Note to Wells Fargo Advisors: A CAR approved version of last Thursday's 2Q23 Newsletter has been added to the Media & Education section of the Resources tab. The CAR # is CAR-0723-00391. 

On July 24th the Nasdaq 100 will undergo a special rebalancing for the third time in its history and the first time since 2011. The reason for the special rebalancing is due to the aggregate weight of companies, each having more than 4.5% weight in the index, exceeds 48%. While the rebalancing takes place, the cap is set to 40%. The adjustment will be based on shares outstanding as of July 3rd. Five stocks have at least a 4.5% weight including names like Microsoft (12.91%), Nvidia (7.04%), Amazon (6.89%), and Tesla (4.50%). The effects of the change will be more felt after the rebalance takes place. As most are aware, much of the performance attribution for both the Nasdaq 100 and S&P 500 indices have been at the hands of the stocks previously mentioned. Now that they will have a lower weighting in the Nasdaq 100, the influence these names have on the index will be less. Since Alphabet has two share classes, despite the total weighting of the two share classes exceeding the 4.5% threshold, it will not be affected by the rebalance.

From a technical standpoint, the Nasdaq 100 has had an exceptionally strong year thus far, well noted in our research so far this year. The Invesco QQQ Trust (QQQ) has gained 38.26% year-to-date and possesses a strong fund score of 4.90. QQQ does sit in heavily overbought territory with a weekly overbought/oversold reading of 70% and is trading on a stem. Its current chart level of $370 is at a notable area of resistance dating back to February and April of 2022. From $370, its next level of true support is offered at $290, however, the $330 level may also act as support if revisited since it was a major resistance level previously. Nonetheless, the strength in Nasdaq 100 and other large-cap growth names has been exceptional so far this year and has yet to show any major signs of slowing down aside from some potential short-term headwinds. 

In today's Midweek Macro from the Nasdaq Economic Research Team, US Economist Michael Normyle discusses June CPI data and the initial reaction from markets.

Headline and Core CPI fall more than markets expected

This morning, June’s CPI data came in lower than markets expected, especially core.

Headline dropped to 3.0% YoY (chart below, orange line) – that’s a lot lower than it was one year ago, when it peaked at 9.1% YoY.

The bigger surprise was that core CPI fell to 4.8% YoY from 5.3% (blue line) – consensus forecasts were for it to only slow to 5.1%.

Headline inflation being pulled down by energy

A big reason why we saw headline CPI drop to 3% YoY from 4% in one month is that energy remains a negative contributor (chart below, black bars). 

The other volatile CPI component – food (green bars) – is also starting to become a smaller driver, too. June marked its smallest contribution in 20 months, thanks to a combination of slowing wage growth and steady agricultural commodity prices.

Importantly, we’re also starting to see progress on the core components (grey, blue, and purple bars) that we talked about in our June 15 note.

Core inflation pulled down by cars, but starting to see services and housing slow too

Looking at the breakdown of core CPI drivers (chart below), the most important development for the Fed and markets is that the “sticky” core components – housing and wage-driven core services – are now slowing.

The contribution from housing has slowed for three straight months (purple bars). That should continue because recent research shows housing CPI lags market-based measures by one year, and market-based measures of rent slowed to 0% YoY growth in June while home prices saw their first year-over-year decline in 11 years. So there’s more housing disinflation in the pipeline.

The rest of core services (blue bars), which is largely wage-driven, has now slowed for two straight months and saw its smallest contribution in 7 months, as the still-tight labor market continues to ease at the margin.

We also see some negative contributors already:

• Used Cars prices (mid-gray bars) are falling thanks to new car inventories improving. Other data show used car auction prices more recently fell 10% YoY.
• Airfares (light blue bars) are down because jet fuel prices have fallen
• Health Insurance (red bars) – this is a quirky calculation, but it’s likely to be deflationary for several more months

Despite CPI data, a 25bps rate hike still likely this month, but odds of second hike are falling

This is the kind of inflation report the Fed has been waiting for. 

