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Market News Posted by John Doherty July 21, 2024

Stock Market Hedges, The Great Rotation, and Bitcoin Futures

Bitcoin

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Top things to watch this week

The Economic Calendar:

MONDAY: Chicago Fed National Activity Index (7:30a CT)

TUESDAY: Redbook (7:55a CT), Existing Home Sales (9:00a CT), Richmond Fed Manufacturing Index (9:00a CT), 2-Year Note Auction (12:00p CT), Money Supply (12:00p CT)

WEDNESDAY:  MBA Mortgage Applications (6:00a CT), Building Permits (7:00a CT), Retail Inventories (7:30a CT), Wholesale Inventories (7:30a CT), S&P Global Composite PMI Flash (8:45a CT), New Home Sales (9:00a CT), EIA Petroleum Status Report (9:30a CT), 5-Year Note Auction (12:00p CT), Michelle Bowman Speaks (3:05p CT)

THURSDAY: Jobless Claims (7:30a CT), Durable Goods (7:30a CT), GDP (7:30a CT), Consumer Spending (7:30a CT), EIA Natural Gas Report (9:30a CT), Kansas Fed Manufacturing Index (10:00a CT), 7-Year Note Auction (12:00p CT)

FRIDAY: Personal Consumption Expenditures – PCE (7:30a CT), University of Michigan Consumer Sentiment (7:30a CT), Baker Hughes Rig Count (7:30a CT)


Key Events:

  • Rotation to small-caps from momentum and Mag7 stocks.
  • Second quarter earnings from Alphabet, Tesla, Coca-Cola, General Motors, and Ford.
  • The economic calendar focuses on GDP growth, the Fed’s favorite inflation indicator, Core PCE, home sales, and personal income.
  • Lite FOMC speaker schedule with Fed’s Bowman jawboning on Wednesday.
  • Bitcoin 2024 Conference featuring an appearance by former President Donald Trump.
  • The start of the Paris Olympics is on Friday.

U.S. GDP REPORT (Growth Rate)

Our favorite medium to long-term macro regime combines GDP and inflation. We are watching the report on Thursday for any outlier data.

Eco Calendar for Thursday 07-25-2024


ROTATION – WHAT’S WORKING IN STOCKS

Stock Market Rotation 07-21-2024

Source: Two River Analytics


STOCK INDEX FUTURES

The S&P 500 closed down 1.96% over the last five days. Seven out of the eleven sectors tracked in the image below also closed lower in the previous five days. Technology had the biggest decline, falling 5.53% over that period. Energy and Financials were the two sectors to close higher over the last five days, increasing 2.04% and 1.11%, respectively.

The stock market is now more focused on company earnings (profits) than on valuation metrics (like price-to-earnings ratios)

Why it’s Important:

  • The upcoming earnings reports for this year’s second quarter (2Q) will be critical for stock prices.
  • Traders are looking for companies to exceed earnings expectations (a beat) by around 2% on average.

Addressing a Potential Concern:

  • Some worry that slowing inflation (disinflation) could hurt company profits by reducing their ability to raise prices.

Overweight Stock Sectors 07-21-2024


HEDGING STOCK MARKET RALLY

Things to consider as you try to protect portfolio gains.

  • Already own stocks? Think about buying protective options to limit potential losses if the market dips. Volatility is currently low, making these options more affordable. We like buying puts or put spreads.
  • Are you looking to short stocks? A skewed butterfly strategy might be suitable. This strategy limits potential gains and losses depending on market movement.
  • Need help deciding what to buy? Consider “value” stocks, which may be undervalued based on their fundamentals.

INTEREST RATE FUTURES

The market is shifting its expectations from aggressive rate hikes to potential Fed rate cuts.

The Fed Funds futures market is pricing a 94% probability of a 25 basis point rate cut in September.

While the Fed acknowledges this possibility, it remains data-dependent and cautious. The economic data provides a stronger case for rate cuts than earlier this year.

Our baseline scenario suggests economic growth will pick up, limiting significant yield curve steepening despite potential rate cuts. The upcoming elections could introduce additional risks to the bond market.

CME Fedwatch Tool 07-21-2024

Source: CME Fedwatch


BITCOIN FUTURES

Bitcoin has seen a significant price surge this month, up nearly 20% since early July. Some traders speculate that this rise is due to anticipation of a price boom triggered by former U.S. President Donald Trump.

This speculation follows Trump’s appearance at a Bitcoin conference and rumors that he might announce the creation of a strategic U.S. Bitcoin reserve. However, it’s important to note that these are just rumors, and there is no confirmation from Trump himself.

Bitcoin Chart 07-21-2024


CRUDE OIL FUTURES

Oil prices broke lower out of their trading range on Friday, as traders will monitor the market’s macro backdrop this week.

There are concerns about slowing demand in China, fueled by recent economic data, which limit price increases.

There are also expectations of a constrained oil supply throughout the third quarter, which is preventing a price plunge too far to the downside.

Crude Oil Chart 07-21-2024


POLITICS & MARKETS (BofA thoughts):

This analysis is only based on the current Trump win probability of +75%.

Expect new tariffs in the next 12 months, which are more likely deflationary than inflationary.

The 2018 trade war occurred against the backdrop of strong global macroeconomics (US ISM and global PMIs @ 60, China GDP 7%) and low interest rates (Fed funds @ 1.25%).

2024/25 backdrop for tariffs is much weaker (ISM < 50, global PMIs @ 50, China GDP 4.7%, Fed funds @ 5.5%). New tariffs threaten a weak global economy with recession (tax hikes on the global economy + business uncertainty).

Presidential Election Probabilities 07-21-2024


WHAT’S YOUR FAVORITE MONITOR SETUP FOR TRADING?

My favorite monitor setup is number 6 at the office and 9+1 when traveling.

Monitor Setup 07-21-2024


Asset class performance sheet

These performance charts track the daily, weekly, monthly, and yearly changes of various asset classes, including some of the most popular and liquid markets available to traders.

Asset Class Performance Summary 07-21-2024


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