Fears Spill Over as Market Feels the 'Nasties'

It's only natural. Fear of the dark. Fear of the unknown. Fear of the known. 

You still do what you have to. You ease yourself over the side of the raft in order to keep a low profile. Quiet motor. Long weapon tied down on the boat. No moon. No light. Taste the water. Brackish. A little later, less brackish, more like disgusting. Getting close. 

What's in the water with you? Could be things we don't like to think about. What waits inside the jungle after getting where we're going? Could be worse. Could be a lot worse.

Both a relief to get out of the stink and an awful feeling as wet clothes and wet boots make too much noise bumping around in the dark. Even jungle boots, at least until some of the muck oozes out of those little round ventilation holes. 

Like magic the mood improves from absolutely awful to merely lousy. No night vision. No GPS. Still years away. Check the laminated map. Red lense, but only for a second, shielded by still wet hands. 

Are we where we are supposed to be? When we're supposed to be there? I think. Good chance. Let's go.

The Nasties

Sometimes as one treks through an unknown environment, one has to make judgments. Sometimes, one tracks animal prints in order to follow the hint of a trail well off of the beaten path. It's not that unusual a method of travel. Sometimes animal trails are noticeable to the human eye and used by humans, other times, not so much. You can go unseen.

However, once in a while, one gets the sense that the animals, maybe a big cat or something predatory, might be tracking you. That realization always makes the hairs on the back of my neck stand up. I call that the "nasties." 

You kids getting the nasties as Thursday night "spills over" into Friday morning? We're here. Fear of the unknown. Fear of the known.

It Started on Thursday

Equity markets opened at their respective highs for the day on Thursday. The selling started in earnest about half an hour after the opening bell had peeled from the marble podium at 11 Wall Street. 

It got uglier around lunchtime and uglier still going into the final hour of play. Sure, Thursday evening's earnings releases had put some pop in the marketplace as both Meta Platforms META and Microsoft MSFT rallied hard.

That "joy" was put to the test early as the Bureau of Economic Analysis posted its July data for Personal Income and Outlays as well as July consumer-level inflation. Just a day after the quarterly data for inflation had put traders and investors at ease, the monthly data did just the opposite. Like a jaguar in the shadows, hard to see, watching from just far enough to raise those hairs on the back of your neck.

The PCE Price index for July printed at monthly growth of 0.3% both at the headline and at the core. Neither was really a surprise, both were an acceleration from June's pace. On an annual basis, headline PCE inflation landed at growth of 2.6%, up from 2.4% in June and above the 2.5% that economists and professional traders probably would have been okay with.

At the core, annual inflation hit the tape at growth of 2.8%, above the 2.7% pace that Wall Street had in mind and even with the upwardly revised 2.8% print for June. 

Was Jerome Powell correct to hold tight on interest rates? Depends what data one uses. Fear of the dark.

Pharma Beat-Down

On Thursday, President Trump put the whammy on "big pharma," sending letters to 17 leading drug manufacturers demanding that these firms take steps to lower prices in the U.S. within sixty days to get on board with his "most favored nation" drug policy. 

Among U.S. pharmaceutical companies receiving letters were Eli Lilly LLY, Pfizer PFE, Merck MRK, Bristol-Myers Squibb BMY, and Johnson & Johnson JNJ. Well-known foreign-based firms receiving these letters were AstraZeneca AZN and Novo Nordisk NVO.

The letter lays out a series of actions that these drug companies must take in order to get "on board." President Trump wrote, "If you refuse to step up, we will deploy every tool in our arsenal to protect American families from continued abusive drug pricing practices. I look forward to your binding commitment to each of these goals by Sept. 29, 2025, and my team stands ready to assist with implementation questions.”

Tariff Story

President Trump signed an executive order on Thursday revising tariffs on many nations around the planet that had failed to reach new trade deals with the U.S. The new rates will run from 10% to 41%. The White House informed trading partners that any goods transshipped in order to evade these new duties will face an additional tariff of 40%. Goods imported from Syria, Laos, Myanmar, Switzerland, and South Africa will face the highest tariffs.

As for the nations most commonly traded with that have not reached deals, goods from Taiwan will be hit with a 20% rate, lower than the 32% that had been threatened, as Canadian goods will face tariffs of 35%, up from 25%. Goods that qualify for preferential treatment under the USMCA agreement will continue to be eligible for duty-free import. President Trump has announced a new ninety-day extension for goods imported from Mexico after having what he called a "very successful" conversation with Mexican President Claudia Sheinbaum. 

