LIVE MARKETS Short selling consumer discretionary stocks running hot
- U.S. stock indexes sharply higher; SOX index up ~4.5%
- Tech leads S&P sector gainers; energy sole loser
- Dollar slips; gold off, crude off ~4%; bitcoin rallies
- U.S. 10-Year Treasury yield jumps to ~2.04%
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SHORT SELLING CONSUMER DISCRETIONARY STOCKS RUNNING HOT (1338 EST/1838 GMT)
With inflation hitting levels not seen for four decades, short sellers are focusing on consumer discretionary names. Short sellers have increased their bets against the sector to the highest level in over a year, according to a report from S&P Global Market Intelligence.
As S&P Global sees the data, there is a building market consensus that consumers are going to rein in spending on non-essential products as inflation has surged 7.5% over the past year.
Among other highlights in the report, S&P says that short selling has been on the decline since early 2020 as equity markets hit record highs throughout the pandemic. Short interest in the S&P 500 was at 2.11% at the end of January, compared to 2.94% two years earlier.
While short selling in consumer discretionary continued to lead all sectors, the report says that short interest in energy grew to 3.38%, the highest level since January 2021. Short interest in healthcare was 4.04%, the highest since mid-October 2021.
S&P says that three of the 10 most-shorted stocks at the end of January were consumer discretionary names — EVgo Inc. (EVGO.O), Big 5 Sporting Goods Corp. (BGFV.O) and Citi Trends Inc. (CTRN.O)
Additionally, another three of the 10 most-shorted stocks at the end of January were healthcare stocks — SmileDirectClub Inc. , Heron Therapeutics Inc. (HRTX.O), and Cassava Sciences Inc. (SAVA.O).
Meanwhile, Blink Charging Co. (BLNK.O) was the most shorted stock on major U.S. exchanges as of the end of January, according to the report.
BULLS AND BEARS: EXPECT A LOT OF TEETH GNASHING THIS YEAR (1249 EST/1749 GMT)
With the end of loose money and rock-bottom interest rates behind us, investors will be the losers after what has been a great bull run. This, according to Bob Doll, chief investment officer at Crossmark Global Investments.
In his latest "Deliberations" this week, Doll says that the macro outlook is for economic growth to stay strong over the next twelve months or more. With this, inflation will be "higher and stickier" than at any point in several decades and "well above current levels" that are being discounted by government bond markets.
As Doll sees it, equity market valuations are still too stretched to endure rising bond yields for very long and are prone to correct as yields continue to bubble up.
Doll does say that although credit spreads have widened a bit they are not yet worrisome for the broad equity market. However, he believes the "tug-of-war between earnings tailwinds and valuation headwinds will likely dominate the investment landscape until the next recession approaches."
Doll's key assumptions are that the economy will grow above trend in 2022, and earnings will be good. With this, inflation will fall throughout the year, but remain at higher than comfortable levels.
To him, all this means stocks will be volatile in both directions without much change, "frustrating both the bulls and the bears."
CHIP STOCKS SURGE AFTER INTEL UNVEILS $5.4 BLN TOWER DEAL (1205 EST/1705 GMT)
Chip stocks are surging on Wall Street on Tuesday after Intel announced it is buying Israeli foundry Tower Semiconductor (TSEM.TA) for $5.4 billion, a premium of 60% over its previous stock price.
Intel rose 1% following the announcement of its deal to acquire the semiconductor foundry, the latest step in the Silicon Valley company's aspiration to become a major provider of manufacturing services to other chip makers. read more
"The deal is expensive, but who cares," writes Wedbush analyst Matt Bryson in a research note. "We believe there were few other alternatives by which Intel could flesh out its perspective foundry business and if Intel is successful in ramping into foundry, no one will care that Intel (overpaid) for TSEM."
The Philadelphia Semiconductor Index (.SOX) is surging more than 4%, rebounding from some of the deep losses it has suffered in recent weeks as investors worried about rising interest rates, and dumped high growth stocks.
Investors have also been debating the risk of chipmakers building too much new manufacturing capacity in reaction to the global supply shortage, thereby setting off an industry downturn.
Nvidia (NVDA.O) is advancing 8% ahead of its quarterly report late on Wednesday. Qualcomm (QCOM.O) and Broadcom (AVGO.O) are both jumping about 4%, and Marvell Technology (MRVL.O) is powering nearly 7% higher.
With the smell of M&A in the air, smaller chipmakers are also rallying, with chip manufacturing equipment maker Amkor Technology (AMKR.O) jumping 9.5%, programmable chipmaker Lattice Semiconductor up 7.1% and analog component maker Monolithic Power (MPWR.O) gaining 8.6%.
The SOX remains down about 11% in 2022, and it is up 9% over the past 12 months.
NO MATTER UKRAINE, INVESTORS TURN LESS BULLISH ON EU STOCKS (1110 EST/1610 GMT)
Even before Monday's selloff amid concerns of an imminent Ukraine/Russia conflict, investors turned less optimistic about the outlook for European equities vs. last month.
The BofA fund manager survey for February out today showed that those expecting European stocks to rise by at least 5% over the coming twelve months fell sharply to 57% from last month's 81%.
And that's mostly due to hawkish central banks and incoming monetary tightening which is seen as the biggest risk factor for markets by 41% of respondents. Only 7% consider a possible Ukraine/Russia conflict the most important.
