Reminder, tune in this coming Thursday to an important webinar

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• Granny Shots April Quarterly rebalance today
• see below for adds and deletes

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Equity markets came under selling pressure on Tuesday, falling 1.6% and breaking down to the lows seen in early April. Was there anything in particular this day to drive stocks to April lows? In our view, the May FOMC rate decision (5/3) is the most important event in the coming few weeks, so we are seeing incoming data through that lens.

• Both VIX +11.1% to 18.7 and MOVE (bond volatility) +9% to 137 moved up sharply Tuesday, so markets were unnerved by something. The fact that First Republic FRC fell 49% (bonds fell 22% to 40) underscores regional bank operating models are challenged as given the current level of interest rates. And private capital will be reluctant to step in. In recent meetings, several clients brought up the risk of the debt ceiling and the specific risks in this cycle given the slim Republican House margin (see Tom Block’s comments on this earlier this week).
• The move in markets was also sufficient to move interest rates as 2Y (-13bp) and 10Y (-9bp) yields dropped sharply to 3.954% and 3.451%, respectively. And the odds of a May hike fell intraday to 71% (pre-U Mich levels), before closing at 79.6%. This was 92.5% just Monday, so the ripple effects in regional banks was enough to shift May hike expectations.
• The sell-off today shifts probabilities towards a “dovish” +25bp hike by Fed in May (as opposed to a hawkish hike). That is, lingering risks around regional banks means the Fed will be more sensitive to an excessive tightening of financial conditions. After all, if financial conditions are too tight, banks and corporations will find it difficult to reasonably finance via debt and equity markets. And this would amplify concerns about banking industry health. Moreover, forward indicators of inflation continue to soften, including labor markets, so we just think it is difficult for the Fed to see increasing risks of higher inflation versus the risk of undershooting.
• A hawkish hike, by contrast, would be a Fed seeing sufficient economic resilience that they would conduct monetary policy as per their earlier targets of “higher for longer.” This would be justifiable if labor markets continued to strengthen and services inflationary pressures continued. But arguably the opposite is happening. One of our clients, ZD of NYC, shared with us that Census Bureau is now collecting income levels of unemployment (UE) claims and this data (see chart) shows a sharp rise in share of claims by those earning over $200k, which is 11% of claims now vs 2% this time last year.
• The trends are pretty interesting on this. In the most recent week, an estimate of 113,793 UE claims were filed by Americans earning over $200k. This is the highest level since the pandemic and the trend shows this is accelerating higher, with this week likely to be the crossover point where the UE claims of over $200k earners exceeds UE claims of under $25k earners. We are just at the crossover.
• This is causing a parabolic rise in the aggregate income lost (UE claims x salaries lost) to $105 billion annualized, up from $40 billion a year earlier. And to appreciate how the overall US household income is rapidly declining, consider this: UE claims of over $200k earners and under $25k earners are roughly equal.
  – lost income of under $25k earners is $1.5 billion per year
  – lost income of over $200k earners is $39 billion per year (using midpoint of range)
  – each over $200k lost job is contributing to a huge decline in US household income
• Wage income might be deteriorating faster than is implied by jobless claims alone. That is a big deal in our view. Hence, the composition of jobless claims argues strongly for the Fed to do a “dovish” hike. A +25bp in May and then a “let’s look around” and acknowledge that upside risk/downside risks are far more balanced. And this means Fed would tolerate an easing of financial conditions.
• FAANG earnings are coming in above expectations as well and as the table highlights, each successive FAANG 1Q23 earnings report has been with a larger magnitude upside beat. MSFT 1.51% and GOOGL 1.03% reported this evening with solid results. Overall, with 138 companies reported, 78% are beating with a magnitude of +6.4%. So overall EPS season is tracking solidly.
• For those not wanting to “buy” until EPS forecasts bottom, the bottom for EPS revisions might be near. As @dayhagan_invest on twitter points out, earnings revisions for MSCI US (lines up with large-cap US stocks) have been rising. The source for this is Ned Davis Research but take a look at the chart below and you can see this uptick is a non-recessionary argument.
• GRANNY SHOTS: Today we are completing the April 2023 Granny Shots rebalance (quarterly). The list has shrunk by 3 (+7 adds and -10 deletes). The 7 additions are: FISV, FTNT 0.51% , MPC -1.07% , NOW 5.07% , ON 2.40% , ULTA, and VRTX 2.08% . The Granny Shots is essentially a core portfolio and consists of stocks appearing the most frequently in our rebalance 3 tactical and 4 thematic baskets. A technical analysis of these stocks by Mark Newton, Head of Technical Strategy, is also included here.
• TOP GRANNY SHOTS: There is only 1 stock appearing in 4 of 7 themes: MSFT 1.51% . There are 3 stocks in 3 of 7 themes: XOM AAPL 1.18%  CDNS 3.45% . Consider these the stocks that are the most commonly seen as “grannies” and thus, the higher quality ideas. To be a “granny”, a stock must be in at least 2 of 7 themes.

