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Real Yields Drop Pushing Stocks Higher On July 28, 2022

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7/27/22

STOCKS – AAPL, AMZN

MACRO – SPY, QQQ, TIP, RINF

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MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN AAPL

Stocks rose again today, following the second quarter of negative real GDP growth. The S&P 500 climbed by 1.2% to close at 4072. The rally extended as real yields fell on the day, and TIP ETF rose to its highest level since early June.

Rates have made a huge move this year, and we appear to be going through a period of consolidation. I do not think it is a change in trend, though. The dollar has been holding up, and as long the dollar remains strong, I do not believe there is a change in direction. But as long as the TIP ETF rises, then stocks can rise. This has worked extremely well all year, and it doesn’t seem like the time to abandon the thesis.

But there will be a lot of economic data between tomorrow and next Friday. Tomorrow we will get the University of Michigan inflation expectations and the PCE readings. Then next week, the ISMs and Jobs data. So this can change quickly, so watching this ETF is very important.

How far can the TIP yield rise? It is tough for me to say at this point. It sure looks like it is getting overbought, and the pattern today looks like a hanging man, but I’m not the best with candlestick patterns. The RSI is very close to 70 as well. So it could still go somewhat higher, but it could be the peak too. I just do not know at this point.

Inflation Expectations

The problem is that inflation expectations are starting to rise again, and with nominal yields falling, real yields need to fall. This goes completely counter to what the Fed wants, but the Fed is disappearing now for the next two months, and who knows if Powell can deliver a message at Jackson Hole that matters.

Why are inflation expectations rising? My best guess is that copper is rising. Copper and breakevens have a strong relationship.

 

The QQQ has been rising, and RSI has been improving, which would suggest that higher prices may come. The real test doesn’t come until $313.

The S&P 500 is in the same boat for now and testing key resistance level. A break out send the index to 4,175.

Amazon (AMZN)

Amazon reported better than expected sales and guidance, and earnings missed again. In contrast, cash from operations missed the forecast. Based on my rough calculations, cash flow from operations over a trailing twelve months appears to be still falling. But if that turns the corner, that would make a big difference. For now, the stock is filling the gap.

Apple (AAPL)

Apple’s results were better than expected, but the company didn’t give the greatest guidance. Specifically, services revenue was expected to decelerate, while FX headwinds will hit overall revenue. Additionally, gross margins for the next were weaker than expected. Typically, this type of guidance is the type that would send the stock lower. So not sure why it is holdings its after-hours gains.

-Mike

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. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. 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.