Investors Selling into Good Earnings News is Not Bullish

The big tech giants known as the FANGMAN stocks that make up about 25% of the S&P 500 mostly reported great earnings and almost in every case, the initial reaction was sold into. Add in Tesla, Visa and Mastercard as well and you have a much less than bullish reaction to better-than-expected news. The next few days to weeks the follow-through behaviour is a key indication how the rest of the year could play out.

There was no shortage of headlines like this that we and others have clearly noticed too.

Selling Into Good News Is Never a Positive – RealMoney (

The chart highlights the past 2 earnings report dates for AAPL and the market reaction. In the case of AAPL, zero growth since August 2020. Valuations have been driven higher by falling inflation and interest rates in recent years. With inflation expectations rising and interest rates turning up (for now), the more rate sensitive stocks are reacting negatively. The steeper yield curve has helped the banks and inflation expectations have helped the energy stocks. Yet large cap tech stocks are starting to behave poorly.

Breadth Divergence

One way we can look under the hood to see what is happening is the analysis of how many stocks are participating in the trend. April was a very good month as typical for stocks coming off the positive divergence in the Jan-March breadth lows. But as we see in the chart, the percentage of S&P 500 stocks that are trending above their own 50-day average has flattened out and turned a bit lower. Historically, this can lead to a period of consolidation for broader equity markets. An over heated market often needs a correction. It’s been very hot since the US election and Pfizer’s efficacy announcement in early November.

The catalyst is likely found in today’s quarterly refunding announcement from the US Treasury.

Quarterly Refunding Archives | U.S. Department of the Treasury

All the stimulus that the market is cheering needs to be paid for. Debt issuance is going to increase significantly for the next year. Our estimate is a deficit of about $1.5T above what the fed is already buying ($80B per month). The Fed has been buying most of the debt issuance so far this year, but that dynamic is going to change dramatically. If money needs to go into the bond market, then it has the effect of sucking liquidity out of other asset markets. It also has the impact of pushing bond yields higher to entice investors to this asset class that has a real (after inflation) negative yield.

On February 1, when Treasury Secretary Yellen announce that they would run down the treasury balance through June, she kicked the can on this bond supply, and she can kick it a bit more, buy they need to fund this. In Feb, the additional $1.9T stimulus was not passed. So either the Fed buys it or bond yields rise a lot more to attract investors. Rising yields are a huge negative for valuations and the equity risk premium (ERP).

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