BOTTOM LINE: Markets awakening to heightened risks, but this is pointing to a dovish +25bp in May

On balance, investors and markets consensus have been persistently bearish since early 2022. While this was warranted earlier in 2022, the risks have become far more balanced and ultimately, hinges on when Fed FOMC relents and pauses (improves bank industry financial models almost immediately).

• recall, for much of 2022, the doomsayers were using an overlay of 2022 vs 2008 and this chart terrified even those who did not see parallels to 2008 (see chart below).
• but since Jan 2023, that analog has broken down as equities have since stabilized and moved above the 200-week moving average. That did not happen in the GFC until December 2010.

While April has been a disappointing month for equities, the incoming data is setting up for a dovish +25bp hike May (in our view), which is supportive of stocks. From a macro perspective, we get some important incoming data the rest of this week.

• FAANG names META 2.05%  (4/26) and AMZN -0.58%  (4/27) report
• March PCE deflator (4/28) and U Mich April final 1-yr inflation (4/28)

So while equities have softened painfully in the past 24 hours, we do not think this alters our view that 2023 will be a positive year for equities.

WAGE INCOME WEAKENING: Jobless claims by income tranche show expanding weakness

One of our clients, ZD of NYC, shared with us that Census Bureau is now collecting income levels of unemployment (UE) claims and this data (see chart) shows a sharp rise in share of claims by those earning over $200k, which is 11% of claims now vs 2% this time last year.

• the rise in over $200k is essentially offset by the dropoff in the lowest income tier (under $25k)
• the Census Bureau does a monthly survey and has collected this data since the end of 2021

The trends are pretty interesting on this. In the most recent week, an estimated 113,793 UE claims were filed by Americans earning over $200k.

• This is the highest level since the pandemic and the trend shows this is accelerating higher, with this week likely to be the crossover point where the UE claims of over $200k earners exceeds UE claims of under $25k earners.

• We are just at the crossover.

This is causing a parabolic rise in the aggregate income lost (UE claims x salaries lost) to $105 billion annualized, up from $40 billion a year earlier. And to appreciate how the overall US household income is rapidly declining, consider this: UE claims of over $200k and under $25k are roughly equal.

• lost income of under $25k earners is $1.5 billion per year
• lost income of over $200k earners is $39 billion per year (using midpoint of range)
• each over $200k lost job is contributing to a huge decline in US household income

The takeaway is that wage income is deteriorating faster than is implied by jobless claims alone. That is a big deal in our view. Hence, the composition of jobless claims argues strongly for the Fed to do a “dovish” hike. A +25bp in May and then a “let’s look around” and acknowledge that upside risk/downside risks are far more balanced. And this means Fed would tolerate an easing of financial conditions.

FAANG EPS: Good so far and 4 key reports ahead

FAANG is up over 29% YTD and health of these stocks is important for Technology and market overall. Of these names, 4 have reported NFLX -0.11%  TSLA -1.93%  MSFT 1.51%  GOOGL 1.03%  GOOG 0.92% :

• 4 of 4 have beat, with MSFT 1.51%  and GOOG 0.92%  magnitude of beat sizable (+9.4% and +8.4%, respectively)
• this bodes well for stocks for the remainder of earnings season

For those not wanting to “buy” until EPS forecasts bottom, the bottom for EPS revisions might be near. As @dayhagan_invest on twitter points out, earnings revisions for MSCI US (lines up with large-cap US stocks) have been rising.

• the source for this is Ned Davis Research
• but take a look at the chart below and you can see this uptick is a non-recessionary argument.