They want core inflation to slow because it tends to show better what is happening to long-term price inflation, so they care about it more than headline. And in particular, they’ve wanted to see progress on the “sticky” wage-driven components.

But the Fed will want to see these trends continue before they end their rate hike cycle. That’s why markets are still pricing 90+% odds of a 25bps rate hike in two weeks. However, odds the Fed can push through a second rate hike by November have dropped to 25% from 35%.

Increased odds that the Fed’s rate hike cycle ends this month is boosting markets
Lower odds of a second rate hike is good news for markets.

The major equity indices jumped on the CPI data (left chart below), gaining around 0.5-1% today, while 10-year Treasury rates fell over 10 basis points to 3.85% this morning (right chart).

That reversed a chunk of the recent run up in rates. Late last month, 10-year rates were as low as 3.7%, and they rose above 4% in the last week, as markets priced in “higher-for-longer” rates. 

But after this CPI report, markets are thinking rates might not need to go as high for as long. That means less drag on the economy, which improves soft landing odds, and that’s good news for earnings and markets.

The broad crypto space took a bit of a breather ahead of this month’s CPI report, seeing all 11 coins in the Nasdaq Crypto Index (NCI) land in the red as of yesterday’s action. While no one piece of data (especially in a volatile and highly speculative area like crypto) gives a full picture as to what an investor should expect, the crypto market mirrors the equity space in the fact that a slowdown in inflation is undoubtedly a positive for the industry. Bitcoin ($BTC) has gained an average of nearly 5% in the following month when headline MoM inflation came in at or below expectations over the last year, versus 3.05% when the reading came in hot. While the difference isn’t quite drastic enough to write home about and many other factors warrant consideration when judging the correlation between collected data, it is a net positive to see inflation falling across the board.

Besides that, it was a relatively muted week in comparison to the last few months for the space. Larger coins, headed by Bitcoin and Ethereum, fell the least. This continues a strong theme that has been discussed in detail over the last few months in which these household crypto names have fared better than their smaller counterparts. The broad pullback for the space does bring many coins back towards the middle of their trading band, which could offer another opportunity to enter into positions if desired.  Another “secondary” indicator that is painting a compelling picture for many is the recent flip to positive weekly momentum for the space. As seen in the chart below, no coin within the NCI displays higher than four weeks of weekly positive momentum, with many having recently just flipped. Ethereum ($ETH) fits the bill as a large coin, on consecutive buy signals in actionable territory and just flipped back to positive weekly momentum that could be considered today. 

Each week the analysts at DWA review and comment on all major asset classes in the global markets. Shown below is the summary or snapshot of the primary technical indicators we follow for multiple areas. Should there be changes mid-week we will certainly bring these to your attention via the report.

With coverage of Fixed Income’s fall to the 6th position in the DALI Asset Class rankings in the past couple of reports, today’s piece will seek to cover underlying changes that will be worth monitoring. First among them is Domestic Equity’s continued increase in tally signal count, having added 11 additional signals during July and bringing the total to 62 since the beginning of the second quarter. Along with Industrial’s sustained leadership, Technology, Consumer Cyclical, and Communication Services have garnered much attention in terms of improvement so far this year as the top four sectors in terms of signal gain. Since the beginning of the third quarter, only one sector has garnered a notable amount of signals.

Over the last week, the Energy sector has risen from 10th to 8th in our DALI sector rankings, picking up 15 buy signals in that span. Amidst its rise, one may be interested in hopping aboard energy while it picks up steam. However, most of Energy’s recent movement has come from the Equipment and Services subsector, as opposed to the sector as a whole.

Out of the 15 buy signals energy has picked up, iShares U.S. Oil Equipment & Services ETF (IEZ) has accounted for a whopping 14 of those. This brought the fund from the bottom quintile to the upper half of the DALI sector matrix; meanwhile, the remainder of the proxies average a rank roughly in the bottom third. While most of IEZ’s new buy signals have come from weaker sectors such as Real Estate, Utilities, and Healthcare, it has also picked up a buy signal versus what has been one of the stronger subsectors in the broader market throughout 2023: Home Construction. This is significant, as it shows relative strength against more than current market laggards.

