Timing & trends
Google is trying to make history again, this time with a massive subsea cable project that would be the first one traversing the Atlantic and not solely owned by a telecommunications company…. CLICK for the complete article
Canadian housing data continued to disappoint in the month of June. As sales dipped, so too did the total amount spent on real estate. The total dollar volume dipped 12% year-over-year in June, totaling C$23.5 billion. A tough blow to government tax coffers which have reaped record sums of property tax dollars in recent years…. CLICK for the complete article
Investors are giving a thumbs down to Facebook’s quarterly report.
U.S. stocks mostly fell on Thursday, with technology stocks leading the Nasdaq sharply lower as Facebook shares plummeted in their biggest one-day drop ever following disappointing quarterly results.
Facebook, due to its size and weight in the market, cast a negative light on the session, which was otherwise largely strong. Seven of the 11 primary industry groups rose on the day, which put the Dow into positive territory and limited declines in the S&P 500.
What are the main benchmarks doing?
The Dow Jones Industrial Average DJIA, +0.61%rose 157 points, or 0.6%, to 25,570. The blue-chip average doesn’t count Facebook among its 30 components.
The S&P 500 SPX, -0.13%fell 8 points, or 0.3%, to 2,837. Tech stocks were by far the biggest decliners of the day, off 2%. The Nasdaq Composite Index COMP, -0.81%sank 97 points to 7,836, a decline of 1.2% from a record close.
What’s driving markets?
Facebook FB, -19.34%dropped 19% a day after the company late Wednesday revealed lower-than-expected quarterly revenue, slowing user growth and weak guidance. At its current level, the stock was on track for its biggest one-day drop in its history.
Other social media stocks fell, withTwitter Inc. TWTR, -3.03% down 4.3% and Snap Inc.SNAP, -2.20% losing 4.4%. The Global X Social Media ETF SOCL, -3.50% was off 4%.
Outside of Facebook-related gloom, the second-quarter earnings season continued to roll on, with a number of major companies reporting better-than-expected results, providing an underpinning of support to markets.
In addition, investors cheered Wednesday’s upbeat meeting between Trump and the European Commission’s president. The two leaders reached a trade agreement that has been called short on specifics, but still significant.
Separately, European Central Bank left interest rates unchanged and affirmed its plan to end its monthly bond-buying program in December, as had been expected. In addition, ECB President Mario Draghi said that uncertainty around the inflation outlook was receding.
What are strategists saying?
“I’m not surprised to see a decline like this in Facebook, especially since even with this drop its still up year-over-year. As a growth investor looking for sustainable competitive advantages, I’m identifying cracks in Facebook’s business model. It’s new users are going to come from emerging markets, for the most part, which generate a lower revenue per user. That means the revenue growth will slow over time, and that margins will compress,” said Brian Milligan, portfolio manager of the Ave Maria Growth Fund.
“Beyond the FAANGs, things look pretty good right now, not withstanding the trade rhetoric, which seems to change every hour. There’s good growth, but trade obviously creates uncertainty, and that’s the risk. How much uncertainty is out there and how much are investors willing to bear?”
Which other stocks are in focus?
Comcast Corp. CMCSA, +3.55% reported adjusted second-quarter earnings that came in ahead of forecasts, but lower-than-expected revenue. Shares rose 3.2%.
Advanced Micro Devices Inc. AMD, +9.78% climbed 6.4% after the chip maker reported revenue that grew more than expected.
Celgene Corp. CELG, +0.86% dipped 0.1% after it reported positive resultsfrom a phase 3 cancer trial after-hours the previous day.
MasterCard Inc. MA, -3.62%fell 3.8% after reporting its results.
ConocoPhillips COP, -0.69% posted adjusted second-quarter earnings that beat expectations. Shares lost 0.9%.
Raytheon Co. RTN, -3.39% slid 5% after the defense company reported second-quarter earnings and revenue that beat expectations.
Dunkin’ Brands Group Inc. DNKN, +0.03% reported adjusted second-quarter earnings that beat analyst forecasts, but it lowered its outlook. Shares were flat.
Under Armour Inc.UA, +2.33% popped 1.9% after it posted stronger-than-expected second-quarter revenue.
PayPal Holdings Inc. PYPL, -4.20% gave a third-quarter outlook that missed expectations. Shares fell 3%.
Hershey Co. HSY, +5.34% jumped 5.6% after it reported adjusted second-quarter earnings that beat expectations.
Supervalu Inc. SVU, +64.16% surged 65% after United Natural Foods Inc. UNFI, -13.78% said it would buy the company for about $2.9 billion. Shares of United lost 14%.
Which economic reports are in focus?
Initial jobless claims climbed more than expected in the latest week, though they remain near a multidecade low.
Durable-goods orders rose 1% in June, the first increase in three months. Economists surveyed by MarketWatch had forecast a 3.8% gain in orders for durable goods.
The U.S. trade deficit in goods widened to $68.3 billion in June, up 5.5% or $3.6 billion, according to the Commerce Department’s advanced estimate released Thursday.
Check out:MarketWatch’s Economic Calendar
What are other markets doing?
European stocksSXXP, +0.63%traded higher after the U.S.-EU trade truce, while Asian markets finished mixed.
Gold futures GCQ8, -0.42%and oil futures CLU8, +0.13%were lower, as the ICE U.S. Dollar Index DXY, +0.47%also lost ground.
The $NDX keeps moving from new highs to new highs driven by a narrow group of stocks. Nothing new about that as this trend has been ongoing for some time and headlines of new record prices for such stocks such as $FB, $AMZN, $GOOGL, $MSFT are now a daily occurrence. The untouchables. Jeff Bezos is worth $140B, no that was so last week, now he’s worth $150B.
