Bullish Trend, Fed Fantasies, September Seasonality, Trading Salesforce
On Wednesday, the recent uptrend in equities remained in place. The moves for the session were muted. That said, the market moved the ball in the right direction for the bulls the day after a very modest volume-based confirmation of a change in trend that actually occurred almost two weeks ago.
Treasuries largely stayed put on Wednesday. I see the U.S. 10-Year Note giving up about 4.1% this morning, and the 2-Year about 4.87%, meaning that while you slept, Asian and European bond traders remained on the bid side of this market, applying mild pressure to these two key yields. The U.S. Dollar Index, which has been under pressure, found support at 103 on Wednesday during the U.S. session, and then again overnight.
The S&P 500 moved 0.38% higher on Wednesday for a fourth consecutive “up” session. This index turned on Friday, August 18, and has tacked on 4.1% since to come into the last trading session of August down just 1.6% for the month.
The Nasdaq Composite has been even stronger of late. That index also turned on the 18th, which was a down day for equities by the way. The Nasdaq Composite has also put together a four-day winning streak, also confirmed the change through volume on Tuesday, and has now traded higher on seven of the past eight sessions.
The Nasdaq Composite is now up 5.5% from that intraday low on August 18 and down just 2.3% going into this final trading day of August. For those who really like to dig into the numbers, the Philadelphia Semiconductor also bottomed on August 18, is up 7% since then, but is still down 5.6% for the month.
Trial By Fire
This admittedly lightly traded rally has been boosted this week by some less-than-strong macro. August Consumer Confidence was weaker, but not weak, the July ADP Employment Report showed that private sector job creation had been softer, but not soft. The July JOLTS survey showed job openings to be in decline, but still elevated, and job quits lower, which may not be a positive for the economy, but does help fight inflation. Lastly, we learned that economic activity in the second quarter had been less robust (but not anemic) than originally thought.
All of those “not so strong” data-points in aggregate, have allowed traders to fantasize that the FOMC might be done or close to done in their deployment of short-term interest rates as an inflation-fighting weapon, and have priced in less aggressive monetary policy moving forward.
Currently, I see that futures markets are pricing in an 89% probability for no rate hike on September 20 and a 56% probability that the Fed is done raising rates. Period. These markets now see rate cuts starting as soon as May 1.
These fantasies, however, will either be dashed against the rocks as this week comes to a conclusion, or they will be cemented in place, and perhaps intensify. This (Thursday) morning, the Bureau of Economic Analysis will publish Personal Income and Personal Spending for July as well as July PCE and Core PCE. These last two just happen to be the Fed’s favorite metrics used to measure consumer-level inflation. What was your favorite metric for measuring consumer-level inflation growing up? I mean everyone had one, right?
The dance continues on Friday morning. That’s when the Bureau of Labor Statistics goes to the tape with July data for job creation, wage growth, participation, and hours worked. Nothing is really more important than this in determining the broader health of the U.S. economy and its prospects for future growth as well as inflation. After that, the July Manufacturing PMI and July Construction Spending will also print.
If our rally is the real thing, we should know more by then, after trial by fire, as the magnitude of the macroeconomic data increases, and probably as human participation in the financial marketplace wanes approaching a three-day weekend.
September beckons. Seasonally, September is the weakest month of the year for equities. Over the past 25 Septembers, 13 have gone negative, while 12 have gone positive (so there is nothing close to a guarantee here), while the mean return for the S&P 500 for those 25 Septembers has been -3.4%. ( If one omits September 2001 for obvious reasons, the mean return across the other 24 improves to -2.4%.
Because you asked, the past 25 Octobers have returned an average of 1.4% and November has been the best month of the year. The last 25 Novembers have returned an average of 4.6%. That would be better than a sharp stick in the eye.
Equity Marketplace
As mentioned above, the movement on Wednesday was subdued. The Nasdaq 100 led all the indexes that I follow closely, with a gain of just 0.56%. The KBW Bank Index, one of only two indexes that I see in the red, actually gave up more — 0.63% for the day.
Nine of the 11 S&P sector SPDR ETFs shaded green for the day, led by Technology ( XLK) and Energy ( XLE) . Those two funds were up 0.76% and 0.5%, respectively. The Utilities ( XLU) at -0.45% finished at a distant last place for the session.
