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This Is the Week That Will Be, Starting With MSFT

This Is the Week That Will Be, Starting With MSFT

Posted July 30, 2024 at 11:00 am

Steve Sosnick
Interactive Brokers

My intention today was to discuss how it was shaping up to be a an uneventful, “watch and wait” day ahead of a series of potentially major market catalysts.  That’s what we had yesterday and seemed to be having this morning.  Nope.

Instead, we see a relatively broad-based, tech-led selloff.  The activity fits with the general “routation” theme that has prevailed for much of the past few weeks.  As we approach midday, the S&P 500 (SPX) is down about -0.75% and the Nasdaq 100 (NDX) is down about -1.5%.  All the “Great Eight” stocks (the “Magnificent Seven” plus Broadcom (AVGO) are lower.  Nvidia (NVDA) is leading the way down, with today’s -6% drop making for a nearly -15% drop over the past five days.  It is difficult, if not impossible, for the aforementioned indices to escape that gravitational pull.  The Philadelphia Semiconductor Index (SOX) is hardly immune, down over -3% today. 

Yet the “routation” continues to leave broad swaths of the market relatively unscathed.  Advancing and declining stocks are roughly even, and the Russell 2000 (RTY) is essentially unchanged.  The Russell 1000 Value ETF (VONV) is up very slightly even as the decline in its Growth counterpart (VONG) is similar to NDX’ -1.5%.  As far as major selloffs are concerned, this remains a very concentrated one.  The problem of course is that the rally was similarly concentrated

Considering that markets are meant to be forward-looking, here is what they have to look forward to this week (all times EDT):

               Today (Tuesday), after the close: Microsoft (MSFT) and AMD earnings

               Overnight: Bank of Japan meeting

               Tomorrow (Wednesday) afternoon, during trading: FOMC meeting and Powell press conference

               Tomorrow after the close: META earnings

               Thursday after the close: Apple (AAPL) and Amazon (AMZN) earnings

               Friday before the opening: June Jobs Report

Any or all of these events has the potential to move markets.  We all know about the power of the FOMC and Jobs Report, but I am actually quite concerned about the outcome of the BOJ meeting tonight.  There is currently a 70% chance that they will raise rates by 10 basis points at this meeting.  That hardly seems meaningful, but it is clearly an “in-play” meeting (as opposed to the 4% chance for a Fed rate cut).  Considering the dislocations that coincided with, if not caused by, the recent rapid appreciation of the yen and its effect upon carry trades, a significant currency move in either direction could have profound effects on risk assets. 

16 Days, Japanese Yen (white) vs. Front Month Rolling NQ Futures (blue)

Source: Bloomberg

Last week we all saw what could happen when megacap tech stocks disappointed.  Tesla (TSLA) sank by a double-digit percentage after missing on EPS and other metrics, but more ominously, Alphabet (GOOG, GOOGL) fell even after a seemingly solid report.  Investors were unhappy with the lack of clarity about when that company’s billions in AI-related spending would yield bottom-line results.  This was a concern raised by META after it’s last report, but it soon faded into the background after investors resumed their love affair with all things tech.  With the infatuation fading, it will be up to each of the four megacaps reporting this week to justify their AI investing with a path to near-term profitability.

One has to wonder if the sporadic outages that MSFT experienced today are auspicious.  Options traders are pricing in a roughly 4.6% daily move between now and Friday afternoon.  That is above recent post-earnings history for the stock (+1.8%, -2.7%, +3.1%, -3.8%, +7.2%, -0.6%), indicating that last week’s GOOGL sell-off might be weighing upon expectations.  We also see a fairly risk-averse skew, though with a notable bump in at-money options:

Top: MSFT Skew for Options Expiring August 2nd (green), August 16th (yellow), September 20th (orange)
Bottom: MSFT Volatility Term Structure

Source: Interactive Brokers

As implied by the graph above, the IBKR Probability Lab shows a peak in at-money options with a relatively steep downside but plenty of probability above the market:

IBKR Probability Lab for Options Expiring August 2nd

Source: Interactive Brokers

Bottom line: MSFT traders are displaying a bit of risk aversion ahead of today’s earnings.  That is not wholly a bad thing – a healthy respect for risk actually implies less danger than a “nothing can go wrong” approach.  It’s up to the company to deliver – and maybe the BOJ too.

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