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T3’s Take 3: Bad Banks, Bad Data, Mega Markets

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1) Bad Banks and Bad Data

This morning, banking giants JP Morgan (JPM), Wells Fargo  (WFC), and Citigroup (C) kicked off second-quarter earnings season by reporting better-than-expected numbers.

However, all 3 were hit with sell-the-news reactions, and were also hurt by a continued drop in US Treasury yields. (higher yields mean fatter profit margins for banks)

As you can see in this chart, banks stocks have had a pretty decent bounce in recent months, so expectations were on the high side:

This morning two key economic data reports missed the mark, which kept the pressure on rates, and in turn, the banks.

The Consumer Price Index was flat in June, missing the -0.1% consensus.

As of late, the Fed’s been been split on the outlook for inflation, but it seems likely that officials will lean more to the dovish side unless we see a big change in the trend of the data.

Retail sales were also weak, though that’s no shocker considering the endless wave of bad news hitting the sector.

Banks were the worst performing sector today, and regionals were especially weak, though they made up some lost ground by the close.

2) Mega Markets

Even with banks taking hits early on, the bulls stepped up to buy.

The SPX and Dow Jones Industrial Average both made new all-time highs today, and the Nasdaq Composite and Russell 2000 weren’t far behind.

In fact, today was the 6th straight session where the SPX bounced to finish above morning lows.

That’s a sign the dip buyers have been quite active.

In addition, according to my contacts, we may be seeing short covering of technology stocks and related instruments like NDX futures.

Unsurprisingly, the VIX dipped today, hitting an afternoon low of 9.64, a level not seen since June 9.

The aforementioned drop in yields (and the US dollar) sent gold up big, and the Vaneck Vectors Gold Miners ETF (GDX) topped my ETF leaderboard.

Other rate sensitive groups like real estate utilities also performed well, and retail stocks were also in good shape for the second day in a row.

3) Fear Into Earnings Season?

We’re about to move into the heart of earnings season, so now’s a good time to take a look at traders’ collective psychology.

The latest AAII Sentiment Survey shows that just 28.2% of individual investors are bullish, down slightly from 29.6% last week.

This 29.6% reading is well below the 38.5% long-term average, and indicates that individual investors still don’t trust the market.

This has been the trend all year, even though the SPX was been consistently hitting new record highs with basically no volatility.

In fact, despite the market’s stunning resilience since the election, the average bullish reading this year is just 33.3%.

Since so many traders make comparisons to 2007, let’s take a look at the averages back then.

From the start of 2007 to July 12, 2007, the average was 41.6%.

That’s a huge difference.

In fact, the evidence shows that traders are actually pretty neutral. They don’t love the market, and they don’t hate it either.

Now if Netflix (NFLX) comes out with a huge earnings report on Monday and spike the Nasdaq, traders will go all-in bullish.

But let’s take it one step at a time.

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