The consumer is still holding out, but certainly not as confident as they were a few months ago. The goal was both good and bad. Comp sales were flat, 1% lighter than expected. On the plus side: Traffic was higher, which is a good thing. The second quarter guidance is light, but the guidance was unchanged for the year. That sounds good, but you can drive a truck with a full-year earnings estimate of $7.75 to $8.75. Target could have thrown an oxen bone and raised the lower end to steer, but chose not to. Traffic is high, but they don’t change routing? This tells me the business is volatile and management doesn’t have much confidence that the discretionary part of the business will bounce back. Bottom line: With Home Depot losing revenue and cutting guidance for the full year, and Target lacking confidence in the back half of the year, this tells me that the consumer is definitely more cautious than it was a few months ago. The good news: the target is a survivor and he will survive. It’s a well-run retailer with huge scale and a solid balance sheet. The bad news: The customer base seems to be swaying. When the lower end consumer has money, they buy more discretionary items at Target. When they don’t, it looks like they go to Walmart. Trading Trends: Ready for Summer Ready to give up and head to the beach for summer yet? I know it’s early, but call the trading desks, wander the stock or options floor at the NYSE, and it kind of looks like everyone’s excited about the start of summer, mostly because of the lack of action. and lack of volume. and low volatility. and lack of direction. Traders are “not sure they should lean in or out of the market,” Craig Johnson of Piper Sandler tells me. Here’s the good news: the market has digested a lot of bad news, but it’s basically been sideways (4100 range) for the entire second quarter. think about it. The collapse of banks, the war in Ukraine, debt ceiling negotiations, as interest rates continue to be raised…and is the market stable? Put this information on a trader a year ago, most of them were predicting the market would go down 10%-20%. Earnings Don’t Cooperate With the “Impending Recession” Story What’s even more surprising is the earnings case. Six months ago, everyone was convinced earnings would come off a cliff in 2023. Most Wall Street strategists believed this year’s earnings would come in around $200, which is a 10% drop from the $218 that was printed in 2022. Quite normal for a recession. Economic, which usually sees earnings drop by 10%-20%. Except it didn’t happen. Earnings estimates for the first quarter have been cut too far. It is expected to decline by 5.1% on April 1, estimates for the first quarter have been rising for weeks and it is now expected to decline by only 0.6%. Estimates for the second half of the year were flat. Full-year earnings for the S&P 500 are expected to grow 1.2%, unchanged since the beginning of the quarter. What kind of recession will we have? Here’s the bad news: The stock market can’t seem to agree with the kind of slowdown we might have. Parts of the market (growth stocks like technology and defensive sectors like healthcare and consumer goods) are looking right during any slowdown. Others (such as industries, materials, and energy) are behaving like a slowdown is definitely coming. For example, Caterpillar, often seen as a leader in international growth, is 20% below its most recent high in January. More bad news: The bond market, with its inverted yield curve, seems to be pointing to a more serious recession as well. Pain traded in a bewildering strip, perhaps the most important thing to realize is how sad everyone is. Emotions are very negative. This is positive. The American Association of Individual Investors poll showed investors “pessimistic” in the 35%-45% range for weeks, well above the historical norm. The BofA Global Fund Manager’s survey has been extremely pessimistic for most of this year. The Commitment of Traders report, which looks at open interest in S&P 500 E-Mini futures, indicated very short interest by non-commercial traders (retail and hedge funds) for weeks. We are talking about very high levels. “Some of the highest short interest we’ve seen since 2007,” PiperSandler’s Johnson told me. “Traders settled into a very negative outlook.” This is, as we have noted many times, a conflicting indicator. In the past, during periods when short interest was as high as this (2007, 2011, 2015, and 2020), the market was usually higher after three months. how much higher? Johnson told me it’s 4.8% higher. “When we have had high short positions like this in the past, we often see the markets move up,” he told me. One of the favorite indicators that traders like to use is the Pain Trade. What movement in the market would cause the most discomfort to most traders? With very negative emotions, it’s obvious what might cause the most pain. “Pain trading has gone up,” Chief Market Technologist Lee Johnson told me. “Everyone is positioned negatively; the real risk is that they get caught and the market moves higher.”
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