the VIX at 23, it is currently at its lowest level this year, heading into an FOMC meeting, which I find bizarre.
The Fed is likely to raise rates by 75 bps, and the CME fed watch tool even suggests a 20% chance the Fed will raise rates by 100 bps. (Should be free to read – The Fed May Hand The Stock Market A Gigantic Shock This Week)
Rates fell sharply on Friday, but a lot of that decline came from a sharp move lower in European rates, with the German 2-yr falling 23.5 bps to 41 bps. Yes, the German 2-year’s yield fell 36% on Friday. The German 10-Yr yield fell 18 bps to 1.04%. The decline in European yields is primarily due to the ECB’s non-approach to monetary policy. The ECB did raise rates by 50 bps last Thursday but failed to give any guidance for the September meeting and also noted that the 50 bps increase last week would not change the expected terminal rate.
Despite the US 10-yr rate falling by 12 bps on Friday, the spread between the US and German 10s widened by five bps. That spread is likely to widen more, especially if the Fed delivers and indicates more rate hikes in the future.
Meanwhile, last Thursday, the BOJ left its monetary policy unchanged, which means that the anchor of the Japanese bond market will continue to help suppress global rates. Currently, the spread between a US and Japanese 10-Yr is extremely wide. With the BOJ holding to its yield curve control, it will be harder for yields in the US to extend much higher for the time being since the spread is already at past record highs.
It tells us that move down in yields on Friday is less of a reflection of the current economic situation here in the US but a reflection of central bank policy action of late last week. It is essential to understand this topic because inflation expectations did not fall at all on Friday, despite the sharp move down in yields. That means real yields were falling to keep pace with falling nominal yields to keep inflation breakevens flat. As a result, the TIP ETF rose sharply. This helped the gap between the QQQ and the TIP close a little bit.
The NASDAQ futures have been in a rising channel, and to this point, the move up from the July 13 lows to the July 22 highs equaled the June 17 lows to the June 27 highs, which could suggest that we have completed the ABC retracement wave off the June lows. This may very well indicate the QQQ the NASDAQ futures are heading back to the lower end of the trading channel.
S&P 500 (SPY)
Meanwhile, the S&P 500 has completed a 38.2% retracement of its move lower from its March 30 high to the June 17 low.
The S&P% 500 has also now seen a 100% extension of its June 17 low to June 27 high…
And a 161.8% extension of its June 30 low to its July 8 high.
It would seem like the highs witnessed on Friday would be the perfect location for the S&P 500 to have at least put in a short-term top. It is an even better place to see a sharp decline, and given how low the VIX is, it wouldn’t take much to get this market moving lower with a gap fill at 3,830, the most reasonable first target level.
Visa will report results this week, with inflation running at almost 9% and strong nominal GDP growth. I think Visa would be a big beneficiary of this environment since payments are nominal and not in inflation-adjusted terms. To me, Visa and Mastercard seem like good inflation hedges but get little attention. Maybe this quarter changes things for both.
Visa is at a significant downtrend, which has presented resistance two times now. It seems like a good technical setup for the stock to break out if the company delivers better than expected results. (From April for subscribers of Reading The Markets – Visa And Mastercard Inflation Hedges? [Video])
Mastercard will also report results this week and has a similar setup to Visa from a technical stance.
Apple reports this week too, and I have seen expectations for some slowing of service revenue growth. But then factor in the terrible results from Verizon and AT&T; I can only wonder about the health of Apple’s handset market and the potential outlook. Also, Apple is likely to see a big hit on revenue and earnings due to the strong dollar, but the stock hasn’t been acting like anything wrong is happening.
That’s all there is going to be for now.
Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.