Overall, with 138 companies reported, 78% are beating with a magnitude of +6.4%. So overall EPS season is tracking solidly.

Sell-off Tuesday pushes equities to April lows

Stocks have been in a narrow range in April and the sell-off Tuesday pushes stocks to April lows. Has the fundamental picture deteriorated to warrant this?

• The troubles for stocks, in our view, started when U Mich prelim April inflation showed a jump +100bp to 4.6%. But as we noted, this jump seems curious and historically reverses quickly. We get the final April figure on 4/28.
• Both VIX +11.1% to 18.7 and MOVE (bond volatility) +9% to 137 moved up sharply Tuesday, so markets were unnerved by something. The fact that First Republic FRC fell 49% (bonds fell 22% to 40) underscores regional bank operating models are challenged as given the current level of interest rates. And private capital will be reluctant to step in.
• So this weakness is somewhat important to respect. In recent meetings, several clients brought up the risk of the debt ceiling and the specific risks in this cycle given the slim Republican House margin (see Tom Block’s comments on this earlier this week).

And the odds of a May hike fell intraday to 71% (pre-U Mich levels) before closing at 79.6%. This was 92.5% just Monday, so the ripple effects in regionals was enough to shift May hike expectations.

Overlay 2022-2023 is no longer tracking 2008 GFC since Jan…

Recall, for much of 2022, the doomsayers were using an overlay of 2022 vs 2008 and this chart terrified even those who did not see parallels to 2008 (see first chart).

• since Jan 2023, that analog has broken down as equities have since stabilized and moved above the 200-week moving average. That did not happen in the GFC until investors December 2010.

34 GRANNY SHOTS: +7 adds, (-10 deletes). YTD outperformance +39bp

Today we are completing the April 2023 Granny Shots rebalance (quarterly). The list has shrunk by 3 (+7 adds and -10 deletes). The 7 additions are: FISV, FTNT 0.51% , MPC -1.07% , NOW 5.07% , ON 2.40% , ULTA, and VRTX 2.08% . The Granny Shots is essentially a core portfolio and consists of stocks appearing the most frequently in our rebalance 3 tactical and 4 thematic baskets. A technical analysis of these stocks by Mark Newton, Head of Technical Strategy, is also included here.

• ADDITONS: FISV, FTNT 0.51% , MPC -1.07% , NOW 5.07% , ON 2.40% , ULTA, and VRTX 2.08%
• DELETIONS: AMT 2.71% , CSCO 6.05% , EOG -0.26% , GD 0.18% , JCI 1.94% , JPM 0.07% , MRO -0.49% , NUE 2.08% , OMC 1.12% , UNH

Below are the 2-year stock charts for the 7 additions on absolute (first set) and relative to S&P 500 (second set).

34 GRANNY SHOTS: Updated list is below:

The revised 34 Granny shots are shown below. The list is sorted by the most attractive (most frequently cited) to least. To be a “Granny shot” the stock needs to appear in at least two portfolios.

• There is only 1 stock appearing in 4 of 7 themes: MSFT 1.51% .

• There are 3 stocks in 3 of 7 themes: XOM AAPL 1.18%  CDNS 3.45% .

Consider these the stocks that are the most commonly seen as “grannies” and thus, the higher quality ideas. To be a “granny”, a stock must be in at least 2 of 7 themes.

Communication Services:GOOGL 1.03% , META 2.05%

Consumer Discretionary:AMZN -0.58% , GRMN 0.38% , TSLA -1.93% , ULTA

Consumer Staples:BF/B, MNST -0.44% , PG 0.44% , PM 0.86% , KO -0.05%

Energy:DVN -0.24% , OXY 0.60% , PSX 0.94% , VLO 1.14% , XOM, MPC -1.07%

Financials:AXP 0.07% , FISV

Health Care:AMGN 2.45% , HUM 0.77% , ISRG 3.96% , MRK 1.86% , VRTX 2.08%  

Information Technology:AAPL 1.18% , AMD 4.25% , CDNS 3.45% , KLAC 4.08% , MSFT 1.51% , NVDA 3.79% , PYPL -1.16% , FTNT 0.51% , NOW 5.07% , ON 2.40%

Think about Granny Shots as a “core portfolio” that we rebalance every quarter. The Granny Shots is a list of our core stock holdings, using 7 thematic/quantitative portfolios and is designed to identify long-term EPS growers. Since inception in 2019, Granny Shots has outperformed every year:

• 2019 +879bp –> great year
• 2020 +3,015bp –> great year
• 2021 +392bp –> good year
• 2022 +395bp–> good year
• 2023 +39bp–> good start

TECHNICALS ON 7 GRANNY SHOT ADDS: By Mark Newton

Check out Mark Newton’s Technical Takes on Granny Shots. Video here.

