Stocks end a strong week with a whimper, and what’s next for small caps? 6/16/23

0:01Right now on Fast, the S &P closing out its best week since March. The Nasdaq of eight weeks in a row and the Dow carrying a gain of a weekly gain of two percent into the weekend. Can the markets keep the bull run going or are choppy waters ahead? Plus, keep on trucking. The transport's chugging higher this week, too. And with FedEx set to report Tuesday, is there still time to get all aboard this red hot sector? And later, our charts of the week. Hard to believe with interest rates at such lofty levels, these names keep posting new highs. Seemingly day after day, we're building up to the big reveal.

0:32I'm Melissa Lee. This is Fast Money. We're live from the Nasdaq MarketSite. On the desk tonight, Tim Seymour, Bono and Isom, Steve Grasso, and Julie Beal. We start off with a muted ending to an otherwise strong week. The broader indices all falling today. The Nasdaq and S &P 500 both snapping six-day winning streaks. The Dow shedding over 100 points still. It was overall a good week for stocks. Nasdaq blocking in its eighth straight week of gains, its longest winning streak in four years. The S &P is seeing its best week since March. The Dow also seeing solid gains as a springtime market rally brought in beyond big tech.

1:06The Dow's biggest winners this week, Intel, up more than 16 percent. Its best week since 2009. Nike, Amgen, Cisco, Microsoft, all well in the green. So is the market breadth a good sign for investors? Tim, do you think that lasts? I think it is. I mean, there are people that can argue there's not a lot of breadth. But we really have had over the last eight or nine sessions, you know, all 11 sectors participating since the Fed. The financials have struggled a little bit more. You know, you see names like Cisco. You look at mega cap tech and there are names within that space that have underperformed.

1:40Cisco, certainly one of them. Intel's been catching up fast. It's interesting because now we look at the Nasdaq that's up 30. I see 31 percent from that SVB bottom. So we're talking about an extraordinary three month run we've had. It's also, when you think about this week, it's a week where actually the ECB sounded more hawkish than our Fed. It's a week where inflation was actually pretty tame. We got some numbers again today. University of Michigan consumer expectations on inflation at least out one year came in dramatically. They're now, you know, 3.3 percent versus 4.2. So these numbers are better.

2:14It's just a question of where this market has come from. And so that that to me is really what this week's all about. You had Michael Hartnett, who I have a lot of respect for at Bank of America, said, you get these kinds of runs. I think he said something like big rally before big collapse. And that's, you know, I mean, that's a little scary. But but that's where we are with this market. It does feel extraordinary. And it's hard to justify multiples. It's hard to justify these. Yeah. I mean, you outlined a lot of the good things going for the markets. At the same time, we also from the Fed got the message of two more rate and six percent potentially longer for higher for longer.

2:47Grasso. And in spite of this, we rally. Right. But if you have two more, then you know what the end is going to come in two more rate hikes. Right. So the end is near. OK, so that's the way that's the glasses have full type effect of it. But where you started the show was the broadening out of the rally. So everyone said that we're isolated to a handful of names. Now we have a lot more names that are participating. Tim has been good at focusing on the other names and the other sectors that have been participating all the while long. So it wasn't just the seven names. But if you really look at it, Those are good things for a rally.

3:20So either the whole market was going to cave or the rally was going to broaden out. We saw it broaden out. I think it's going to broaden out more. But the problem is, I do believe you have for a healthy market, you do need to have a little bit of reversion on this trade. And I think that the Fed made it possible for the bulls to continue to run. But I think we're going to see a reversion of that trade, have it settled back in, all normal, healthy, no collapse, but a reversion trade. Yeah, it's really a push and pull between do you think that the economy is strong enough, which it seemingly is, for the Fed to continue forward?

