We're at the halfway mark for earnings, with more than half of the S&P 500 reporting as of this morning. Bob Pisani brings you the good news, so far. » Read More
Stay in or stay out?
That was the initial issue for the Brexit vote, but now it's more complicated. The market has gyrated so much that traders are no longer sure how much the market might move, regardless of whether the public votes to stay or remain in the European Union (EU).
I said on Thursday that the markets had sold off so much on exit concerns that the risk then was to the upside. That is, the market was going a long way toward pricing in a Brexit already. The pain trade (the trade that would cause the greatest amount of pain to active market participants) was therefore higher, because everyone was starting to position for the likelihood of an exit.
What a difference two trading days make. The FTSE has risen nearly 5 percent from its bottom on Thursday as the polls have shown stronger support for remaining in the EU following the murder of British MP Jo Cox. Even the S&P 500 Index has staged a notable turnaround: It bottomed on Thursday at 2,050 and has moved nearly 50 points (about 2.5 percent) in two trading sessions.
The Fed statement was essentially unchanged. The FOMC did dial back jobs growth language, noting that "the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up."
Six Fed officials now expect only one rate hike this year. The futures, meanwhile, are only pricing in an 8 percent chance of a July rate hike.
The dollar dropped, gold rallied modestly and bond yields dropped. The S&P is unchanged. Bank stocks, sensitive to interest rates, dropped one percent from their highs, but recovered half of those losses fairly quickly. Most bank stocks remain up on the day.
U.S. and foreign investors have woken up to the fact that a Brexit could become a reality.
You can see this in the rather strange action of the CBOE Volatility Index, which roughly measures investor demand for protection against market declines in the next 30 days.
The VIX moved five points — from roughly 15 to 20 — in two trading days. That is a fairly rapid move, but what's even stranger is the move in stocks.
Normally, when you get a five-point move in the VIX in a short period, you would expect the S&P 500 to move roughly 3 percent to 4 percent — but the S&P only moved about 1.7 percent.
That means there wasn't as much selling of stocks as you would expect, but there was suddenly a lot of demand for protection.
What would account for this surprisingly strong move in the VIX?
1) The VIX had a sharp move up yesterday at about 11:30 a.m. ET, almost exactly when a Guardian poll came out indicating surprisingly strong support for a "yes" vote on the U.K. leaving the European Union.
Traders had discounted the idea that a Brexit could happen, but they are now starting to change their minds. The concern is not just that a Brexit could weaken the British pound, it could also hurt British banks. A leave vote might also lower bond yields even further, weaken commodity prices (with the possible exception of gold), and hurt emerging market assets.
My colleague Mike Santoli pointed out this morning that much of the demand for protection may also be coming from foreign investors simply seeking to buy protection — any protection — from a Brexit.
He's likely right. VIX products have increased in popularity and are a proxy for global volatility exposure, particularly to the Fed and Brexit.
2) Many traders in volatility are likely positioned very short; that is, they have been betting volatility would remain low. Many are likely "covering" their shorts as Brexit has become more of a reality. At the very least, if you are short volatility, and volatility goes up, you would have to buy volatility just to keep your exposure at the same level.
3) Sellers of volatility were likely in short supply, which has driven up the price. The game of buying and selling volatility has become a business on Wall Street. Not just banks, but many hedge funds are active buyers and sellers.
Here's the problem: Suppose you are a guy at a hedge fund that buys and sells volatility. You know many of your hedge fund friends have had their faces ripped off on various other trades that have gone against them this year. You are a little cautious because, hey, your job could be on the line.
Suddenly, you get a lot of requests to buy volatility from you with the VIX at 20.
You know this is all on concerns over a Brexit. If you sell the VIX at 20, and there is a vote to stay in the EU, you figure the VIX will drop down to, say, 15. So you would have sold the VIX high. Buy low, sell high. You win.
But suppose there is a vote in favor of a Brexit. You have no idea what could happen, but for sure the VIX will jump. Maybe a lot. Maybe to 40.
Ouch. You are now in a position where you sold the VIX at 20 and it goes to 40. Very bad. Like, maybe-your-boss-calls-you-in-his-office bad.
My point: For some traders, the risk of selling the VIX may be far greater than the potential reward. They want higher prices.
This is a classic behavioral economics issue.
