Is The Market Rotating Or Broadening?... And Options Action Ahead Of Earnings 7/12/24

0:02John, thank you very much. And live from the NASDAQ market site in the heart of New York City's Times Square. This is Fast Money. And here's what's on tap tonight. A big week for small caps. The Russell has been a real laggard so far this year, but this week it had a monster breakout. Is this rebound for real? We'll debate that one. Plus, big bank bummer. Shares of Wells Fargo hit hard after disappointing results. JP Morgan and Citi also lower on the day after reporting earnings. So is this a bad sign for the rest of the sector, which will post results, or most of it will, next week? And later, it's Friday.

0:36Ahead of a big week of earnings, we'll fire up an old-school options action palooza to get you ready for results from Netflix to UAL to J &J and a bunch more. We've got a lot more banks, by the way. I'm Tyler Matheson. In tonight for Melissa Lee. Coming to you live from Studio B at the NASDAQ market site. On the desk tonight, Tim Seymour. He's not really on the desk. He's home, but he's here in spirit. Courtney Garcia, Carter Wirth, and Bono and Eisen all join us here live on set. And we start with the great market rotation, or is it the great market broadening? Whatever it is, it's nice. Small caps, which have been a clear underperformer this year, jumping again today, bringing their gains since Monday to 6%.

1:18That's the Russell 2000's best week since November. The rate-sensitive real estate sector, the only S &P 500 group still in the red for 2024. It led the index this week up more than 4%, 4.4 % to be exact. And the Dow up just single digits this year versus a 20-plus percent gain in the NASDAQ. Jumped 250 points today. It hit its first intraday record in nearly two months. But it wasn't just the laggards playing catch-up. Big winners of the year, from arm holdings to an NVIDIA, an Apple. They were hit hard yesterday, but were able to recoup much of their losses, suggesting that maybe Thursday's pullback was a blip in the AI-led rally.

2:03So is the rising tech tide now truly lifting all boats? Courtney, you pointed out this phenomenon earlier today. Yeah, and I think the question was, when you started to see this rotation yesterday, everyone said, OK, this rotation we've all been waiting for this year, out of growth, into value, is finally starting to happen. But today you're seeing that tech trade is coming back as well, which means we're seeing more of a broadening as opposed to just a rotation, which is good. That means the entire markets are going higher. What's the difference there between a broadening and a rotation? In other words, it means that everybody sort of benefits as opposed to cash leaving one sector and rotating into another?

2:38You got it, yeah. So the difference of money coming out of tech and going into those other sectors, you're seeing kind of everything rally is what they're calling it, right? Everything is going up. And that's actually a much better sign. So when you're looking at the equal weight S &P, that has done very well so far. And that's really indicative that you're seeing the broad markets doing better. And those have a really good valuation. I mean, they're trading at less than their historical averages, significantly less than the 23 times earnings of the S &P 500. And that's why you want to make sure you're getting into this before this rotation or this broadening happens.

3:09You're starting to see that happen this week, and that's really what the markets are positive on. Tim, what about these small caps that started to take part this week, up 6 % for the week? And they have been, of course, laggards sort of famously throughout this entire bull market so far. Tyler, sorry, I can't be with you there today, but I feel you here. And yeah, and as we talk about this, I mean, the small caps outperformed over the last two days by 520 basis points to the S &P. Courtney pointed out that the equal weight was up about 3 percent and S &P value was up about two and a half percent.

3:45So the dynamic here to me is a case of, yes, I think positioning was so extreme to the downside. Small caps were so oversold. The recipe for the rally is pretty clear. If you have a soft landing and you have a benign Fed and maybe even a Fed that could move, look, traders are starting to price in possibly a 50 basis point hike in September. It's going to be great to listen to Jim Bianco in a second because I think he's probably on the other side of that. I think that's a recipe for the small caps continuing to outperform and making multi-year lows relative to the S &P. I'm just not so sure. I'm also somebody that doesn't feel like you have to own small caps.

4:23I realize opportunistically, sure, if something's oversold and you have a chance to continue to ride this trade. There's no question, if you look at the chart on small caps, they began to drastically underperform the S &P in November of 21. And that's when the Fed got on their horse. So fascinating week. I think this was a really interesting week for so many reasons that we've already just discussed. Watch the dollar also. I think a weakening dollar is part of a bull rally that also will help broadening, not just multinationals, but again, commodities, resources, things that are dollar kind of inverse dependent.

