Research Notes

Strategy

• The bull trend remains intact, but internals are softening - fewer than 50% of stocks are above their 20-DMA and only ~9% are making new 20-day highs, a backdrop that historically favors pause or consolidation over an immediate surge.
   
  • deGraaf had a video explaining this here.
    
    
• The equal-weighted S&P 500 is pressing up against all-time-highs, while the Russell 2000 has posted a golden cross.
   
  • Heavy IWM outflows continue, creating a more favorable tactical setup for small-caps, though relative strength versus large-caps still doesn't point to a sustained leadership shift.
  
  
• Homebuilders have rallied into their descending 200-DMA, improving momentum rankings without changing the intermediate downtrend. Overbought conditions suggest these recent breakouts could prove more of a ceiling than a springboard for forward returns.
  
  
• In rates, the U.S. 10-yr yield has formed a dark cross and is holding its downtrend line; a break below 4.12% would help confirm the move lower, aligning with our Asset Allocation model's recent rotation of cash into bonds.
  
  
• Rolling high-beta outperformance has eased from peak levels but remains in the 97th percentile, leaving room for further contraction.
   
  • Meanwhile, momentum has improved to the 30th percentile, supporting the ongoing rotation from beta into momentum.
    

Economics

• July's CPI rose 0.2%, bringing the six-month annualized rate to 1.9%.
   
  • Medical care services surged, and without that component, core CPI would have been 0.27% rather than 0.3%.
  • Tariffs continue to push up core goods prices, which rose 0.7% after June's 1.0% gain.
  • While services eased modestly - food away from home posted its weakest gain since January (0.3%), and hotel/motel CPI fell for a fifth straight month.
  
  
• PPI surprised to the upside, up 0.9% (~4x expectations).
   
  • For core PCE, the implications are relatively mild - portfolio management services spiked 5.8% on equity market strength, but medical care services and airfares were restrained.
  • We estimate core PCE will rise 0.26% in July.
  • The concern is that producer margins are expanding - final demand trade services rose ~2%, implying producers have room to pass tariff costs along to buyers.
  
  
• For the Fed, July's CPI likely locks in a September rate cut, but probably just 25bps given that some FOMC voters had penciled in no cuts at all this year.
  
  
• The NFIB Small Business Optimism Index rose to 100.3, a five-month high, with a net 36% expecting the economy to improve - the most since February.
   
  • However, more firms cited "poor sales" as their top problem, highlighting the disconnect between sentiment and slowing economic reality.

Research Notes

Economics

• US labor market continues its downtrend. Weekly job postings continue to trend down, layoffs picking up, quits are cooling.
  
  
• March data showed broad economic weakness, with declines in services, confidence, housing, and commercial real estate.
  
  
• Rising inflation, weakening job outlooks, and cautious business spending point to growing economic strain.
  
  
• Home prices are cooling, which may curb spending as household wealth dips and the savings rate edges higher.
  
  
• The rebound in capital goods shipments looks fragile, with growth mostly tied to tech and broader investment plans weakening.
  
  
• New tariffs could cut 0.5% from GDP, strain trade ties, and raise car prices before production shifts take effect.
  
  
• Auto repossessions are at their highest since 2009, and tariffs may push buyers to the used market, keeping prices elevated.
  
  
• Despite trade tensions, signs of de-escalation and strong profits offer some cushion, with markets already pricing in much of the downside.
  
  
• Q4 growth was lifted by consumer and government spending, but with investment falling and key supports fading, a broader slowdown seems likely.

Strategy

• Market technicals show potential for a rebound. We think Mag7 approaches 50dma and potentially crosses through, getting to overbought, high beta stocks slowly recovering, and excessive outflows in IWM and SPY could fuel a tactical bounce.
   
  • Remember, this was a beta-driven correction, not a momentum-driven one.
    
    
• Bullish signals may re-emerge if a high percentage of stocks move about their 20dma and hit 20-day highs, suggesting a reassertion of the bull trend.
  
  
• Despite heightened policy uncertainty and a dark cross in tech, strong credit markets and sentiment tied to returns suggest the current pessimism may be overdone.
  
  
• Semi's continue to weaken, with even "good" ones coming under pressure.
  
  
• Staples pulled back at resistance levels, maintaining relative downtrend. Sharp unwind in beta and extreme underperformance suggests continued downward pressure.
  
  
• Transports reiterate bearish trend but flagging oversold and in "seller's frenzy". Expect short-term tactical bounce but fade the move.

Policy

• Debt limit deadline ("X-Date") likely between July and October, with resolution hinging on reconciliation or bipartisan deal amid uncertain cash flows.
   
  • Delays risk market volatility and a Moody's downgrade, raising U.S. borrowing costs.
    
    
• Trump will announce reciprocal tariffs on April 2, targeting about 15 key partners; recent moves on oil, autos, and threats to the EU and Canada may be strategic leverage.
  
  
• Section 232 is being used more broadly to justify tariffs on national security grounds, covering autos, copper, timber, and pharma, with an emphasis on U.S. production.
  
  
• Tariff timing and scope remain unclear, with Trump using them as a flexible tool, adding to market uncertainty.