On Tuesday at 5pm ET, MSCI, the largest indexing firm in the world, will announce whether they will include mainland China stocks in their global indices. Right now, only Hong Kong and China shares that are listed in overseas markets (like the U.S.) are included.
Inclusion of mainland China stocks would be an important development. China's mainland market is roughly $6 trillion — nearly a tenth of the world's stock market capitalization, which stands at roughly $69 trillion. China's authorities have made inclusion in global indices a major priority.
Call it the triumph of the indexers: The whole world is moving toward investing using indexes and ETFs — most of which are pegged to these indexes. More than $10 trillion in assets are pegged to MSCI's global indices. This includes passive investments like ETFs and active management.
Today I'm co-moderating the Singularity University's Exponential Finance Conference in New York, looking at the intersection between technology and finance and industry.
One of the most interesting speakers today is Marco Annunziata, chief economist of General Electric.
Big data is changing even the way old industrial companies operate. Digital technology has become more pervasive on the industrial side of the economy, and Annunziata has been in the forefront.
Call it the "Industrial internet" if you will. Take industrial machines from jet engines to medical equipment and turn them into intelligent interconnected devices. Suddenly, you are no longer just selling assets, you are selling services.
You can improve the performance of the machines. You can better predict when the machine will break. Their functionality can be extend, exchanged and improved. There are cost reductions, and more up time for the machines. Ownership of the assets become less important: they are part of a suite of services.
Tuesday I'll be co-moderating the Singularity University Exponential Finance Conference in New York. The event provides another opportunity to assess how disruptive technologies like machine learning, artificial intelligence, big data, robotics, and blockchain technology are influencing the financial world.
Just look at one area — big data analytics — and you can see the impact. Like all institutions, banks are awash in new data on their customers. They have information on loyalty cards, social networks, purchase data, browsing habits — an ocean of information. Using big data analytics, they can sift through this information more quickly, which has changed the way risk is priced.
That supports faster and more accurate decisions and has supported the rise of peer-to-peer lenders like Lending Club and Prosper.
Big data is changing even the way old industrial companies operate. Marco Annunziata, chief economist at General Electric, will speak on how GE is taking industrial machines from jet engines to medical equipment and turning them into intelligent interconnected devices.
Once again, I will be interviewing Ray Kurzweil, director of engineering at Google, and the co-founder and chancellor of Singularity University.
Given Ray's central role in the development of artificial intelligence and machine intelligence, and his key predictions on the development of that technology, I'm sure he will have a lot to say about the hoopla surrounding artificial intelligence and the somewhat apocalyptic comments about a machine takeover from Elon Musk and others.
One thing is for sure: The interaction between finance and technology, or "fintech," remains a hot topic. In a March 2016 report, Citigroup noted that investment in private fintech had grown from $1.8 billion in 2010 to $19 billion in 2015.
The economic data has been poor this morning, though the market reaction has been fairly muted.
Are we once again at another failed attempt to hit a new high?
The bears have several arguments:
1) Market is full valued (17.5 x forward earnings)
2) Earnings and revenue growth remains negative
3) Growth prospects are weak
4) Macro risks: Brexit, Fed, U.S. election
The close is very important today. We have moved up in the last hour every day this week. The full valuation would be a very logical reason to reverse that short-term trend.
The bigger issue is, will today's data be the start of reversing the longer-term trend: that there is little alternative to owning stocks in a slow-growth, low-rate world.
That would take a bigger paradigm shift than just one day's economic data, but it's one the bears are already making. They argue that central banks are losing credibility as low (and even negative) rates have less and less impact, and lawmakers seem powerless to enact needed fiscal reforms.
May ISM services came in at 52.9, below expectations of 55.5, with new orders at 54.2 from 59.9. The employment component of the ISM report dropped into contraction territory at 49.7.
The May nonfarm payroll report, at 38,000, with downward revisions in prior months, was also a negative.
Not surprisingly, bank stocks have opened weaker as bond yields are lower.
The weaker dollar has been a help to commodities; base metals like copper and commodity stocks like metals are higher; energy stocks are mixed.
Overall, the pattern for stocks today is fairly typical of what you see when there are big misses in the jobs report. Cyclicals like consumer discretionary and industrials are weak, defensive names like Utilities are flat.
