Snap’s winning streak snapped

Stocks gained yesterday as investors celebrated Friday’s avoidance of a bear market by the S&P500. Biden hinted that he may lower Trump-era tariffs on China to ease inflationary pressures and the market applauded – he just hinted.

Don’t fall asleep at the wheel. Yesterday was an interesting one in stocks. There was a bevy of news which could have been interpreted in many ways, and traders decided to pick the path of optimism. It all started last Friday when stocks faded from early gains pushing the S&P500 into bear market territory. Remember that a bear market is defined when an index closes -20% or more below a recent high. The S&P500 looked as if it was about to accomplish that on Friday as the index fell into the bear zone by midday. Ultimately, the index rallied into the close for not only a slight gain but as an escapee from bear market territory. If the index had closed in bear territory, it would have joined its once high-flying cousin Nasdaq, already in a bear market. The Nasdaq is heavily weighted in technology and growth stocks which have had a rough go of recent. Let’s get something out of the way – gaining the moniker “bear market” is certainly not something to celebrate, but it is not something to panic about, either. Friday’s market action in the S&P500 represents 1 thing: there are buyers looking to pick up equities at discounted levels. Whether Friday’s level is THAT level which will ultimately stick is very much up in the air. Everyone would like to take credit for picking the absolute bottom and buying at that level, however chances of success in that endeavor are very slim. A better and more fruitful strategy would be to allow some of the negative market forces to dissipate and to wait for the market to re-trend before throwing a return-of-the-bull-market party. You’re probably asking, “what does that actually look like, Mark?”

Let us start with some simple conditions. Foremost, the VIX Index is still at elevated levels. The VIX measures the volatility of the S&P500 and this morning the index is around 29. For some reference, it has traded above 20 for most of this year spiking as high as 35 in mid-March before briefly dipping below 20 in early April. The VIX typically spikes and retreats during times of market stress, rarely remaining at elevated levels. During March of 2020, the VIX spiked from the high teens to 82 but ultimately returned to the lower 20s in summer of that year. 2021 would see the VIX return to the high teens which ultimately gave way to 2022’s elevated levels. From 2013 through 2020, the VIX rarely got beyond 20, and many analysts use 18 as a guidepost for market volatility. What does that all mean? It means that we remain at very elevated levels of volatility. The current level, 29, implies daily market swings of +/-1.8%, weekly market swings of +/-4.1%, and monthly oscillations of +/-8.4%. See where I am going with this? With the VIX at these unusually sustained high levels, lots can go wrong…or right in just 1 day. Should the index begin to trend lower and settle down, we would have a better chance of a sustained turn-around. When might that happen? Lots of this volatility comes from the unknowns, namely: the path of inflation, the path of the Fed, and the potential for recession. Based on Fed guidance and Fed Funds futures, it appears that there is a good chance that the Fed will continue to raise rates at its current pace through late summer. What would cause the Fed to change its course? If inflation surprisingly pulls back, the Fed may slow its pace of hikes. There is some evidence that it may ease in coming months due to some letup in supply tension and the base effect. Should we get unexpected spikes in inflation…well, you know, faster hiking. That brings us to condition number 2: recession. Right now, there is no evidence that a recession is imminent, but clearly that can change. There is an indication that consumers are losing confidence and that we are shifting our demand patterns, conditions that can be early signs of a contraction in the future. Elevated prices, higher interest rates, stock market losses, and low confidence can certainly dampen consumer demand. If it becomes clear however, that we may be nearing a recession, the Fed is likely to slow or even cease raising interest rates. The Fed may even cut interest rates if the economy slows materially. So now we have two conditions under which the Fed may abandon its current tightening path: lower inflation and increased chances of recession. Clearly, the first case is preferable over the second, but until volatility pulls back and it is clear that the Fed is ready to lift its foot off the brakes, moves like we had yesterday may just be flashes in the pan. We have a term for that on Wall Street: a dead cat bounce. If you are not into one hit wonders or you are offended by cat references, stay focused on the long term, and avoid trying to time the market.

WHAT’S SHAKIN’

Snap, Inc (SNAP) shares are lower by -29% in the premarket after it lowered its forward guidance to a range below analyst expectations. The company has seen a slowdown of usage after it surged throughout the pandemic. Like other social media platforms, the war in Ukraine has not only caused usage to dwindle but also a pullback on advertising bookings. The company has already announced Q1 earnings and is not expected to announce its Q2 results until July 22. Analysts have lowered EPS targets for Q2 by -75% in the past 4 weeks. Both Meta (FB) and Twitter (TWTR) are also down in the premarket on the news. Potential average analyst target upside: +79.3%.

Albemarle Corp (ALB) is higher by +1.25% in the premarket after it raised its full year revenue forecast resulting from strong lithium demand by battery manufacturers. The company is expected to deliver its Q2 earnings in early August and analysts have upped their EPS estimates by +96% in the past month. Dividend yield: 0.65%. Potential average analyst target upside: +14.1%.

Futures, in general: At this early hour, stock futures are pointing to a lower open after being spooked by Snap’s less-than-glowing guidance. Crude, Gold, and Bitcoin are higher while Treasury yields are lower.

YESTERDAY’S MARKETS

Stocks rallied yesterday as the potential for lower tariffs on China got the thumbs up from stock traders who sought to take advantage of Friday’s late-session, bear-market-avoiding rally. The S&P500 gained +1.86%, the Dow Jones Industrial Average rose by +1.98%, the Nasdaq Composite Index climbed by +1.59%, and the Russell 2000 Index advanced by +1.10%. Bonds dipped and 10-year Treasury Note yields climbed by +7 basis points to 2.85%. Cryptos added +0.78% and Bitcoin declined by -1.98%.

NXT UP

• S&P Global Manufacturing Flash PMI (May) is expected to have declined to 57.7 from 59.2 while the Services PMI may have fallen to 55.2 from 55.6.
• New Home Sales (April) are expected to have pulled back by -1.7% after declining by -8.6% in March.
• Richmond Fed Manufacturing Index (May) is likely to have fallen to 10 from 14 according to economists’ consensus.
• Jerome Powell will make pre-recorded remarks at Davos Economic Summit.