In more detail, BofA said those expecting downside for EU stocks rose six-fold to 18% while those saying the region's stock market has already peaked rose to 22% from 8% last month.
Those expecting the bull run to continue until at least Q4 however remained the majority at 29%, but that's down sharply compared to last month.
BUY SMALL CAP GROWTH, BUT... (1100 EST/1600 GMT)
While the small-cap Russell 2000 index (.RUT) is underperforming the large-cap Russell 1000 index (.RUI), BofA equity and quant strategist Jill Carey Hall still suggests buying shares of smaller companies, but with caveats.
Small caps are cheap with a 29% P/E discount to large caps and in small, growth stocks (.RLG) trade at a historical P/E discount to value (.RLV). But Carey Hall expects growth to see better growth in the next 12 months.
The relative forward P/E of RUT vs. RUI fell to 0.72x last month, - its lowest level since the 1998-2001 period and 29% below average. So small remains cheap vs. large on every metric, even non-earners and outliers are included.
Small-cap energy and financials rank highest "with inexpensive relative valuations and strong ranks on revisions and technicals" with both trading at historical discounts to large cap peers.
Last month the RLG fell 13% while RLV fell 6%. Currently growth is down 10.6% YTD vs value's 2.2% dip.
With the relative forward P/E of small growth vs. value at 1.28x, below the long-term average of 1.33x, Carey Hall says "the last time the relative multiple fell from highs to similar levels (in mid-2002), Growth performed in-line with Value over the next 1-3 months, but outperformed over the next 6-12 months."
Also small growth will see better earnings, sales growth vs. value over the next 12 months and has had better estimate revisions in the last three months, according to Carey Hall.
But she cautions that the RLG has a higher proportion of non-earners and a higher exposure to healthcare, which she ranks poorly, while growth stocks are likely to be hurt by rising rates and tend to underperform in late cycle.
However, after favoring value over growth in 2021, the strategist suggests "a more barbelled stance in '22."
She suggests sticking with quality value and stocks with attractive free cash flow, because of late cycle/Fed hiking but "add growth exposure via cyclical growth" and stocks with "high/expanding margins amid continued inflation."
STRANGE WEATHER: HOT PPI, COOL EMPIRE STATE (1006 EST/1506 GMT)
Data released on Tuesday did little to assuage investor fears that the Federal Reserve will try to douse inflation flames in the coming months with an ice cold bucket of rate hikes.
Producer prices (PPI) (USPPFD=ECI) surged by 1% in January, twice the rate analysts expected, according to the Labor Department. read more
The hot PPI reading, which tracks prices that U.S. companies get for their goods/services at the proverbial factory door, suggests U.S. companies will continue passing rising prices along to the consumer, throwing gasoline on the CPI fire - the consumer price index hit its highest annual rate in four decades last month.
Line-by-line, the report shows the biggest increases coming from construction services (jumping 3.6%) and processed goods (rising 1.7%), with unprocessed goods actually posting a 2% monthly drop, a silver lining which suggests manufacturing input prices could start coming back to earth.
Core PPI, which excludes volatile food, energy and trade services, decelerated ever so slightly, rising 6.9% after December's upwardly-revised 7% surge.
The combination of stubborn supply disruptions and elevated energy prices will prevent producer prices from reverting to more normal patterns until later this year," writes Mahir Rasheed, U.S. economist at Oxford Economics, adding that the report's "reinforce the case for the FOMC to commence rate liftoff at next month's policy meeting with a rate hike of at least 25 (basis points)."
The numbers do seem to suggest that at the conclusion of next month's monetary policy meeting, Powell & Co will attack the inflation monster with big guns, with the market now expecting better-than-even odds of a 50-basis-point rate hike.
The graphic below shows PPI along with other major indicators, all of which continue to soar well above the Fed's average annual 2% inflation target:
Separately, factory activity in New York State increased a wee bit this month after dipping its toes in contraction territory in January.
The New York Federal Reserve's Empire State manufacturing index (USEMPM=ECI) came in at an underwhelming 3.10, well below the 12.15 consensus.
Still, the number was an improvement of last month's -0.7 reading, which marked the index's first dip into contraction since June 2020.
An Empire State number above zero signifies expanded activity versus the previous month.
But do two months make a trend?
"It's not clear whether the weakness in January and February marks the start of a sustained slowing in the sector or is just a consequence of the Omicron wave, which resulted in tens of millions of lost working days across the country, and perhaps the severe weather in January," says Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Wall Street is solidly green in morning trading as signs of a possible easing Russia-Ukraine tensions read more enticed buyers back into the fold.
The rally is broad-based, with growth (.IGX) preferred over value (.IVX) and chips (.SOX) having a better day than most.
S&P 500 FUTURES WEIGH RUSSIA RELIEF VS PPI POP (0900 EST/1400 GMT)
U.S. equity index futures are sharply higher on Tuesday on signs of a de-escalation in tensions between Russia and Ukraine read more , and after key inflation data came in above estimates. read more
Based on futures' action, the S&P 500 index (.SPX) looks poised to jump more than 50 points in early trade, which would put it back around its 200-day moving average (DMA), which now resides around 4,455 read more :
In any event, with Tuesday's strong move in the futures, tech (XLK.P) is a premarket winner, while energy is on the losing side.
Financials (XLF.P) are also rallying. This, with the U.S. 10-Year Treasury yield jumping back over 2%.
Here is your premarket snapshot:
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