As Q3 and a dismal September end, some interesting dynamics are playing out in the stock market.
You can blame higher interest rates for some of the disjuncture that's going on. The CBOE Volatility Index ($VIX) is relatively low, yet the percentage of stocks trading below their 50-, 100-, and 200-day moving averages is relatively low. Here's the market in a nutshell:
- The Dow Jones Industrial Average ($INDU) is trading below its 200-day moving average.
- The S&P 500 ($SPX) is trading below its 100-day moving average.
- The Nasdaq Composite ($COMPQ) is trading below its 100-day moving average.
- The CBOE Volatility Index ($VIX) is relatively low, at less than 18.
- Year to date, Communication Services, Technology, and Consumer Discretionary are the three leading sectors.
We saw a similar scenario unfold in 2005, but there are stark differences between then and now. In 2005, Energy was the leading sector for the year, with Utilities in second place. Communication Services and Consumer Discretionary were the two sectors in negative territory.
The Big Picture
Although history is known to repeat itself, each time, it's still somewhat different. This year, investors are uncertain about inflation and interest rates. Plus, there is the possibility of a US government shutdown that could weave its way into the stock market. As Q3 ends and we gear up for Q4, it's important to have the bigger picture in mind.
Let's start with market breadth.
The chart below gives a good picture of the overall market breadth. The NYSE new 52-week highs ($NYHGH) are slowly rising. The new 52-week lows spiked, but they're slowing down. And if you look at the high/low ratio, it's pretty flat.
The market seems to be lacking momentum. Sometimes, it looks like it will move up, but sellers come in and cap the move. Similarly, when the market looks like it's going to sink, buyers prop it up. So what catalyst will move the market in either direction? Will it be earnings, or something else?
The general thinking among Wall Street analysts is that Q4 will see strong earnings, which could be the catalyst the market is waiting for. But, on the flip side, Treasury yields are high. And higher yields haven't been great for growth stocks.
The chart below shows the relationship between the S&P 500 and the 10-year Treasury Yield Index ($TNX). In the last half of September, the two diverged significantly.
Yields have reached levels they haven't seen since 2007, and let's hope the market doesn't perform the way it did in 2007. The circumstances are indeed different this time. We don't have the high levels of mortgage debt like we did then. There's a chance that interest rates may be close to a peak, although the Fed could still hike once more this year. So, that may mean yields could stay higher for longer. And it's the "higher for longer" regime that could be causing hesitancy among investors.
The bigger question is if stocks can perform well while interest rates are high. The dominant seasonality narrative of Q4 being strong could unfold. But if the large mega-cap stocks lead in Q4, could higher interest rates act as headwinds? If they are, it could make for relatively muted growth in Q4. But there's a chance that other asset classes could dominate. How will the last three months of 2023 shape up?
The Bottom Line
It all depends on what interest rates do. The market could go either way. It could turn around and go higher, or could fall even further before moving higher. Keep an eye on market breadth, because it can reveal what's brewing underneath the price bars.
US equity indexes mixed; volatility up
- $SPX down 0.27% at 4288.05, $INDU down 0.47% at 33507.50; $COMPQ up 0.14% at 13219.32
- $VIX up 1.04% at 17.52
- Best performing sector for the week: Energy
- Worst performing sector for the week: Utilities
- Top 5 Large Cap SCTR stocks: Super Micro Computer (SMCI); Dell Technologies (DELL); Palantir Technologies (PLTR); Splunk Inc. (SPLK); Jabil, Inc. (JBIL).
On the Radar Next Week
- September ISM Manufacturing PMI
- Fed speeches
- ISM Services PMI
- September non-farm payrolls
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.dow jones sp 500 nasdaq stocks fed us government interest rates
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Forget Ron DeSantis: Walt Disney has a much bigger problem
The company’s political woes are a sideshow to the one key issue Bob Iger has to solve.
Walt Disney has a massive, but solvable, problem.
The company's current skirmishes with Florida Gov. DeSantis get a lot of headlines, but they're not having a major impact on the company's bottom line.
DeSantis has made Walt Disney (DIS) - Get Free Report a target in what he calls his war on woke, an effort to win right-wing support as he tries to secure the Republican Party nomination for president.
That effort has generated plenty of press and multiple lawsuits tied to the governor's takeover of the former Reedy Creek Improvement District, Disney's legislated self-governance operation. But it has not hurt revenue at the company's massive Florida theme-park complex.
Disney Chief Executive Bob Iger addressed the matter during the company's third-quarter-earnings call, without directly mentioning DeSantis.
"Walt Disney World is still performing well above precovid levels: 21% higher in revenue and 29% higher in operating income compared to fiscal 2019," he said.
And "following a number of recent changes we've implemented, we continue to see positive guest-experience ratings in our theme parks, including Walt Disney World, and positive indicators for guests looking to book future visits."
The theme parks are not Disney's problem. The death of the movie business is, however, a hurdle that Iger has yet to show that the company has a plan to clear.
Disney needs a plan to monetize content
In 2019 Walt Disney drew in more $11 billion in global box office, or $13 billion when you add in the former Fox properties it also owns. In that year seven Mouse House films crossed the billion-dollar threshold in theaters, according to data from Box Office Mojo.
This year, the company will struggle to reach half that and it has no billion-dollar films, with "Guardians of the Galaxy Vol. 3" closing its theatrical run at $845 million globally.
(That's actually good for third place this year, as only "Barbie" and "The Super Mario Bros. Movie" have broken the billion-dollar mark and they may be the only two films to do that this year.)
In the precovid world Disney could release two Pixar movies, three Marvel films, a live-action remake of an animated classic, and maybe one other film that each would be nearly guaranteed to earn $1 billion at the box office.
That's simply not how the movie business works anymore. While theaters may remain part of Disney's plan to monetize its content, the past isn't coming back. Theaters may remain a piece of the movie-release puzzle, but 2023 isn't an anomaly or a bad release schedule.
Consumers have big TVs at home and they're more than happy to watch most films on them.
Disney owns the IP but charges too little
People aren't less interested in Marvel and Star Wars; they're just getting their fix from Disney+ at an absurdly low price.
Over the past couple of months through the next few weeks, I will have watched about seven hours of premium Star Wars content and five hours of top-tier Marvel content with "Ahsoka" and "Loki" respectively.
Before the covid pandemic, I gladly would have paid theater prices for each movie in those respective universes. Now, I have consumed about six movies worth of premium content for less than the price of two movie tickets.
By making its premium content television shows available on a service that people can buy for $7.99 a month Disney has devalued its most valuable asset, its intellectual property.
Consumers have shown that they will pay the $10 to $15 cost of a movie ticket to see what happens next in the Marvel Cinematic Universe or the Star Wars galaxy. But the company has offered top-tier content from those franchises at a lower price.
Iger needs to find a way to replace billions of dollars in lost box office, but charging less for the company's content makes no sense.
Now, some fans likely won't pay triple the price for Disney+. But if it were to bundle a direct-to-consumer ESPN along with content that currently gets released to movie theaters, Disney might create a package that it can price in a way that reflects the value of its IP.
Consumers want Disney's content and they will likely pay more for it. Iger simply has to find a way to make that happen.
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Stock Market Today: Stocks turn higher as Treasury yields retreat; big tech earnings up next
A pullback in Treasury yields has stocks moving higher Monday heading into a busy earnings week and a key 2-year bond auction later on Tuesday.
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