4:57And I think that has more life as well. I'm glad you said that you feel me there. It's good to be felt. You said, by the way, I think you said a 50 percent hike. Did you mean a cut? Sorry, I sure did. Thanks for that. I obviously feel you even more now. Yeah, a 50 basis point cut is something that traders are starting to price in. I'm feeling just felt. Carter, you said something earlier today that caught my attention, and that is there aren't 2 ,000 stocks in the Russell 2000. Oh, well, in the context, yeah, well, there never is, right, because, you know, things get acquired and they chuck them out and they reconstitute the index.

5:33But I think whether it's broadening or whether it's just money flow has to be. Think about this. So it is only nineteen hundred and eighty two stocks, not two thousand. Not to say that's not a big number, but they all add up to three point two trillion. Which is the size of Amazon or Amazon, right? The S &P is forty seven trillion. And so as a sponge, money comes out of one area and it moves into the other. But the question is, are small caps in and of themselves a very desirable, highly profitable, and likely to outperform area of the market? I don't suspect so. There's beta. Yes, we know this.

6:06And a lot of them are unprofitable. So is this just a knee-jerk reaction as money's come out of the high flyers that everyone loves and everyone owns are very crowded and say, I've got to put it somewhere? And that's rotation versus it's something that's structurally bullish. I don't think it's that. You think it is not an injury? It's just what it is. It's the water moving around in the boat. So, Bonwin, there was a time that I remember, and you probably do too, when if the Dow hit one of these big round numbers, like 40 ,000, we've been here before, but when it hit 40 ,000, it was a big deal.

6:39Not so much anymore. Does it mean anything to you? The number in and of itself, no, just because you tend to kind of be, like stocks tend to become more valuable over time. So saying that it had hit 40 ,000 10 years ago versus 40 ,000 now clearly isn't necessarily comparing apples to apples. With that said, I'm definitely in the broadening camp. And I think one of the things that you really want to debate is whether or not we're in early cycle or later cycle. And I do think that's a debate worth happening. The caveat there is that we've never had a situation where we've had rates, you could argue, artificially so low for so long and have had the type of fiscal stimulus that we've had going into and coming out of COVID.

7:21I think that is a new situation here. So I'm with Carter. There's no way that you're literally going to have a like-for-like exchange where you have money coming out of the MAG-7 or the tech flyers or AR, however you kind of want to define that leadership and have it rotate into small caps. So what happened today that made the Dow go up 400 points at one point? I believe it was. It didn't finish there, but above 40 ,000. S &P is back at, what, 5 ,600 or something like that. What was it about today that made this happen? Was it the awareness or the feeling that interest rates are going to get cut and finally settled in?

7:56I do think it's that macro environment. Yeah, I mean, there's this permanent belief, because there's a belief in cap M and dividend discount models, that if rates go down, we expand the multiple. If that were always the case, when was the lowest rate ever? On the COVID low. Well, the stock market should have been 1 million. It doesn't work like that always. It's a little too clever by half, as the British expression goes. I think there is this sort of belief that we're in a Goldilocks, and that could be possible, and rates don't matter. They're not going to be three, and they're not going to be six, and the higher for longer is out the window.

8:27And we're stuck here at four, four, four, and four is kind of— And the market can live with that. And the market can live with that. But the question is, at what point are equities full? At what point do you have to lap your earnings? And so forth and so on. And so it does get down to always, on a three - to six-month basis, or six - to nine, Are you adding or reducing exposure to the equity market? You have to make a choice. Courtney, some of the big banks, not all, but some of them came out today. You've got Citi, Wells, and J.P. Morgan. You know, I guess Wells had a nit to pick in its earnings report, but the others were pretty good.

8:59But the banks didn't play today. Those didn't. Yeah, I think what you're seeing here is clearly there was a bar set higher. So even though there was actually some good news that came out with the banks, right? I mean, you're seeing there's buybacks happening. You're seeing that net interest is actually not, I don't think, as bad as people expect. But specifically with Wells Fargo, they came in in their expectations going forward in the lower range of where they already were. Right. So people were hoping that there was going to be some better revisions. They're still looking forward, not going to have that net interest that people were hoping.

