Morning Market Feed May 16th

As everybody seems to be focused on how high GME will go, I’m more focused on how high markets will go. As we know, markets have been pushing their boundaries, showing signs of slowing down, and with a recent slight pullback which was brought back up by good earnings, now even pushing new All-Time-Highs. As much as I try to give both bullish, as well as bearish perspectives, it’s no secret I currently lean more towards the latter one. So besides my highlights of the market which include Tuesday’s PPI report, yesterday’s CPI report, and monday earnings, I will explain the issues I am seeing in the market, so let’s dive straight into it!

S&P500 +1.24% | Dow Jones +0.94% | Nasdaq +1.56% | Russell2000 +1.25% | 10-year 4.34%
(Indexes at close of May 15th)

- Starting with the Producer Price Index

Some people use the PPI index as a leading indicator of where CPI will go. Quite a lousy one if you ask me, because PPI has been negative in both October and December of last year which was the leading indicator of CPI jumping back up in January.
So what was Tuesday’s release? Bad. Well not that bad due to the downward revisions of last month, making the final demand number -0.1% for March. But the PPI index showed a month-over-month increase of 0.5% in April, if we exclude February, we have to go back to August of last year for a reading that’s higher.

- So what about CPI then?

Well, I started by saying that PPI has been a terrible leading indicator for CPI recently and as PPI is near the highest reading in about 6 months, CPI has its first easing in 6 months which is a huge positive of course. So what was good and what wasn’t?
The positive was that inflation on car parts slowed down which will work positively on insurance as well, these are items that have been a pain in the butt in recent rapports as this item has seen inflation of 22.6% from April ‘23, to April ’24.

Year-Over-Year Changes in CPI

CPI Changes Per Categorie

- And those monday earnings?

Monday is my second largest holding as I think their business model allows for rapid expansion. It’s a smaller company however at an 8 billion market cap and has been volatile, in my opinion, due to two factors. The first being, that it’s an Israeli company. I will not get political but some funds have to, as at the key points when the conflict got more intense, the stock slid a little. So far monday has not really been affected by the conflict in their fundamentals. The second reason I believe we are seeing some volatility is the fleeing optimism for rate cuts. Small caps are impacted the most by interest rates as they are often seen to be needing the funding the most. Monday has a capital-light business model, is profitable, and has no debt. No need to panic about the interest rates. So what about the earnings?
You can read more about the earings in this article

- Why I’m more fearful of the meme rally than optimistic

On Monday I wrote a quick article on the previous GameStop rally. What I want to add to that is that it happened at the end of January, the beginning of February, this happens to coincide with the end of momentum for the stocks that were adding to the Covid-Bubble the most. In August of ’21, when AMC also failed to make everybody rich enough to buy at least 3 Lambo’s, it marked the peak in the Russell2000, and not long after, inflation turned out to be not so transitory.

So what do I think is important in this story? Is it the inflation I have already spoken about? Or is it the failure of these stocks?

It’s mostly that these rallies can be linked to a “last hurrah” after a very strong bull-cycle in my opinion. Do I believe this marks the end of a bubble? No, because I don’t think we are in such an environment, but we are in an environment in which most stocks are somewhat expensive, with AI-linked stocks simply being rather expensive. So seeing these stocks popping up gives the idea that it’s another piece to the puzzle that we may need some slowdown in the markets, and there may be some room for re-adjustments.

So as that is what are some bearish arguments, we should also look towards the other side, so what can we say is bullish? I can say two things very easily which make it quite difficult to be bearish. First of all, we have just seen a 5% pullback on the S&P500, and a 7% pullback in the Nasdaq. These pullbacks have reversed and yesterday we made fresh All-Time-Highs. A pullback has already happened. The second is that it is an election year. It is not a secret that election years are very rarely negative years in the market, with the only two in recent history being 2000 and 2008. This means that betting for a down year in the market means betting against obvious statistic.

S&P500 returns in election years by thebalancemoney.com

That was it for today, I will send another newsletter tomorrow going into the jobs data coming out today, as well as Wallmart earnings and other news items we will see coming out today.

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