Equities are trading lower through both Asia and Europe ahead of the U.S. open as are domestic equity index futures.

Marketplace

One must remember that while it may not look that ugly at the major index level, the selling was nearly constant on Thursday and markets sold off from an upward burst early on. Yes, the S&P 500 gave up 0.37% and the Nasdaq Composite gave back just 0.03%, but it gets worse from there. The small-to mid-cap indexes all lost at least 0.93%, while the KBW Banks surrendered 1.31% and the Philadelphia Semiconductor Index was bludgeoned for 3.1%.

Eight of the 11 S&P sector SPDR ETFs closed in the red on Thursday, obviously led lower by Health Care XLV at -2.8% and followed by the REITs XLRE and Materials XLB. Communication Services XLC easily led the winners on Thursday and that was largely due to the 11% pop for Meta Platforms META, as the Dow Jones US Internet Index gained 3.21%.

So, this is where we realize that we may be up against something. This is where you stop moving, get low, unsnap your Ka-bar and switch your weapon off of "safe." 

Losers beat winners by almost 3 to 2 at the NYSE and by almost 2 to 1 at the Nasdaq. Advancing volume took just a 32.9% share of composite NYSE-listed trade and a 36.1% share of Nasdaq-listed trade. More importantly, aggregate trading volume increased across the listings at both the NYSE and Nasdaq as well as across the membership of the S&P 500. 

Gang, you know what that means, right?

Yes...

Thursday qualifies as a potential "Day One" bearish reversal. Take a look below:

No, the upward trend has not yet broken. ​That said, note the sizable increase in trading volume on the larger selloff. Never mind that this is actually the third day of this current spate of weakness. This is the one that counted due to the trading volume and the size of the candle which included an intraday reversal. 

Now, remember, a large selloff on Friday will be seen as a continuation of Day One. We actually need to see a break or pause in between any Day One and any Day of Confirmation.

Can anything help? Can anything make it worse? It is July Jobs Day my friends. Anything can always come out of left field, but this is an expected news event. The algorithms that control the point of sale stand ready to overreact, force momentum overshoot and create market inefficiency. You know that as this is what they are designed to do, so keep your helmet on and buckle your chinstrap.

News and Notes

-- Apple AAPL earnings impressed. The stock is trading higher overnight despite a weak tape.

-- Amazon AMZN had a nice quarter. The guidance was less nice. The stock is trading sharply lower overnight.

-- Palantir Technologies PLTR has secured a deal from the U.S. Army that could be worth up to $10 billion over a decade. The agreement consolidates 75 Army contracts into one. Palantir will establish a framework for the Army's future software and data-focused needs. This is the largest contract ever awarded to Palantir and in fact, one of the largest Department of Defense contracts ever awarded, period. Regardless, Palantir is trading lower overnight.

July Employment Situation (08:30 ET)

Non-Farm Payrolls: Expecting 105K, Last 147K.

Unemployment Rate: Expecting 4.2%, Last 4.1%.

Underemployment Rate: Expecting 7.8%, Last 7.7%.

Participation Rate: Expecting 62.3%, Last 62.3%.

Average Hourly Earnings: Expecting 3.6% y/y, Last 3.7% y/y.

Average Weekly Hours: Expecting 34.2, last 34.2 hours.

Other Economics (All Times Eastern)

09:45 - S&P Global Manufacturing PMI (Jul-F): Flashed 49.5.

10:00 - ISM Manufacturing Index (Jul): Expecting 49.6, Last 49.0.

10:00 - Construction Spending (Jun): Expecting 0.0% m/m, Last -0.3% m/m.

10:00 - U of M Consumer Sentiment (March-F): Flashed 61.8.

10:00 - U of M One-Year Inflation Expectations (March-F): Flashed 4.4%.

10:00 - U of M Five-Year Inflation Expectations (March-F): Flashed 3.6%.

13:00 - Baker Hughes Total Rig Count (Weekly): Last 542.

13:00 - Baker Hughes Oil Rig Count (Weekly): Last 415.

The Fed (All Times Eastern)

No public appearances scheduled.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: CVX (1.73), CL (.89), XOM (1.55), MRNA (-3.01)

At the time of publication, Guilfoyle was long MSFT, PLTR equity.