9:28And right now you were hoping that with interest rates coming down, this is going to be a positive for the banks. And people were hoping that they were going to do better last quarter. It's just one of those things where the bar was set too high. Tim, are those big banks close to fully valued? Is that part of the story here? Not all of them. And again, I love Citi's numbers. I'm a Citi shareholder and have been for a long time. And I've certainly held it through periods where I wasn't as excited about both the fundamentals and truly some catalysts to take the stock higher. But for a stock that's moved 75 % off the October lows and really rallied 13%, 14 % for, call it three weeks into those earnings, I thought the stock behaved fine today.

10:09I thought the fact that they reiterated their guide, the places where you are most excited, I think, in Citi are not just in terms of the capital deployment, the buyback. I think that was expected. I think what they can do in terms of dividend profile is great. But it really is the margin profile of this bank and the profitability. And it's not anything terribly sexy, but relative to the others, it is a valuation that I like. And I thought we got kind of affirmation of that today. And if you thought banks were well overbought going into these numbers, you have to like the response. And we've had many times where banks don't seem to respond on earnings day to me to fundamentals.

10:50And that's what we've seen across, I think, seven or eight quarters going back. All right, cool. Let's get more on what's in store for markets with Jim Bianco, Bianco Research President. Jim, welcome. One of the reasons we love having you on and I, over the years, have enjoyed talking to you is that you often say the unexpected. A lot of sort of contrarian views come out and today will be no exception. You expect zero rate cuts this year. Explain your reasoning. Well, I think they should have zero rate cuts this year, but I suspect that the Fed won't listen to that and probably might cut. But the reason I suspect that we're going to have zero rate cuts is I don't think they're warranted.

11:30The economy is continuing to move along just fine. It was growing well above what we call potential or about two and two and a half percent last year. It's growing a little bit below potential this year. That's what economies do. I suspect there'll be a second half rebound. And as far as the inflation numbers go, I've long been in the camp that the new level for inflation is 3 % to 4%. We hit 3 % in June of last year, 12 months ago. We then went up to 3.5 % until January of this year. Now we're back down to 3%. So I'm looking at this as the lower end of the range. If that's all the case, then the Fed's neutral rate, if you want to put it that way, is probably somewhere about 4 % or a little bit above that.

12:17And that's not that controversial because the market is very close. There's various measures that guesstimate where the neutral rate is, around 4%. So in other words, the Fed, if they want to get off restrictive, has only got about four rate cuts that they have to do to do it. If they're going to do two of them this year, they're effectively going to be at neutral by the end of the year. And given the strength of the economy, I don't think it's warranted. Now that I've said that, looks like what I think doesn't matter. The Fed is going to probably do it anyway in September. Well, the wholesale prices were a little higher than expected.

12:50I mean, so inflation is not it's not done yet. Right, Jim? Yeah, no, I don't think it is quite done. And I think really what you've got to look at in terms of inflation is a couple of things. One, the government spending. Government is 22 percent of GDP. There's only been two times it's been higher than that in American history. And that was the covid response four years ago in World War Two. That type of level of spending right there, you can't have a recession with the government spending that kind of money. And with the government sucking up that kind of goods and services with that kind of spending, keep a pressure on interest or keep pressure on inflation, which should keep pressure on interest rates.

13:29The other one is there seems to be a bit of a change in the attitude among consumers. They're a lot willing to consume and spend a lot more. I'm talking about per unit, not just because prices are cumulatively higher. And I'll give you one antidote. Look at the numbers of throughput through the airports at 3.1 million, a new all-time record right now. And the reason I point that out is travel is the ultimate thing that no one needs, but everybody wants. And if we're all wanting to go 3.1 million of us a day through the airport, doesn't sound like the consumer is ready to slow down anytime soon.