How do you quantify risk in a market that prices in no risk?
While most people are focused on stocks prices one underlying issue that appears to be largely ignored by participants is the unprecedented market capitalization expansion we are witnessing in these few select stocks.
The numbers are simply staggering. Magic money out of thin air.
$FB, $GOOGL, $AMZN, $MSFT and $AAPL. These 5 stocks now worth nearly $4.1 trillion. That makes these 5 companies the 4th largest economy of the world if you use GDP as a reference. Not bad for less than a million people employed at these 5 companies.
Now check this out: Their combined market cap increase? $260,000,000,000. That’s $260B. In just the past ELEVEN trading DAYS!
No seriously:
Oh it gets better.
2018 year to date? EIGHT HUNDRED TWELVE BILLION DOLLARS market cap expansion in just 6.5 months. $812,000,000,000. That’s a company the size of a $MSFT or $GOOGL in its own right.
Now all these companies are growing revenues and earnings, but have they have expanded revenues, never mind earnings, in the past 6.5 months that justify an $812B increase in market cap? Buyers at these levels must think so.
Now let’s put this market expansion in context of charts.
$MSFT yearly:
$MSFT is now 29% above its yearly Bollinger band and 42% above its yearly 5EMA. Its touched its yearly 5 EMA every year since inception except 2000.
$AMZN:
$AMZN is now 49% above its yearly Bollinger band and 67% above its yearly 5EMA.
Doesn’t matter whether you show linear or log charts, the percentages are the same, but the linear charts highlight the historic perspective.
This is the kind of price expansion and technical disconnect that reminds of $CSCO in 2000:
$NDX is now on its 10th uninterrupted year up:
17% above its yearly Bollinger band and 31% above its yearly 5 EMA.
My premise remains: Eventual technical reconnects are coming with all of these and this defines the correction risk in this market. As the larger indices are now very much dependent on its largest market cap components continuing to ascent.
And for now this trend continues.
$NDX made another all time human history high yesterday also far disconnected from its quarterly 5 EMA again:
And it’s all about the magic 5 as the larger Nasdaq continues to show lower highs for new highs vs new lows as $NDX keeps marching on to new highs:
Yesterday 4 of the fab 5 had outside reversal days on the gap down and registered all time highs on negative divergences:
And of course $NDX also had negative divergence on multiple time frames from short to long:
On the 2 hour chart:
On the monthly chart:
I could go on, but you get my drift.
Massively extended charts with extreme market cap appreciations concentrated in a handful of stocks.
Are investors concerned?
It does not appear so as the $VIX has retreated back to below 12 yesterday and today, ironically retesting the broken trend line again:
I submit the combination of the factors above suggest that investors are greatly under appreciating risk in tech, hence the tech alert here. $812B in market cap appreciation came in 5 stocks in just 6.5 months. History suggests that vastly extended charts making new highs on negative divergences at points of extreme low volatility are subject to risk reversion and large market appreciations can disappear more quickly than investors are usually prepared for.
Fro now they keep on chugging along and perhaps will make further highs. But the warning signs are very pronounced.
I’ve bludgeoned you over the years about how the Semi signal in January of 2013 was the first real proof that the positive economic cycle that is so readily obvious now was in play. We used the Semi Equipment book-to-bill ratio first and foremost per my little graphic here…
The theoretical progression was to be along the lines of Semi Equipment → Semi → Broad Tech → Manufacturing → Employment = Widespread acknowledgement of a strong economy. 
So last year we (NFTRH) began the process of evaluating the reverse of the above, that would start the clock ticking on the “widely acknowledged strong economy”.
But in this age of interconnected information and sound bites flying at us with the power of 10 billion butterfly sneezes it is important to realize that the markets and especially the economy can move like aircraft carriers trying to turn in waters filled with all sorts of hyper active sharks, PT Boats, day traders, casino patrons, men, machines, substance abusers (info junkies) and Ma & Pa all trying to make some coin. In other words, the process can be real slooooow. Just as it was in turning to the positive side half a decade ago.
As the mainstream media were feeding this garbage to the masses… Fund manager looks beyond FAANG stocks and finds even bigger winners for 2018 … we took exception and did a little digging into the fundamentals, just as we did back in 2013.
NFTRH first included this daily chart of two premier fab equipment companies (as mentioned in the MSM article linked above) vs. the broad Semi sector. The first breakdown came in February.
We also used a weekly view to hold a guarded to bearish view when the ratios failed to recover despite the February/March bounce.
We also have this cool looking chart of AMAT & LRCX vs. broad Semis for a little historical perspective.
Finally, we review broad Semi leadership (to Tech) having gone in the tank each week in NFTRH using a fine tuned daily chart. But the weekly and monthly give longer-term perspective with respect to the economic cycle.
Is the economic cycle over? There is no evidence of that. But the signalling has not been positive since about the day that the bullish fund manager noted above unwittingly called a top in these indicators. Indeed, I have an industry contact (whose input was shared with NFTRH subscribers) who provided information very much in line with the charts above, but did not sound like the end of the world either.
With respect to the Semi sector I am not at all sure whether the big cycle is ending or is just getting interrupted. But for 8 months now it has been better to have the information above than not to have it. Buying AMAT and LRCX per Mr. Fund Manager would have been ill-advised. Having a discrete relative bearish view on Semi Equipment would have been advised. Simple.
Now we can proceed with open minds and take what comes, bullish or bearish. The above is yet another little ‘tune out the MSM’ parable among other things I guess.
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