3:55And is the Fed presence going to overtake the economic strength that we're seeing right now? They're essentially saying that the labor market does need to does need to continue to loosen and it hasn't gotten there yet. They're saying that they have the majority of Fed panelists saying that they want at least another 50 basis points. So I didn't really interpret that as saying that's the end game. Where I think the market continues to push back against is the notion that they will, in fact, stay higher for longer. And let's be clear about this. The bulls have fought the Fed all the way up. The bears fought the Fed previously through the pandemic all the way down and lost.

4:31Right. So I think that at some point you start to get a little top heavy. Now, I will say, speaking of breadth, which is really the initial question, if you start to look at the IWM, not year today, but really over the last month, you have seen some real outperformance there. And that, to me, says that investors are, in fact, believing that the economic robustness is leading to a rally. And so with that in mind, I do think that this in the short term does have legs. However, you do have that Fed overhang that I think right now in the short term is being ignored to a certain extent. I mean, over the past month, S &P small caps up, what, 8 percent?

5:03S &P mid caps up 7 percent, Julie Beal. That's your neck of the woods. We're reversing a lot of the long-term trends where small caps have been consistently lagging. And I think it makes sense because much of the small cap index is not necessarily high quality. And in the recession, it's very concerning. What I think is fascinating is if you look at the S &P 500 the last year through June, it's a perfect butterfly image, right, where we went up this year, we went down last year. And if you think of where we were last year, right, the market was selling off 2%, 3%, every day. Rates were low. The economy was strong.

5:42And here we are now. We're past the banking crisis. Rates are higher. And it's not totally clear how good the inflation picture is going to be. That's a little unusual, right? So I think it bears making sure that the businesses that you own are good and strong. Yeah, it does feel like the market, to Julie's point, is climbing a wall of worry, right? Where we've sort of gotten through crisis after crisis. We've got through the notion that rates will be higher. And yet we have digested this and we have moved on. Is it time to just sort of get on board, even here at these heights? Look, equities have been responding to positioning sentiment.

6:16They've been responding to an earnings season that has been absolutely fine. Mega CapTech arguably had a great, you know, those folks that are carrying the market actually had great numbers. I don't think earnings are going to expand. I think we have a place here. Also, when I talk to guys that are involved in credit markets, not necessarily even high yield stuff and the stuff that's obvious to you, you can kind of see out there, but the stuff that needs a mark to market and guys that are in the leverage loan market, in the middle markets. And they're telling you, like, look, I'm looking at books of stuff.

6:44I'm looking at assets. I've been asked to bid on this block of stock. And there is no market. And it's not that things are so distressed. It's just that the mark to market for a lot of these parts of the less liquid world, especially in credit, are nothing like what the equity markets are doing. Equities are acting right now as if there is not a care in the world on the credit side. And credit guys will not tell you that. So after the kind of move we've had, my chart of the day yesterday, which was, you know, we all, our chart of the market that we thought was most important based upon where we were now, I just looked at the forward multiple and the PE on the NASDAQ and on the S &P.

7:19So it's hard for me to say everything is great here because it's not great. And we've had an enormous move. Steve talked about the health of maybe getting some kind of a pullback. You know, what will be interesting is we're starting to see some of the companies that have done really well on this. Some of the folks have benefited from inflation. The fact of the matter is inflation is coming down. You are seeing some normalization. You are seeing some retailers that are actually not going to do so well. Let's see what FedEx has to say next week. And I know we're going to talk about that. So the market always sets up to hurt the most amount of people at any given point.

7:48There are people who are still that's always that's always the case. Everyone's on the wrong side of every trade. So look at what we had in the last week or two. What was the big conversation? All of the options were pointing towards a lower market. People were making bets the market was going to go down. Didn't happen. Upset everyone. What what what has to happen then? People have to close out their positions, cover their shorts, bring them back into the market. So I've been thinking that I was always worried about the recession coming. What happens if we had the recession? I've made this case on the show a number of times.