(Newton) MPC -1.07%  – Bullish 

Short-term pullback looks to be nearing its first major area of support for MPC -1.07%  following its peak in early April.  MPC’s intermediate-term uptrend has been ongoing since it bottomed last July 2022 and has had several pullbacks hold this uptrend which now interest at 122.   Given that seasonality and momentum for Crude oil remain bullish through May, it’s likely that MPC can bottom out near current levels without too much damage.  Stabilization should result in this starting to turn back higher over the next month to challenge and exceed all-time highs near $139.  Only a break of mid-March lows of $119.59 would postpone the rally, which is not expected.   While momentum has stalled a bit given MPC’s slowdown since January,  the stock remains within striking distance of all-time highs following a very rapid ascent over the last three years.  Thus, more weakness will be necessary to avoid, technically speaking.  I like MPC, it’s in my UPTICKS list and expect this to rebound, with 140 and then 145 being key resistance.

(Newton) FISV – Bullish

Movement above March peaks is very constructive technically for FISV and should drive this back to test 2021 peaks near $127.34.  Note, this peaked near the same level a year prior, in 2020, near $125, so this entire area at $125-$127.34 could prove important as resistance, technically speaking.  The wave structure remains bullish near-term, and while momentum is nearing overbought levels per RSI, this has not happened yet, and FISV is considered the most technically bullish of any of the stocks being added to Granny shots based on near-term structure.  Overall, I do expect that FISV likely will stall out upon nearing this 125-127 area, and this might prove to be a meaningful ceiling over the next few months until this can consolidate.   However, any gains over $127.34 on a weekly close should help this begin a much larger intermediate-term advance.   Pullbacks over the next couple months should translate into buying opportunities technically, creating a better risk/reward.  Only a move down under $111 on a monthly close would serve to postpone the rally which is not expected in the immediate future.

(Newton) ON 2.40%  – Bullish

Pullback looks to be nearing support.  Following a move below lows going back since early 2023, ON 2.40% ’s recent decline could be considered a short-term bearish development.  However, this weakness lies as part of a longer-term area of intermediate-term trendline support stemming from last year’s Summer lows just above $44.   Its February peak happened at near an exact 100% projection off its lows of $44, near $88 which can often be considered important technically.  Since that time, ON has lost roughly 20% but has not done much major damage.  Thus, the area near $66-68 is likely to coincide with a short-term bottom for ON as this intersects the longer uptrend and $66 is a 50% retracement of ON’s advance from last July.  However,  breaks of $66 would cause more downward pressure on weekly momentum, and suggest that potentially 2023’s early lows in January might need to be tested before this advance can resume.  Overall, I remain positive on ON, and it remains in my UPTICKS list and one of my favorite Semi names technically.  However, I’ll keep a close watch on technical structure in the weeks and months to come for evidence of this changing.    Movement back above $80 will be needed to nullify concerns about this recent weakness and would help to jumpstart a move back to new high territory.

(Newton) NOW 5.07%  – Neutral

NOW 5.07%  has traded largely in range-bound consolidation for the last year, and trades largely where this did back in April 2022.  While the larger downtrend in NOW did successfully end back in January on the lengthier intermediate-term downtrend line breakout, its attempts at moving higher largely have been repelled after having recouped only around 1/3 of the prior decline.   While some might attempt to refer to NOW’s pattern technically as a reverse Head and Shoulders pattern, this won’t be accurate barring a confirmed breakout of the “neckline” which currently lies at $485.  Until that time, NOW is neutral, not bullish, despite the intermediate-term downtrend line break three months ago.  Overall, near-term weakness should be initially contained near $440 and only a violation of $405 would serve to turn trends down to bearish from neutral.  Bottom line, NOW will take time before this gains technical conviction, with a weekly close back above $485 being the necessary first step.   Such a move, particularly on high volume, would add conviction to the idea of NOW starting an intermediate-term uptrend.  Gains would then likely push up to $520, then $562.  For now, technically, this is neutral, and further near-term choppiness looks likely.