The chart below shows the RS relationship between Oil Equipment and Services versus the iShares U.S. Home Construction ETF ITB.  With July’s action, IEZ has simply outpaced ITB, up 11.38% compared to down 63 basis points. Much of IEZ’s performance came after news last week that the U.S. posted higher net crude imports and gas inventories remained unchanged. The difference in performance toward the end of last week brought the RS chart into Xs and higher to complete an RS buy signal. Prior to last week’s change, IEZ had been on an RS sell versus ITB since early February and IEZ underperformed ITB during that time – down 1.20% versus up 11.92%.  Bear in mind, this one RS chart is among many that evaluate an overall sector’s strength and much of the gain in strength for Energy has come from one subsector. Additionally, broader Technology and Industrials – along with a number of their subsectors – are still favored over Oil Equipment & Services in the long term. Some of the RS charts have shifted into Xs though with action over the past week and are favoring Oil Equipment & Services in the short-term, so it will be worth continuing to monitor. Further improvement is needed from the subsector for those RS relationships to flip, and upside from elsewhere in the broader Energy sector would help the case for garnering attention in client portfolios.

Given IEZ has both strong recent performance and relative strength versus a leading subsector, many clients may be asking whether now is the time to enter. IEZ does have a strong fund score of 4.46, which was boosted by a recent market RS chart reversal into Xs late last week, and has maintained a buy signal and a positive trend since early June. That said, the ETF has skyrocketed up 16.17% in the past week and now sits in heavily overbought territory with a weekly OBOS reading of over 100%. Additionally, it is nearing resistance at $23 without support until $18.50. Those seeking long-term exposure should wait for price consolidation or a pullback to $21 before entering. From here, a move to $23.50 would mark the highest chart level since early 2019. 

U.S. Sector Updates

The past week saw no significant technical developments in the Basic Materials, Healthcare, Communication Services, Utilities or Real Estate Sectors. Those that saw noteworthy movement are included below, in order of their relative strength ranking in the DALI domestic equity sector rankings. Sector designations are based on DALI sector rankings and are as follows: 1 - 3 overweight, 4 - 7 equal-weight, and 8 - 11 underweight.

Technology – Overweight, Improving

International small-cap equities have had notable technical improvement over the past few weeks, as shown through the SPDR S&P International Small Cap ETF GWX. This fund moved higher at the end of June after finding support at the $29 level from December and continued climbing to the $31.50 level on its default chart this week. This forms a triple top at resistance from April and June and tests the longer-term negative trend line that has been in place since May of last year. The fund carries a less-than-acceptable 2.69 fund score but does show a positive score direction. The technical picture would strengthen with a potential breakout at $32, which would also return the fund to a positive trend. Initial support can be seen at the $29 level from June and last December.

The above representative includes broad international equity representation but carries a significant weight toward developed markets. Japan, South Korea, Canada, Australia, and the UK represent about 72% of the fund’s entire allocation, and there are 25 total countries included in the holdings. Therefore, it may be prudent to examine the relationship between emerging and developed markets by focusing on the small-cap space. This can be accomplished through a relative-strength comparison of the iShares MSCI Emerging Markets Small Cap ETF EEMS and the iShares MSCI Developed Markets Small Cap ETF SCZ. We will look at this relationship on a 2.5% scale as this has produced consistent signal movement over the years; buy signals have generally been followed by consecutive buy signals and sell signals have generally been followed by consecutive sell signals. This chart has maintained an RS buy signal since December 2020 and gave a second consecutive buy signal last April before reaching an RS peak in September. Movement over the next few months saw the chart retract into a column of Os as we entered 2023, signifying near-term weakness from small caps in emerging markets when compared to their developed market counterparts. However, the past two weeks of action have seen that shift, as the chart reversed back up into a column of Xs following the market action on Monday, July 3.

