Welcome to earning season! With the major banks and brokers reporting earnings this morning, Q2 earnings season has begun. Of the four major banks reporting today, they all exceeded EPS and revenue forecasts, and except for Wells Fargo (WFC), they’re also trading higher on the day.  WFC’s decline is tied to weaker net interest income and an increase in non-performing loans. The response in the market has been mixed as futures are little changed with the S&P 500 indicated modestly higher while the Nasdaq is modestly lower heading into the June PPI report and then the Michigan Confidence report at 10 AM.

June’s PPI came in higher than expected and May’s results were also revised higher, which has put some downward pressure on equity futures and pushed yields higher, so that should (in theory at least) reverse some of the moves we saw in yesterday’s volatile session

You’ve been living through history over the last few days, and we’re not even talking about political history. We’ve been highlighting the near-record levels of outperformance of mega-caps relative to the rest of the market this year, and earlier in the week we noted that the rubber band can only stretch so much before it snaps back. Yesterday gave a perfect example.

In last night’s Closer and on X yesterday, we noted some of the major one-day extremes we saw in the relative outperformance of small caps versus large caps.
Another major shift was the performance of semiconductors relative to homebuilders. Over the last five years, homebuilders and semiconductors have traded practically step for step with each other. During that time, the correlation between the Philadelphia Semiconductor Index (SOX) and the S&P 500 Homebuilder Sub Industry has been +0.93.  Admittedly, the last three months have seen a deviation from that positive correlation, but the two indices have seen similar returns and followed very similar paths.

Yesterday saw the two sectors deviate in a big way. While the SOX fell 3.5%, the homebuilders industry surged 6.7% for the best day since November 2022.  As shown in the chart below, the 10+ percentage point outperformance of homebuilders versus semis was the widest since the depth of Covid in March 2020, and there have only been 24 days since 1994 when the one-day performance gap between the two was wider than yesterday.

What makes yesterday so unique is the market environment it occurred. Prior days where homebuilders outperformed semis by such a wide margin took place in extremely volatile environments. While the VIX closed yesterday below 13, on the 24 other days when the performance spread was ten percentage points or wider (in favor of homebuilders), the closing level of VIX ranged from 19.6 up to 70, and the median closing level was 26.5!  Similarly, under the reverse scenario when semis outperformed homebuilders by 10 percentage points or more, the VIX closed in a range of 21.5 up to 61.6 with a median reading of 29.4. we’re not exactly sure what to make of the lack of volatility given the moves underneath the surface, but it’s somewhat unprecedented.

More By This Author: