We Rallied a Second Day. But Can We Trust It?
Did the markets prove something on Monday, or is this just part of a counter-trend bounce? Also retail sales sour and semiconductors surprise, especially ... Intel.
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Is it live? Or is it Memorex? Is this two-day rally the real thing? Do we at least have an actual Day One bullish change of trend under our belts? The answer remains ... not yet. Sort of. It's complicated.
Twenty-four hours ago, we wrote that Friday's rally could extend for a few days while remaining nothing more than a counter-trend relief rally. That said, these markets came awfully close to actually proving something on Monday and in a way, may have.
Market breadth was convincing for a second-straight regular session. While the S&P 500 gained 0.64% and the Nasdaq Composite tacked on just 0.31%, the market's unloved stepchildren carried the football. The Russell 2000 gained 1.19% on Monday as the S&P Small Cap 600 ran 1.46% higher followed by the S&P Mid Cap 400 that was up 1.1%.
There was, however, a divergence in the force, young Luke Skywalker. While the Philadelphia Semiconductor Index gained 1.42% led by Intel INTC at +6.82%, the Dow Jones U.S. Semiconductor Index (which supposedly measures the same activity) gave up 0.51%. I kid you not. Nvidia NVDA, which is holding its big GTC conference this week in San Jose, California, surrendered 1.76% on Monday, leading the semis to the downside.
You know who else did not enjoy a winning session on Monday? Most of the rest of the "Magnificent Seven" were spectators at best as small to mid-cap stocks found buyers. Tesla TSLA led mega cap losers on Monday, down 4.79% for the day, as Amazon AMZN, Alphabet GOOGL, and Meta Platforms META all joined Nvidia in the red.
The Breakdown
For a second straight trading day, all 11 S&P sector SPDR exchange-traded funds closed in the green, led by the REITs XLRE and Energy XLE as the U.S. dollar weakened and WTI Crude Oil found a bid. Winners trounced losers at the NYSE by a 13-to-3 margin, following Friday's 16-to-3 imbalance. Winners also beat losers by roughly 5 to 2 at the Nasdaq.
Advancing volume took a decisive 86.5% share of composite NYSE-listed trade on Monday and a 64.4% share of composite Nasdaq-listed activity. Do we have a "day one?" If we only look at New York Stock Exchange listed activity or the S&P 500, we do, as aggregate trade increased about 3.5% on a day over day basis across both and S&P 500 volume closed above the 50-day trading volume simple moving average for that index.
Aggregate trade ebbed across Nasdaq-listed securities, however, for a second straight day. On Monday, composite Nasdaq-listed activity contracted by a surprising 11.1% on a day-over-day basis. Does this all mean that we are sitting on a bifurcated marketplace? For now, it does mean that there has been a rapid rotation out of tech, out of growth, and into smaller caps and "old economy" type stocks.
Does This Settle Anything?
Not at all. Nvidia's Jensen Huang will deliver his keynote address from San Jose later today. Not that I'm some kind of goofy fan of the man or anything, but one has to respect what the markets will do if high-speed, keyword-reading algorithms pick up on anything he says (positive or negative). Investors have to keep in mind that important market-moving speeches like this are not read or watched in real-time by decision makers who react within minutes.
These speeches are reacted to in microseconds by algorithmic traders as the words are still being delivered and those algorithms are designed to use speed and momentum to create market overshoot, actually exacerbating inefficiencies. That's why markets seem to have a mind of their own in 2025 and why volatility seems less "under control" than it did when human market makers still existed.
Oh, you may know someone who claims to be a market-maker or a "specialist," but make no mistake, that individual is doing little more than monitoring what his or her algorithms are doing and is not even going to intervene unless something goes haywire. Don't forget, Nvidia will also hold that session with sell-side analysts tomorrow, which is the day that the Federal Reserve makes its next decision on monetary policy. So, no.... nothing is settled.
The Economy Continues to Slow
On Monday, the Census Bureau released its data for February retail sales. The numbers were disappointing. Not only did the headline results show month-over-month growth of 0.2% from January, with Wall Street looking for something like 0.7% or 0.6%, but January itself was revised lower. Apparently, January retail sales actually printed at -1.2% from December, which was well below the originally released -0.9%.