There are multiple representatives in the emerging market space that have shown recent strength, and these generally follow the areas that have exhibited strength through the broader market representatives. The Brazil Small-Cap fund EWZS has gained over 27% so far this year, while the India Small-Cap fund SMIN has risen over 13%. Both areas could provide potential opportunities for investors looking to gain exposure to international equities in the second half of the year. Regardless, the small-cap improvement seen across the broader international equity space adds to the positive weight of the evidence for the asset class moving forward. 

Fixed income dropped to the bottom of the DALI asset class rankings for first time in more than 10-years. The move comes as rising yields have weakened the core fixed income market; the Bloomberg Barclays US Aggregate Bond Index (LBUSTRUU) finished June down slightly, while domestic equities, international equities, and commodities each advanced.

Yields reversed course on Wednesday after June CPI came in lower than expected. The US Treasury 10-year Yield Index (TNX) declined 11bps and reversed down, falling to 3.85% on its default chart. Shorter-term yields saw larger declines as the Two-year US Treasury Yield (US2YR) fell 14 bps.

Fed futures are still pricing in roughly a 92% chance of a 25 bps rate increase at the Fed’s July meeting. However, the odds of a second increase at the September meeting declined following the CPI release.

While yields have risen recently, weakening core bonds, high yield spreads have continued to narrow reflecting a risk-on stance toward credit in the market. CBUS 10 Year Spread (CBUS10YRSPREAD), which measures the spread between high yield bonds and US Treasuries reversed down in June and has narrowed further since the end of Q2, printing an O at 4.63%.

While the recent rise in yields and resulting decline of fixed income to the bottom of the DALI asset class rankings is certainly not a good sign for bond holders, it may be a positive indication for the economy (or at least economic sentiment) and US equities. The rise in yields combined with the drop in high yield spreads are the opposite of what we would expect to see if the bond market were predicting a recession.

The fixed income rankings in the Asset Class Group Scores (ACGS) clearly reflect the weakening of the core fixed income market as many core groups – US Treasuries, investment grade corporates, US Government, etc. – now sit in the red zone with scores below 2.5. Meanwhile, the inverse fixed income group now ranks second among fixed income groups. However, there are still several groups – primarily outside of the core market – that show average scores above the 3.0 threshold including, floating rates, the only fixed income group with a score above 4.0, convertibles, high yield bonds, and emerging market income.

Remember, these are technical comments only. Just as you must be aware of fundamental data for the stocks we recommend based on technical criteria in the report, so too must you be aware of important data regarding delivery, market moving government releases, and other factors that may influence commodity pricing. We try to limit our technical comments to the most actively traded contracts in advance of delivery, but some contracts trade actively right up to delivery while others taper off well in advance. Be sure you check your dates before trading these contracts. For questions regarding this section or additional coverage of commodities email will.gibson@nasdaq.com.

Data represented in the table below is through 7/11/2023:

Broad Market Commodities Report

Portfolio View - Commodity Indices

As already discussed in today’s Major Index and DALI Overview, energy is showing signs of life - this is also true in the commodities space. For instance, over the past seven days crude oil (CL/) gained over 7% and returned to a Point & Figure buy signal in the process.

While positive, this rally brings crude oil to its bearish resistance line on its default chart and a key area of resistance on its longer-term 2-point chart (pictured in the bottom left below). Notice that over the past year breaks of the bearish resistance line on the default chart led to short-lived rallies (at best) before a continued downtrend. On the 2-point chart, we saw a couple of head fakes as well earlier this year.

With market action on Wednesday (7/12), crude oil will print an additional X at $75 and officially reenter a positive trend – a break at $76 is needed on the 2-point scale. However, in light of the previous negative trend breaks over the past year (as first highlighted today), more technical evidence is needed, from our perspective, to consider this the beginning of a new long-term uptrend. Although, with the next level of resistance distant, situated at around $83, perhaps there is a near-term trading opportunity. Longer-term confirmation could come with a clearance of the $83 resistance level.

Daily Option Ideas for July 12, 2023