14:03Well, I'm traveling tomorrow, so I'm going to leave earlier than I even thought. One of the other things I want to pick up on, Jim, my notes indicate that you think the 10-year Treasury yield could still get up to 5.5%. What is going to take it there? Well, a couple of things. The target was 5 to 5.5, so that is the higher level. I'll point out that as late as last week, the 10-year Treasury was still at 450. So we've been in a period of higher volatility. And the last thing I'll point out is around April, I've had that target all year, 5, 5.5. We did get the 4.75 in April. And right after that, I kind of said, I'll still stick with 5, 5.5.

14:44But it's more of a low conviction call. Now that I've said all of that, I still think it's going to be that the economy is going to be OK. The economy is going to continue to move along at trend, 2.5%, if not higher, in the second half of the year. And if inflation doesn't go much below my 3%, the 3.5 % target, that all pretends for higher interest rates and probably above that 475 in April that we saw. And that gets me very close to my 5%, the lower end of my 5, 5.5%. Well, quickly, a quick thought then. If the 10-year gets to 5 % or above to even 5.5%, the connection there between that and mortgage rates is pretty direct.

15:26That's going to hurt housing, isn't it? That's going to send the mortgage rate up close to 8 percent? Well, it depends on what the definition of hurt housing is. Housing prices are not being hurt. If you're a homeowner, there's nothing wrong with this housing market because your price keeps going up. If you're a home buyer, then yes, that is going to be a problem. But that is housing. Housing is not the entire economy. It's a$30 trillion economy. Maybe two of it is residential housing. So when you look at interest rates, you have to think about the broad measure of the economy. So yeah, the most interest rate sensitive sector, housing, will probably be hurt, but a lot of other sectors won't be.

16:08And that's why I think interest rates can go up and the economy can withstand it. All right, Jim, thank you very much. Have a great weekend, sir. Stay cool. Thank you, too. All right. Well, now that Jim is gone and can't defend himself, who would like to argue with him? Anyone? Let me take a shot. I mean, the whole thing is that there's this higher for longer. It became a mantra and it's never happened. So consider this. Over the past two years, right, 52 weeks, 50 weeks, you're talking about how many weeks have 10-year yields been above 4.5 percent? Now, surely 4.5 percent is not higher for longer.

16:404.5 percent is back to that elixir, Goldilocks. 10, 12 weeks. Out of the last two years, we've been higher. Most of the time, we've been lower than 4.5 percent. Where is the higher for longer? It just has never been real. Want to button off the segment, Bonwin? Well, I just think the other aspect that we haven't really talked about is the labor market. And you are starting to see That's some softening there, right? Yes. Higher, higher unemployment seven months in a row or something. Absolutely. And I think the Fed has started to actually acknowledge that that being part of the dual mandate. So, yes, I do think that the economy has proven to be a lot stronger for longer than we than we had feared.

17:16It was just, you know, 18 months ago that everyone, myself included, was calling for a recession. But I do think labor market softness is something that is now being considered a bit more heavily. Very interesting. OK, Manu and thanks. Coming up, folks, start your engines. Ford shares revving up this week inside the stealthy rally. Who's paying attention to Ford? And another under-the-radar mover that could be primed for big gains. We'll tell you which one that is right after this on Fast Money. You're watching Fast Money here on CNBC. We'll be right back.

17:56Welcome back to Fast Money, everybody. A couple of stocks staging stealth rallies this week and catching one of our traders' eyes. Both Dick's Sporting Goods and Ford gaining about 10 % since Monday. Ford's 4-plus percent rally today brings shares to their highest level in almost a year. The company reportedly looking to expand its EV supply chain with a$400 million plant in Kentucky. And Dick's recouping all of its losses since a sell-off on July 1. It has been up 5 % in each of the past two days. but it is still 5 % from the all-time high hit late last month. Tim, you were watching both of these names.

18:34Take them in whichever order you'd like. Well, yeah, let me talk about Ford, and let me talk about, you know, you could talk about GM, too, because U.S. auto, I mean, GM's at two-and-a-half-year highs. Ford is breaking out. Ford's moved almost 30 % in about three weeks. It's a combination of decent news out of both firms in terms of their EV business. But there's no question, if you look at the breakout over the last few days, This interest rate move, this interest rate sensitivity, if you think homebuilders who have outperformed the S &P by 9 % benefit and lower rates, so do car companies. So does the financing arm.