8:22What happens if we have the recession already? Because you only tell the recession after you come out of the recession anyway. It's always in hindsight that the economists always give you their take on it. Let's say we already did that. Market has to move higher. Let's say that the consumer pulled back already. And now if you still have a job, you still have money in the bank, you feel more confident spending. Let's say that corporations pulled back on their capex. How do you know the markets have to go higher if we've seen a recession? How about the run that we've had since the October bottom.

8:55Could that have been the run that was? Oh, I don't I don't I don't think any of us. I don't think any of us know anything. All I do know is that every time the bears have made a bet, they've gotten run over and you had to pivot. So now we're even more extended. So, yes, I would like to see the market come in to give a chance to people to buy something at a discount. But sometimes the market doesn't give you what you want. You have to trade the market you have. You might have to still keep buying the market. Coming up, shaping up or shipping out. We are counting down to earnings from FedEx. But will the delivery giant deliver on results?

9:27We are trucking into the transport space next. And later on options actions, we are talking used cars and wine bars. Stocks catching our traders eyes during a short week of earnings. More Fast Money right after this.

9:43welcome back to fast money as we mentioned small caps have been having a big run the iwm etf closing out its fifth straight week of gains as long as weekly winning streak going back to december 2020 the chart master sees even greener greens from here let's bring in carter worth of worth charting carter right so obviously an area of the market or a theme or a part that has underperformed substantially. And yet it's underperformed to such an extent that we're down to levels last seen in 2003 and at the COVID low. Let's look at a chart or two and try to figure it out together. So the first thing we're looking at is a ratio chart.

10:18It's one thing divided by another. In this case, IWM, the Russell 2000 ETF, relative performance to the SPY. And you can see as annotated there, those little rounding bottoms were exactly to the penny at the COVID low, meaning such underperformance that we're down to where we were at an epic moment. Here's a longer term chart. We're down to a low in 03, just coming off the financial crisis low two years later. And so the question is, do you play this for a bounce? It's really, it's sort of an if-then statement. If the market's going to keep going higher and higher, at some point small caps come to life.

10:54Or if the market's going to come apart, one might think that small caps get worse. But at this point, so much is priced in. I think it's a heads you win, tails you win. We shall see. But let's look at one particular stock. And there are many, of course. Look at Allegiant Travel, a well-defined downtrend in an area, of course, that's come to life. You see the move in cruise lines, airlines, and certain hospitality stocks, hotels. This one is really lagged. But what? It's moving above the downtrend line. Second of three charts, look at this. Another way to draw lines. It's identical charts, same time frame.

11:26But you can call it what it's known as, right, a cup and handle bottom. And then finally, a final iteration, you'll see it here. If we were to just look at the circumstance since the low, we're in a nice, well-defined channel. And we're nowhere near the high of the channel. So the presumption is higher from here. We like it on the long side. Carter, if the small caps look good, is the extrapolation that the rally is broadening and the other parts of the market can make up for a pullback in technology? Well, that would be sort of the hope. It's not that they look good. It's that they look so bad they're good, right, in terms of relative performance.

12:04But to be fair, as you pointed out a moment ago, they have started to show some life. And so I think it's a relative trade as much as anything else where it's taking the road less traveled. Everyone is buying more and more of the largest, steepest, uncorrected stocks. And I think the real opportunity is to reduce some of your exposure there and put it into smaller things or an aggregate of smaller things like the IWM. All right. Carter, thanks. Carter Braxton Worth of Worth Charting. We'll see him shortly on Options Action. Let's trade this. Julie, I don't know if you have a take on Allegiant or if you can give us one of your top small cap picks.

12:39Allegiant is really interesting, right, because this is an airline that caters fully to leisure travel. So it's probably more sensitive, but they have been able to run their business such that they only compete in markets where they're by themselves. So they really know how to play competition to their strength. I think it's probably pretty well positioned going forward. You know, you can't get you can't get a flight anywhere. So I think this makes sense. I think for small caps, broadly speaking, you really have to be picky. You have to be so picky because these businesses can be much more vulnerable.

