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At the start of the week, I was hopeful that the combination of Fed decision day (5/3) and soft readings on labor (JOLTS, employment report) would cause markets to constructively reprice a Fed “pause” — this is what we viewed as a positive resolution to the “make or break” week:

The Fed provided sufficient rationale for “pause” to become our base case (no hike in June) but equities fell sharply, down -3% since last Friday, while bonds and Fed futures rallied on the pause — US 2Y fell from 4.04% to 3.77% (sizable move). So bonds rallied sharply while stocks tanked.
Part of the reason for equity softness are driven by the spreading regional bank crisis and the growing concerns about the US debt ceiling and the “x” date approaching far sooner. During the FOMC press conference, the KBW Regional Bank Index fell -6% (see below) as Powell’s comments of a “conditional pause” and need to stay “high for some time” placed additional pressure on regional banks. And Tom Block, Fundstrat’s head of policy strategy, notes the impasse is particularly tough for the debt ceiling in 2023.
On Thursday, the entire regional bank complex came under selling pressure again, but two stocks were into a downward spiral PacWest -51% ($PACW) and Western Alliance Bank -39% ($WAL) and both saw their short-term bonds fall 50% to $30-$40, very distressed prices. The assurances of regulators is not what investors want to hear, as the mounting concerns of deposit flight, funding costs, CRE exposure and the fact $FRC $SIVB equity holders were zero’d out means regional banks are no touch.
But we are arguably reaching a point of hysteria. For instance, Pacific West Bancorp ($PWBK) had to issue a press release and on its website state that it is not PACW — and after falling -5%, managed to close the day higher. Similarly, Republic First Bancorp ($FRCB) had to issue notices that it is not First Republic ($FRC) and after seeing its shares fall -20% managed to close down only -5%. And there are some suggesting that 0DTE options and short term speculators are adding to pressures.
Fortunately, Mark Newton, Head of Technical Strategy at Fundstrat, believes regional banks could bottom by this Friday (see below). This is an incremental positive. After all, the entire stock market becomes somewhat “untouchable” if investors feel that the FDIC, Fed or White House needs to intervene in the banking system. This raises too many tail risk issues including credit tightening, commercial real estate and wide economic implications. Additionally, the DeMark daily indicators might trigger a ’13’ buy signal Friday, but a price reversal would be key.
As for the near term outlook for stocks, two key events are on the horizon. The first is April jobs report (Friday 5/5) and DeepMacro is forecasting a miss. A miss would be good as it would strengthen the case for a longer pause. And next week is April CPI (5/10) and while the risk is core CPI is higher, a miss would be welcome. Consensus is looking for +0.3% MoM, which is downshift from +0.4% last month.
Starting Friday 5/5, there will be 13 Fed appearances/speeches post-FOMC. And we believe these 13 meetings will ultimately be about “damage control on regional bank fallout” — that is, there will likely be some walking back on the tone of hawkishness and “higher for longer.” As the intraday chart below clearly highlights, it was the Powell’s statements about the above that triggered incremental selling.

Bottom line: Stocks are entering a gauntlet of key data and a reversal of regional banks matters most

This is a tough time to argue adding risk. We had hoped stocks would be breaking to the upside on the Fed pause. But with the tailspin in regional banks, this is making stocks more challenging. In our view, we still see good risk/reward but the timing has been pushed out. We still view October 12, 2022 as the low, but expect stocks to act hesitantly into next week’s CPI.

the key remains Regional banks ($KRE) and if Newton’s view is correct and bottom is seen Friday, this is a positive.
As for sectors, our favorites remain FAANG/Technlogy and Apple reported solid results 5/4 ($AAPL), Industrials ($XLI) and Energy ($XLE). But energy has headwinds as economic resilience is uncertain.
While Industrials did not get the sustained lift despite signs of strengthening ISM, this is hard to avoid fallout from the regional bank sell-off.

STOCKS VS BONDS: Bonds rallied (yields fell) but stocks did not follow

As shown below, equity markets diverged and did not follow the rally in bonds (yields fall). While many attribute this to heightened recession risk, the yield curves flattened this week (10Y less 2Y) and (30Y less 10Y).

REGIONAL BANKS: Histrionics but real issues due to rates and structural factors

The issues for regional banks are real. Even if the deposit base is stable, there is the challenge of asset quality (loans) and cost of funding. And as the chart below shows, regional banks tanked during the FOMC press conference. And we highlighted the Powell statements — it is about “rates”, “pause” and “longer”.

But there is also hysteria behind this. Look at the web page of Pacific West Bank, as it tries to make clear it is not PacWest ($PACW).

And Republic First is trying to fight traders who see them as the same as First Republic.

Whether there is manipulation of bank shares is unknown. But we also know that whenever there is a downturn in stocks, investors blame short sellers and manipulators. I don’t have a view personally. But I do generally believe short sellers are an overall positive force in markets.

And regional banks might be bottoming soon. Mark Newton, Head of Technical Strategy at Fundstrat, believes regional banks might be making a short-term bottom Friday. He certainly is not saying the “bottom” but a sign of seller exhaustion.

