The color red (which on Wall Street denotes losses) is prominent in the equity futures market this morning. That should probably come as no surprise considering the S&P 500 has gone up in 10 of the last 11 sessions and the Russell 2000 has surged 11.7% over the last seven trading sessions.
Currently, the S&P 500 futures are down 60 points and are trading 1.1% below fair value, the Nasdaq 100 futures are down 320 points and are trading 1.6% below fair value, and the Dow Jones Industrial Average futures are down 146 points and are trading 0.3% below fair value.
The contention that the broader market is overbought on a short-term basis and due for a pullback is valid in its own right, yet it has been helped along this morning by some other news.
A Bloomberg report that the Biden Administration is discussing tighter export restrictions for semiconductors and semiconductor equipment going to China has caused an upsetting stir. NVIDA (NVDA) is down 3.9% and ASML (ASML), which reported better-than-expected Q2 results and reaffirmed its full-year revenue outlook, is down 7.8%.
That weakness is demonstrative of losses across the widely-owned and heavily-traded space, which is going to be a key drag on the broader market. Separately, a remark from former President Trump that Taiwan should be paying the U.S. for its defense has created some geopolitical angst that is also weighing on the semiconductor group.
Elsewhere, a second quarter profit warning from Five Below (FIVE), a second quarter revenue warning from Spirit Airlines (SAVE), and disappointing second quarter results from J.B. Hunt Transport Services (JBHT) have taken some wind out of the market’s sails, piquing some concerns about a slowing economy.
Dow component Johnson & Johnson (JNJ) posted better-than-expected second quarter results, but trimmed its FY24 adjusted operational EPS, saying M&A costs have offset its improved performance. Shares of JNJ are flat in pre-market trading.
These corporate developments have blended with some economic data this morning that did little to alter the negative disposition seen in the equity futures market.
Total housing starts in June increased 3.0% month-over-month from a depressed base to a seasonally adjusted annual rate of 1.353 million (Briefing.com consensus 1.310 million); however, single-unit starts were down 2.2%. Total building permits jumped 3.4% month-over-month to a seasonally adjusted annual rate of 1.446 million (Briefing.com consensus 1.391 million); however, permits for single units — a leading indicator — were down 2.3%.
The key takeaway from the report is that, while it might have been better than expected relative to consensus estimates, it was not a strong report nor a particularly encouraging report for an inventory-constrained housing market in need of lower-priced, single-family homes.
The 2-yr note yield is up four basis points to 4.48% and the 10-yr note yield is up one basis point to 4.18%, so even the Treasury market is giving in to some selling pressure after a spirited run of late that has taken yields noticeably lower over the course of this month.
That is perhaps no surprise either.
What remains to be seen is how the market — and particularly the broader market — responds to this pullback activity. To that end, the behavior of the small-cap stocks will be a focal point.
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Originally Posted July 17, 2024 – A pullback effort is in the offing
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