Our partners at Kensho note that of the 31 times since 2006 when the jobs report has missed by more than 50,000, consumer discretionay and industrials underperformed and consumer staples and utilities did better, though both were down slightly. In other words, the market typically become more defensive.
Going into today, the market has been holding up well. The advance/decline line has been moving up. Health Care has been a leader in the first days of the month, Tech was a leader in May, both healthy rotation from the Energy and Materials in prior months.
The Russell 2000, which has lagged the big-cap S&P 500 for a year, was at a six-month high.
The Nasdaq was at a six-month high.
And the S&P 500 was within two percent of an historic high.
The S&P so close to new highs has been the source of endless frustration for traders. We have failed numerous times to hit a new high since the S&P hit an historic high in May 2015.
My message to everyone on this is, relax. It's actually the norm.
Dan Wiener, who runs the Independent Adviser for Vanguard Investors, one of the best investor newsletters, noted in a recent report that since March 1957 the S&P 500 has spent 37 percent of the time within 5 percent of a new high. It's spent 6 percent of the time at a new high. It's spent 57% of the time down 5 percent or more.
Think about that. The S&P 500 has spent 37 percent of the time within 5 percent of a new high. That means that all this angst over the inability to hit a new high is hand-wringing over perfectly normal market action.
Time to look for breakouts.
The strong ISM number this morning was a big relief for the markets. The low print of the day was right after the open, and we struggled until 10 am ET, when the ISM number came out and the markets immediately turned around.
The Beige Book showed modest economic growth with tighter labor conditions pushing up wages—not a big change but the markets again moved up modestly nonetheless.
The next big number will be Friday's ISM Services, which is also expected to be strong...55.5 (anything above 50 indicates expansion).
The problem now is that we are in a no-man's zone, with very few leadership breakouts.
Normally, when the S&P 500 is less than two percent from a new high, you will see sector breakouts. Traders will aggressively purse some sector, volume will increase, and suddenly there will be a spate of new highs.
That's not happening, at least not yet. There are 91 new highs on the NYSE Wednesday, that is nowhere near where we should be.
There are tantalizing signs. The Semiconductor Index is at new highs for the year and just on the verge of a 52-week high. A few chip names like Texas Instruments and Microchip Technology and Nvidia are indeed at new highs Wednesday.
Still, traders are waiting for significant breakouts. That's why Friday is important. ISM services and nonfarm payrolls!
The Shanghai and Shenzhen stock exchanges both rallied more than 3 percent overnight. There was no economic news. Instead the rally appears to be tied to the very political battle over whether China's two mainland stock exchanges — the Shanghai and the Shenzhen — should be included in the world's biggest indexes.
MSCI, the world's largest indexer, will soon announce whether it will include China's two mainland stock exchanges — the Shanghai and the Shenzhen — in its global indexes, particularly the MSCI Emerging Markets Index, which is the index used for the MSCI Emerging Market ETF, the world's largest emerging market exchange traded fund.
Right now, only Hong-Kong listed stocks are included in the indexes, there are no stocks from mainland China.
This is an important decision. It would, for example, roughly double the weighting of China in the MSCI Emerging Market ETF.
In a market that is increasingly global, this sounds a bit crazy. How do you ignore $6 trillion in equity market cap represented by the Shanghai and Shenzhen exchanges?
If you're tired of hearing about how venture capital firms have captured all the early-stage financing for exciting new start-ups, I have some good news for you.
Mom-and-pop crowdfunding for the average person is about to become a reality.
On Mon., May 16, the Securities and Exchange Commission will begin implementing equity crowdfunding nationwide for the average investor. This will allow small companies to directly raise debt or equity capital from friends, family, and interested investors. It's the final piece of landmark legislation called the Jumpstart Our Business Startups Act, popularly known as the JOBS Act, that was passed in 2012.
One of its provisions allows new businesses to raise capital from directly from private investors. Initially, only accredited investors — those with $1 million in net worth or who earn at least $200,000 per year — were allowed to invest in start-ups.
France's biggest bank, BNP Paribas, posted a narrow increase in net profit on Thursday, as its retail bank struggled to the low interest-rate environment.
Shares of LogMeIn skyrocketed on news of the company's merger with the GoTo unit of Citrix Systems.
Shares of biotech company Illumina spiked 8 percent Wednesday after the company handily beat Wall Street estimates a day earlier.