(Newton) ULTA – Bullish

ULTA remains near striking distance of all-time highs, having risen more than 40% off its October 2022 lows.  While a mild consolidation has begun over the last couple months, this has had little to no effect on causing any material deterioration in the stock.   ULTA had largely gone sideways from August 2021-November 2022, so the act of breaking out of this 14-month range resulted in a big acceleration back to new all-time highs.   Momentum has pulled back from overbought levels on weekly charts as a result of the recent slowdown, but doesn’t imply that ULTA needs to move lower.  Monthly RSI has reached the highest overbought levels since 2017, but yet also won’t be a concern unless more evidence of weakness occurs.  Only a weekly close under $501 would serve to postpone this rally, and result in an intermediate-term break of its uptrend from last Fall.   While consolidation might persist in the seasonally weak month of May, it’s thought that any rally back over $553 should help to get ULTA’s rally back on track.  Upside targets above 553 lie near 600 and then $695, which would represent a 100% alternate extension of the initial rally off the 2008 lows.   Overall, this remains a bullish technical name and it’s right to overweight and expect higher prices on an intermediate-term basis.

(Newton) FTNT 0.51%  – Bullish, but peaking out near-term.  

Following a greater than 50% lift off January 2023 lows, FTNT now has rolled over to multi-day lows this past week.  This serves to break the uptrend from January, suggesting that further near-term weakness is possible which would make this vulnerable to selling pressure to $60, or possibly $58.  However, until/unless $54 is broken, pullbacks should serve as opportunities to buy dips, and the near-term weakness/trendline break isn’t doing much to alter FTNT’s bullish intermediate-term structure.   Any rally back this year above $69.07 would create upside targets near all—time highs at $74.38, made back in late 2021.  At present, it looks likely that FTNT might weaken more into the seasonally sub-par month of May.  However, it’s difficult to not buy dips on weakness in the weeks to come, expecting that a move back to new highs in the 2H of this year can occur.

(Newton) VRTX 2.08%  –  Bullish

Mild consolidation has occurred in the month of April as part of VRTX 2.08% ’s ongoing uptrend, but trends from last month’s lows remain quite constructive, and gains up to $345-350 look possible before any real slowdown or reversal.  This level coincides with a meaningful area of longer-term trendline resistance caused by connecting former peaks of this rally since last April 2022 highs.   Overall, in the bigger scheme of things, it’s thought that the larger intermediate-term breakout above 2020 highs should serve as a positive intermediate-term reason why trends likely can persist higher over the next 12-16 months.   Neither weekly, nor monthly momentum has gotten that overbought, and so any pullback down under $324 likely would find firm support near $310-$317 before pushing back to new all-time highs.  In general, it’s attractive to own VRTX given its stellar track record within Healthcare and over the last 12 months, it’s the 9^th best performer of all 66 members of the SPDR S&P Healthcare ETF (XLV 1.49% ) with returns of greater than 22%.  I expect this recent strength should be able to continue in the months to come.

SEASONALITY: The 8 groups most attractive for next 6 months

There is an element of seasonality for Granny Shots and our rebalance highlights these 8 groups as most attractive:

• Tech Hardware
• Systems Software
• Technology Distributors
• Semiconductors
• Life Sciences Tools & Services
• Data Processing & Outsourced Services
• Automobile Retail
• Biotech

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34 Granny Shot Ideas:GOOGL 1.03% , META 2.05% , AMZN -0.58% , GRMN 0.38% , TSLA -1.93% , BF/B, FISV, MNST -0.44% , PG 0.44% , PM 0.86% , DVN -0.24% , FTNT 0.51% , OXY 0.60% , PSX 0.94% , VLO 1.14% , XOM, AXP 0.07% , MPC -1.07% , AMGN 2.45% , NOW 5.07% , ON 2.40% , ULTA, VRTX 2.08% , AAPL 1.18% , AMD 4.25% , CDNS 3.45% , KLAC 4.08% , MSFT 1.51% , NVDA 3.79% , PYPL -1.16% , HUM 0.77% , ISRG 3.96% , KO -0.05% , MRK 1.86%

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