As one might imagine, breadth reverted closer to mean than it had earlier in the week. Winners beat losers by 3 to 2 at the NYSE, and by 5 to 4 at the Nasdaq. Advancing volume took a 55.6% share of composite NYSE-listed trade, and a 58.5% share of composite Nasdaq-listed trade. Trading volume contracted on a day-over-day business, for securities listed at 11 Wall Street, for securities listed up at Times Square, across the S&P 500 and across the Nasdaq Composite.
In short, the professional accumulation that we had experienced on Tuesday, largely came to an abrupt halt on Wednesday. Are the pros out for the week? With the two days of macro mentioned above staring right back at them? I doubt it. Even if they’re on the beach, they will participate electronically. There is no such thing as truly being “off” in 2023.
Salesforce Update
Being I’m the guy who wrote the bullish piece on (and invested in) Salesforce ( CRM) ahead of its earnings numbers, I guess I’ll update the story now that the company has reported their fiscal second quarter.
For the three-month period ended July 31, Salesforce posted an adjusted EPS of $2.12 (GAAP EPS: $1.28) on revenue of $8.603B. The top and bottom line numbers both beat the Street, while that revenue print was good for year-over-year growth of 11.4%.
Remaining Performance Obligation increased 12% to $46.6B, as Current Remaining Performance Obligation increased 12.1% to $24.1B. As revenue was growing 11.4%, the cost of revenue decreased fractionally, leaving a GAAP gross profit of $6.49B (+16%) on a gross margin of 75.4% up from 72.5%. GAAP operating margin improved from 2.5% to 17.2%, as adjusted operating margin improved from 19.9% to 31.6%.
Operating cash flow popped 142% to $808M, as free cash flow ramped 379% to $628M. Salesforce did return $1.9B to shareholders during the quarter in the form of shares repurchased for the company treasury. I think that maybe they could have repurchased fewer shares, but my opinion was not asked for.
Glancing at the balance sheet, the company’s cash position stands at $12.4B, as current assets stand at $21.138B. Current liabilities add up to $20.805B, including $999M in short-term debt. This puts the current ratio at 1.02. While that does not look so hot on the surface, once unearned revenue (which is not a financial liability) is removed from the liability side of the balance sheet, the current ratio rises to a very muscular 3.22.
As far as guidance is concerned, current quarter revenue is now seen at $8.7B to $8.72B, which is above the $8.66B that Wall Street was looking for. Full-year revenue is seen at $34.7B to $34.8B, which again, beats the Street’s consensus view of $34.65B. Full-year GAAP operating margin is expected to print at roughly 13.3%, or 30% once adjusted. Full-year operating cash flow growth is seen at 22% to 23%.
This is the chart I published for subscribers yesterday. I gave you a pivot point of $238 and a price target of $273. When I wrote that, I did not think that I would have to think about those levels very soon. I still might not have to, as I see the shares trading with a $226 handle overnight. That’s up 5%+, but probably not a threat to hit pivot today. There is no reason to adjust these levels. My panic point remains in place as well, but is a moving target. That level would be a break of the 200-day simple moving average (SMA), which is currently $185.
In addition to my long equity position that is now (at $226) up 42.5%, I got short a $210/$205 bear put spread expiring tomorrow late yesterday for a net credit of $1.74, just to pad the P/L a little.
Let’s just hope the rally lasts through the macro. That’s still a big “if.”
Economics (All Times Eastern)
08:30 – Initial Jobless Claims (Weekly): Expecting 236K, Last 230K.
08:30 – Continuing Claims (Weekly): Last 1.702M.
08:30 – Personal Income (Jul): Expecting 0.3% m/m, Last 0.3% m/m.
08:30 – Consumer Spending (Jul): Expecting 0.6% m/m, Last 0.5% m/m.
08:30 – PCE Price Index (Jul): Expecting 3.3% y/y, Last 3.0% y/y.
08:30 – Core PCE Price Index (Jul): Expecting 4.2% y/y, Last 4.1% y/y.
09:45 – Chicago PMI (Aug): Expecting 44.2, Last 42.8.
10:30 – Natural Gas Inventories (Weekly): Last +18B cf.
The Fed (All Times Eastern)
03:15 – Speaker: Atlanta Fed Pres. Raphael Bostic.
09:00 – Speaker: Boston Fed Pres. Susan Collins.