13:12So I think it merits just being a little bit careful. Right. But the broader take on Carter's charting is that this broadening could mean that RRSP equal weight S &P looks much better than S &P 500 and so on. Bonwin, are you sort of going that route, moving down the market cap size to find values? I mean, I'm with Julie. I think it's tough to do it. I think for a momentum trade, yes. I mean, it is what it is, right? You just ride the trend. I think when you start to really part and parcel the situation, the question is, do you think the best or worst of the economy is ahead or behind us. And for me, I think there still is real headwinds.

13:45And so I don't really want to be sliding out of the risk curve, sliding down the quality curve. No, I don't. We started off the show saying quality companies and the Russell 2000, 40 percent of those companies are unprofitable. The S &P, 16 percent of those companies are unprofitable. So if you're looking for high quality companies, unfortunately, you get pushed into an NVIDIA that's up 192 percent. And I know that you have to hold your nose. And every time I say it, hold your nose and buy, it seems like the right trade. But I do like the broadening out of the of the overall market. All right, let's get the shares of FedEx here.

14:17Trucking higher this year, surging nearly 35 percent since January. The company set to report fiscal Q4 results after the bail on Tuesday, with analysts expecting a drop in both revenue and profit. Meantime, UPS has been lagging its rivals since last earnings report. Just today, UPS workers authorized their union to call a strike as soon as August 1st if a contract agreement is not reached. So what does this all mean for FedEx and the transport trade? Tim, this is a trade you're in. It is. And I tell you, it's been such outperformance by FedEx for this period. And boy, they had it coming to them, too.

14:48But I mean, FedEx is up almost 60 percent from that CPI bottom. And it's really up around 240. You're at an important level on the chart where actually, I think it's now a prove me dynamic. They had a lot to prove over the last couple of quarters, and they actually were better. I think margins are certainly better. They're seeing slightly higher ground volume. And I think that some of the difficult comps on Express may be coming through. I think it's going to take a lot to push this significantly higher, especially after the move it's had. The multiple, which got down to kind of a 12 times trough multiple, has already moved kind of two turns.

15:19That relative value trade against UPS, you know, I almost be ready to go the other way again. Julie, how about you? FedEx or UPS? Probably, you know, I think FedEx in this case, I think the positioning is probably better and a little bit more consistent in terms of their performance. And I always have anxiety when it comes to labor contract negotiations. They can go really sideways and it can really damage the reputation among the customers that count on you. What do you think I'm going to go with? I have no idea. You're going to go with something that's not used to. Expeditors, EXPD, the chart on that one looks great.

15:53So on a yearly basis, it's actually outperformed FedEx. Obviously, FedEx is very proud of himself. I love it. I love it because everyone's talking about what's right in front of you. I want to move that out of the way. Talk about what's behind it. Expeditors. Coming up. Very proud. I know you're smiling from ear to ear. Good for you, Grasso. Big gains this year, but can there possibly be more upside ahead? We're digging in on the foundation of this trade. And throughout June, CNBC is celebrating Pride Month. Here's our own Julie Beal. When I started my career on Wall Street, there was very little representation.

16:33You know, you may know that someone was gay privately, but it wasn't someone who was out and who was comfortable. And so it didn't leave a lot of room for anyone else to feel safe to step out. And I think that's the responsibility for, you know, us elders to be out there and to create space and create safety for the younger gay people. There's just as many gay people now as there were back then. There's just way more room for them now.

17:09Welcome back to Fast Money. We wanted to bring you an update on one of the stocks we covered yesterday. Shares of Alexandria real estate down nearly 5 % today after activist and investor Jonathan Litt revealed his short position in the lab property operator on our show. here's what he had to say about the stock last night. You see downside to Alexandria as much as 40 percent. That's correct. For this to be valued where office is valued, it's going to be down 30 to 40. And what's interesting, I was just before the show talking to a banker about a variety of things. And I said, did you know this about lab space?