Not including autos, January was revised to -0.6% from -0.4% and February printed at growth of 0.3% when Wall Street had been looking for 0.4%. Sales contracted on a month-over-month basis for electronics and appliances, at department stores, for gasoline and somewhat surprisingly at restaurants and bars. Where were sales strong? Health & beauty and e-commerce. That's about it.
What I find telling is that what I call the "fun index" was lower. Within the report, there is one category defined as "sporting goods, hobbies, music & books," which I see as discretionary spending. This is the kind of spending on the things people like, but don't need and this category landed at -0.4% in February from January and at -3% from last February. This tells us that Joe and Jane Average are struggling.
Additionally...
The Empire State Manufacturing Index for March printed at a surprising -20, with economists looking for something close to -2 and down from February's +5.7. These regional surveys can be lumpy, but make no mistake... This is a kick in the pants for the northeast. The arguably more important Philadelphia Fed Manufacturing Index for March will hit the tape on Thursday morning. Then, we'll know more.
The March edition of the NAHB Housing Market Index printed at 39, down from 42 for February. This is really a survey index that measures homebuilder optimism, not the broader housing market as its name implies. The issue here is 39 equals the least optimistic that homebuilders have been since December 2023.
In response to Monday's data, the Atlanta Fed revised their GDPNow running model for Q1 down to -2.1% from -1.6% (q/q, SAAR). The model will be revised again later this morning as February Housing Starts and February Industrial Production cross the tape. Keep in mind that neither the New York Fed's model nor the St. Louis Fed's model are nearly as dire as is the Atlanta model and St. Louis, at least in my opinion, has been quite accurate over time.
Currently...
Fed Funds Futures markets trading in Chicago are pricing in a 99% probability for no change made to the overnight Fed Funds Rate tomorrow afternoon and an 82% likelihood for no change at the next Federal Open Market Committee policy meeting culminating on May 7. A quarter-percentage point rate cut is now being priced in for June 18 (69% probability) with a 78% likelihood for a second quarter point rate cut by the end of 2025.
New Sheriff in Town
President Trump has nominated current Fed Gov. Michelle Bowman to the position of Vice Chair of Banking Supervision at the Fed. Bowman has served on the Fed's Board of Governors since being nominated to that group by this president in 2018. What does this mean for us investors? In my opinion, this makes it easier to invest in the banks as Bowman comes from a community banking background.
While Bowman has typically been a policy hawk in terms of interest rates, which would not necessarily be what the president would prefer, that can be good for bankers. Bowman is also seen as someone in favor of cutting back on banking regulations, which does put her in line with this president and would be in stark contrast to Michael S. Barr, who stepped down from this position earlier this year, but still serves on the Fed's Board of Governors.
I remain long Wells Fargo WFC and have added to that position on weakness in anticipation of the Fed lifting that bank's punitive asset cap that had been put in place in response to the scandals that rocked the bank several years ago. This move, in my opinion, should Bowman be confirmed to the position, does not hurt the bank's chances.
Economics (All Times Eastern)
08:30 - Housing Starts (Feb): Expecting 1.375M, Last 1.366M SAAR.
08:30 - Building Permits (Feb): Expecting 1.45M, Last 1.473M SAAR.
08:30 - Import Prices (Feb): Expecting -0.1% m/m, Last 0.3% m/m.
08:30 - Export Prices (Feb): Expecting 2.0% m/m, Last 1.3% m/m.
08:55 - Redbook (Weekly): Last 5.7% y/y.
09:15 - Industrial Production (Feb): Expecting 0.2% m/m, Last 0.5% m/m.
09:15 - Capacity Utilization (Feb): Expecting 77.8%, Last 77.8%.
4:30 p.m. - API Oil Inventories (Weekly): Last +4.247M.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: ZTO (3.28)
At the time of publication, Guilfoyle was long INTC, NVDA, AMZN, WFC equity.
