The Week Behind

Despite another blowout quarter from Nvidia and Federal Reserve Chair Jerome Powell striking a neutral tone at Jackson Hole, the markets ended the week on a messy note. On the week, the S&P 500 and NASDAQ managed to eke out gains of 0.82% and 2.26% respectively, while the Dow experienced a slight decline, losing 0.45%.

Highlights 

• Nvidia exceeded analyst expectations in remarkable fashion. Nevertheless, in contrast to the previous quarter, their outstanding performance failed to bring the broader market higher. 
• While many accurately characterized Jerome Powell’s speech at Jackson Hole as net-hawkish, I think it is better described as promoting maximum optionality. He emphasized the importance of data dependency, acknowledging the unprecedented inflation situation caused by a historic combination of pent-up pandemic demand and significant fiscal stimulus.

Good News Met By A Muted Response

Going into last week, the market’s attention was on two key events: Nvidia earnings and Jackson Hole. Despite Nvidia’s exceptional quarter and Chairman Powell’s neutral stance, the market struggled. On both occasions, positive developments were met with a muted response. In my view, this indicates the appetite for stocks has been exhausted in the short-term. Moreover, this suggests the August malaise could linger into early September. 

However, a bullish technical setup is brewing. First, the S&P short-term oscillator is firmly in oversold territory, which indicates the S&P 500 is well-positioned to reverse the downward trend. Second, considering Powell’s speech, I believe it is more likely that interest rates drift lower than higher. Should the US10Y yield retreat, it has the potential to be the positive catalyst to trigger the upside reversal the S&P oscillator indicates is due.

The Week Ahead

For the US10Y to retreat, PCE and Payrolls need to demonstrate that inflation is following a trajectory that doesn’t necessitate changes to the Fed policy.

PCE for July releases on Thursday. Emphasis will be on core metrics. On a monthly basis, a 0.2% increase is expected. On a yearly basis, 4.2% is the forecast. Notably, this figure is higher than the prior month’s 4.1%. The increase is expected due to the sustained gain in energy commodities. A slightly hotter figure is likely tolerable as long as energy is responsible for the increase. 

Payrolls for August releases on Friday. The forecasts stand at 165k – 170k for headline job creation, 3.5% unemployment rate, 0.3% increase to monthly average hourly earnings, and 4.4% to yearly average hourly earnings. If job creation is below expectations, unemployment rises, and/or average hourly earnings surprise to the downside, it would suggest the Fed can maintain its current course, which aligns with the market’s comfort zone. 

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Aside from the influential macro reports, three noteworthy companies report. On Wednesday, Crowdstrike (CRWD) and Salesforce (CRM) turn in their quarters. For the month of August, both stocks are down 5-10%. The decline suggests expectations have been reasonably calibrated. Good results have a better probability of being positively received. To this point, I added to my positions in each at the end of last week.

Second only to Nvidia as a significant provider of AI-related hardware, Broadcom (AVGO) reports on Thursday. Unlike NVDA, which traded up into its earnings, AVGO has declined 7%. Now that the stock price has set more balanced expectations, I think it is more likely that the market responds positively to what is anticipated to be another strong quarter from AVGO.

Suspicious Price Action in Seagen (SGEN)

SGEN, a biotech firm concentrating on cancer treatments, was valued at $43B in a takeover bid by Pfizer (PFE) last March, implying a $229 share price for SGEN. SGEN now hovers ~$200, revealing a 14.5% spread. The wider the spread, the more doubt surrounding the deal.

Although the S&P 500 is down ~3.5% month-to-date (MTD), SGEN is up ~3.5%. Without any headlines to attribute SGEN’s strength, I find the consistent, incremental share price appreciation suspicious: Someone might possess some nonpublic insight into how the FTC will rule and is acting on it by incrementally amassing SGEN shares ahead of a positive announcement. This “someone” is gradually building the position to avoid regulatory attention. 

Granted, attributing this action to insider trading is speculation on my part. In truth, it is equally feasible that a large investor, without nonpublic knowledge, has decided that the deal is likely to close and is building the position gradually to avoid moving the price against him. A big lump-sum buy-order would have the effect of moving the price meaningfully higher than buying in tranches. 

Either way, my experience in merger-arbitrage indicates this steady price increase, especially with the backdrop of a lackluster market, hints that someone with substantial capital is positioning for an imminent positive headline. 

UPDATE: Monday morning (8/28/23), the FTC paused its review of the Amgen-Horizon (AMGN-HZNP) deal, which is a positive sign for closure. Given the timing of the headline, I now believe it is more likely that algo-M&A strategies were tracking action in HZNP shares and, due to the deals’ similarities, buying SGEN as well. Although the rationale stated above – insider trading or a substantial institutional bet – can be applied to HZNP and this development is positive for SGEN, the PFE-SGEN deal is further from closure than the original article may imply.

Full disclosure, I initiated a SGEN position last month to hedge a misstep with PFE. Given my belief that PFE-SGEN will close, the 14.5% spread offers a welcome hedge to my PFE position.