17:43He said, I had no idea. He goes, I'm going to go see if we have credit out to them. We reached out again to the company for comment have yet to hear back, but again, an open invitation to the CEO if he chooses to come on. What's your take on this short day, too? Well, you know, Jonathan does such deep work, and he's talking about cell phone data and dynamics that they were doing that no one else is doing. So, you know, the point is that there's a valuation discrepancy between where some of these kind of medical office space and facilities were being priced relative to commercial, and that's really the arb he's talking about.

18:17And again, it's an arb to the downside. Yep. Let's move on. Got a chart of the week. Superfecta for you on this summer Friday. What's that word? Did you make that up? I think it's me. I don't know. I don't think you learned that in Harvard. It just means that we have a lot of charts. There's a lot of home builders here. Colty, D.R. Horton, Lennar, Toll Brothers, all hitting all time highs this week. This comes ahead of a slew of housing data next week, including KB home earnings, home builder confidence, housing starts, existing home sales are more highs ahead. Steve. Yeah. So so this was the first one that was sold off based on rates moving higher.

18:53And now when you see rates maybe possibly starting to come in and we have those buy down rates that they can offer incentives for new home, new home buyers, I would think that it probably has a little more to go in this trade. and I would stay with a bunch of these names. But just look under, get those. There's Lenar, there's KB Holmes, there's Pulte. Look at them all. Look at the charts on them all. Let that be your guide. Superfect. I would have thought that it would be multifecta. You have three of them, though. Why not a trifecta? I mean, that's a horsey term. Julie, you like this trade? I think it's interesting.

19:28I think you're, you know, look, these are, they have what we need more of, and that's closing. So, you know, it makes sense in certain ways. they've been able to weather it. I'm a little bit nervous given how fresh they seem to be on evaluation side. So for me, I'm going to stay on the sidelines. Thank you very much. The structural issues surrounding the housing trade, I mean, they are there. They're undeniable, Bono. But the question is, how much do you pay up for this trade at this point? As we've all said, it's really about what stock you're going to pick. And I personally have said it. I'm going to reiterate it.

19:56I really think you just slide up the value chain to toll just because you don't have the downside of the more stretched consumer there. Yeah. I'm surprised that when I put to you the home builders that you actually talked about the home builders. Well, I gave you multiple. But I did give a couple. I almost want Home Depot, to be honest with you. You like Home Depot here? I think I like the home builders better than Home Depot. But you do get that professional that's always sort of their rock and their anchor in the Home Depot stock where they have an outsized professional user. If you ever go to the Home Depot, and I know Tim's always in Home Depot.

20:33I live in Home Depot. Right? There's always a line of contractors. My mother-in-law gave me a Home Depot card. Thank you, Diane. By the way, I need to spend it this weekend. On a shed. What are you going to buy? I actually need a new, like, power drill, like one of those ones that you pop the battery in. Sounds like a good Father's Day gift to see more family. He's going to buy it for himself. How about that? I will buy it for myself if I don't get it. But, kids, if you're watching, please. You're asking me, actually, what to get. Yeah, it's a great idea. Time for the final trade. ahead of this Father's Day.

21:01Let's go around the horn. Julie. Tyler is a software name. They just announced that they're going to be earning a billion dollars of free cash flow in 2030. Good enough for me. Tim Seymour. Dads. Happy Father's Day, in case you don't hear it. Pepsi, 38 times trailing for food companies. I think that have seen a very significant sweet spot. I think margins are coming down. Great company, but I think some of the best is behind Pepsi after a great run. Newest member of the dad club, Bono and Eisen. Thank you very much. So Toll Brothers, listen, I don't think we should be paying all the builders with a broad budget at this point.

21:37Supply and demand dynamics are at your back, but I would be looking at Toll higher end. Steve. Micron, look through the China headwind. I've traded it a couple times this week. Look forward to trading it next week. All right. That does it for us here on Fast Money. Give your dads a big hug, please, out there. Celebrate your dads. Don't go anywhere. Options Action is up right after this.