19:05And so if you think about, again, the capital financing arms at Ford especially, the sensitivity there is extraordinary. So if you look at Ford, this breakout above 14, I think, is fascinating. In the case of Dick's, and I think a lot of retail, this pop is related to victims of both retail and discretionary spend. And if you hire for longer, certainly as it relates to the short end, is where the Fed lives. And if we got some sense this week that the Fed is really ready to start moving and we just debated that, we'll just leave it there. But look at the outperformance of the XRT. Look at the outperformance of apparel.

19:39Look at the outperformance of discretionary over the last two to three days. And Dix, which has been a great story. Dix has been certainly one of the best stories in retail, but it had a very big pullback. But you can see the sensitivity to these types of names after yesterday's follow through from the CPI. And even the Powell testimony gives these names a lot of confidence. Courtney. Yeah, I think I like the idea that there are certain companies that are going to do well when interest rates come down. So I think the likelihood is increasing that interest rates are coming down sooner rather than later.

20:10Ford, like another car company, should benefit from that. Right. I mean, it's going to be cheaper for customers to buy them now that it's going to cost less on the loans. But I think there's a lot of other beneficiaries that are going to be more directly affected because we have something like a Ford. They have so many other competitors. So I do like the housing trade. I do like things like real estate. I think it's actually a little more interest rate sensitive. So I like the idea here. I just think there's other areas that I would add to as opposed to a Ford as opposed to Ford. All right. Let's take a quick break.

20:37Coming up, Meta Moves. Our chart of the week is this tech Titan, notably sitting out today's rebound. All that and more next. Fast Money will be back in two minutes.

20:57All right, welcome back to Fast Money, everybody. It's Friday, so that means we've got a chart of the week for you. One tech name notably sitting out today's rebound, Meta, down nearly 3 % today, dropping more than 7.5 % this week. Stock's worst week since late April. Bonwin, what do you make of that action? So we were talking about rotation versus broadening, right? And I remember there was a long period of time where Meta outperformed Apple, and we were all calling, is this the end of the Apple rally? And I just wonder, being if there's a little bit, to take one of Carter's terms, sloshing around the funds between Apple and Meta.

21:32It seems like Apple has now retrenched itself as one of those premier MAG7 names, and perhaps Meta is just taking a break. Carter, thoughts? Well, so, you know, think about relative performance is everything. At the end of the day, that's what alpha is defined as, right? And so here's a stock over the past three months that is unchanged while the Magnificent 7 is up 25 and the QQQ is up 14. So unch versus 14 versus 27. So one has to wonder, what is going on? Are people just, hey, I'm full with this one. I don't think I want to buy more. Or is the general marketplace, the collective wisdom expressing a view that this one is not interesting to me.

22:07It doesn't have potential. I don't want to commit capital. Usually that's what poor relative performance means. And so there is a reason behind it that people are not embracing it. And yet Meta had relative outperformance last year, right? Yes. And so one could say, is it the pause after the good outperformance or is it a stall because it's full and perhaps it's run out of gas? Tim, want to dip in here or you got a thought? Yeah, I think it's a combination of there's no question if you think about this as a week where people at least, you know, we've talked about broadening. Maybe you question all the strength in the AI trade that it has to be a runaway train.

22:45Meta, which is one of the few, call it the practitioners, not the creators. If you look at reels and some of the growth, some of the IG content, apparently 80, excuse me, 50 percent or more of that is AI generated. So we've been able to point straight to Meta. So if you had weakness in that trade this week, not surprisingly, Meta is going to get caught in that. At 20 bucks a share, they're going to earn on estimate roughly in 2024. This is a stock that's not cheap, again, relative to itself. And this is something that I think at some point is part of what the market is doing and what the market did this week.

23:20So it doesn't surprise me. And that chart, you know, is a couple levels of 480, 460, and then there's a lot of big backfill. I'm not sure you're supposed to be running from the door here, but massive, massive run. Courtney, any thoughts on Meta? Yeah, and I think they're also facing some issues. Like when you're looking at the macro environment, there's been some pressure under their advertising spend. They also have a lot of competition from TikTok. That has been a big conversation with them where you've actually seen earnings and revenues declining. So I think for a lot of those reasons, you're seeing people take a pause.