The Bears Feel the Pain - Pulse of the Markets Report 7/19/23

July 19, 2023: The current bear market might be feeling a squeeze soon. The stock market seems short-term overbought, mega-cap stocks are excessively crowded trades, and a market pullback appears necessary.

Various expressions of this viewpoint advise investors to "trim positions" in stocks that have seen significant gains and to avoid chasing soaring stocks.

Despite the sound and practical advice, the stock market and mega-cap stocks continue their upward march. The Dow Jones Industrial Average has registered seven consecutive winning days; Microsoft (MSFT) reached a new record high yesterday; the S&P 500 achieved a new 52-week high yesterday; the Dow Jones Transportation Average hit a new 52-week high yesterday; and the Vanguard Mega-Cap Growth ETF (MGK) has climbed 3.6% this month and an impressive 41.7% for the year.

The anticipated pullback remains elusive as any down days are quickly met with buying interest, resulting in mostly positive weeks.

This resilience to selling pressure is precisely why the stock market continues its ascent. Notably, this has led to short sellers covering their positions and sidelined investors feeling the pressure to put their cash into action in what is known as a "flat squeeze," causing what everyone considers a "pain trade."

The pain is felt when the stock market defies expectations. In this case, the pain trade is observing a market that refuses to succumb to selling pressure, leaving sidelined participants unable to bear watching stocks soar without their participation.

This pain is now palpable as observed in the market activity, often signifying the tipping point at which the feverish pace may slow down. Interestingly, this palpability coincides with the upcoming earnings reports from Tesla (TSLA) and Netflix (NFLX), which have experienced impressive gains of 12% and 7.8% this month, and a staggering 138% and 61% respectively, this year.

However, both stocks are predicted to open higher in pre-market trading, while the major indices themselves are not showing any signs of significant selling interest at the beginning of the session.

Goldman Sachs (GS) appears to be a drag on the Dow futures, with indications of a 1.5% decline after falling short of the consensus Q2 EPS estimate. Although the financial sector performed well yesterday following better-than-expected results from Bank of America (BAC), Morgan Stanley (MS), and Charles Schwab (SCHW), it remains to be seen whether Goldman's weakness is a company-specific concern or an industry-wide issue.

Meanwhile, several regional banks, including U.S. Bancorp (USB), Western Alliance (WAL), and M&T Bank (MTB), reported results that have received mixed reactions.

In other news, the FTC and DOJ have issued a draft update outlining new guidelines for their approach to merger reviews. JPMorgan upgraded Cisco (CSCO) to Overweight from Neutral, and Carvana (CVNA) is experiencing a surge following an agreement with noteholders that will significantly reduce its outstanding debt by over $1.2 billion.

On the economic front, the UK reported weaker-than-expected June CPI data, which is considered good news, and housing starts and building permits for the U.S. in June were also lower than expected, suggesting a positive outlook for interest rates.

The 2-year note yield is down three basis points to 4.73%, and the 10-year note yield is down five basis points to 3.74%.

Total housing starts decreased 8.0% month-over-month to a seasonally adjusted annual rate of 1.434 million, with single-family starts down in all regions except the West (+4.6%), following a downwardly revised 1.559 million for May. Building permits decreased 3.7% month-over-month to a seasonally adjusted annual rate of 1.440 million, with permits for single-family units showing little change in all regions, following an upwardly revised 1.496 million for May. The key takeaway is that higher financing costs are creating challenges for builders and preventing stronger activity in a supply-constrained housing market.

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