Mark cites DeMark signals and, as shown below, the daily DeMark might be showing ’13’ buy signals by Friday. The key is seeing prices respond to these levels. That will be important.

and a bottom for regional banks would be helpful for equities to find support.

FED SPEAK: Regional bank damage control tour

Starting Friday 5/5, there will be 13 Fed appearances/speeches post-FOMC. And we believe these 13 meetings will ultimately be about “damage control on regional bank fallout” — that is, there will likely be some walking back on the tone of hawkishness and “higher for longer.”

Two Fed speakers Friday.
Bullard 1pm ET Friday at the Economic Club of Minneapolis. There will be Q&A.
Lisa Cook at 1pm ET also giving the Commencement Address at MSU (Michigan State University) but this is a speech and no Q&A.

ECONOMIC CALENDAR: Key May data is inflation and ISM, and April was overall “tame”

Key incoming data May

~~5/1 10am ET April ISM Manufacturing (PMIs turn up)~~ Positive inflection
~~5/2 10am ET Mar JOLTS~~ Softer than consensus
~~5/3 10am ET April ISM Services~~ Tame
~~5/3 2pm Fed May FOMC rates decision~~ Dovish
5/5 8:30am ET April Jobs report
5/5 Manheim Used Vehicle Value Index April
5/10 8:30am ET April CPI
5/11 8:30am ET April PPI
5/12 10am ET U. Mich. April prelim 1-yr inflation
5/12 Atlanta Fed Wage Tracker April
5/24 2pm ET May FOMC minutes
5/26 8:30am ET PCE April
5/26 10am ET U. Mich. April final 1-yr inflation
5/30 Conference Board Consumer Confidence

Key data April

~~4/3 10am ISM Manufacturing Employment/Prices Paid March~~ Tame
~~4/4 10am ET JOLTS Job Openings (Feb)~~ Tame
~~4/7 8:30am ET March employment report~~ Tame
~~4/12 8:30am ET CPI March~~ Tame
~~4/12 2pm ET March FOMC Minutes~~ Tame
~~4/13 8:30am ET PPI Marc~~h Tame
4/14 7am ET 1Q 2023 Earnings Season Begins Better than feared
~~4/14 Atlanta Fed Wage Tracker March~~ Semi-strong
~~4/14 10am ET U. Mich. March prelim 1-yr inflation~~ Hawkish
~~4/19 2:30pm ET Fed releases Beige Book~~ Tame
~~4/28 8:30am 1Q23 Employment Cost Index~~ Semi-strong
~~4/28 8:30am ET PCE March~~ Tame
~~4/28 10am ET UMich April final 1-yr inflation~~ Hawkish

STRATEGY: Focus on Industrials, a week to make a tactical positive bet

Both the ISM PMI and S&P Global US PMIs are released on Monday:

ISM Manufacturing PMI has been better than consensus.

Actual 47.1 vs Street 46.8 and last month 46.3

S&P Global US PMIs has come in slightly lower than consensus, but remains above 50.

Actual 50.2 vs Street 50.4 and last month 50.4

Whenever PMIs bottom (see below), Industrials tend to bottom. This first chart shows rolling change for US PMIs and US Industrials returns.

This distribution table puts this in a clearer light. When PMIs are rising and from low levels, Industrials see strong gains.

Since 1948, when PMIs are over 50 and are rising (n=60), Industrials see positive forward 6M and 12M gains of 85%/95% of the time with median gains of +12.6%/21.5%, respectively.

Those are very favorable risk/reward and high absolute return opportunities.

Industrials are oversold vs S&P 500 on 20D %-change, with a z-score of -1.2.

The top chart is the relative price ratio of Industrials vs S&P 500
The bottom is the z-score of the 20D % change.
The most recent 4 times this was seen, Industrials staged strong rallies vs the broader market.

This is not that different than the signal we highlighted two weeks ago regarding FAANG/Technology. And we know that FAANG powered higher in the past two weeks

And Industrials are the most oversold vs other sectors, particularly against Staples.

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.

There are 3 stocks in 3 of 7 themes: $XOM $AAPL $CDNS.

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, $META

Consumer Discretionary: $AMZN, $GRMN, $TSLA, $ULTA

Consumer Staples: $BF/B, $MNST, $PG, $PM, $KO

Energy: $DVN, $OXY, $PSX, $VLO, $XOM, $MPC

Financials: $AXP, $FISV

Health Care: $AMGN, $HUM, $ISRG, $MRK, $VRTX

Information Technology: $AAPL, $AMD, $CDNS, $KLAC, $MSFT, $NVDA, $PYPL, $FTNT, $NOW, $ON

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34 Granny Shot Ideas: $GOOGL, $META, $AMZN, $GRMN, $TSLA, $BF/B, $FISV, $MNST, $PG, $PM, $DVN, $FTNT, $OXY, $PSX, $VLO, $XOM, $AXP, $MPC, $AMGN, $NOW, $ON, $ULTA, $VRTX, $AAPL, $AMD, $CDNS, $KLAC, $MSFT, $NVDA, $PYPL, $HUM, $ISRG, $KO, $MRK

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