“We are drowning in information but starved for knowledge.” – John Naisbitt
Entering this week, the S&P 500 and Nasdaq were down for three straight weeks, and while the magnitude of the declines is nothing near what we saw in the spring, the streak of weekly declines is the longest in more than 11 months for the S&P 500 and 13 months for the Nasdaq. Indeed the stock market has withstood a major shock this year and responded far better than most analysts believed.
The final quarter of 2020 is here next week, and with all the “risks” being highlighted, volatility is likely to remain elevated. There are always at last two ways to view the stock market at any given time. From an optimistic point of view, there is the potential for favorable results from the Phase III clinical trials as early as the end of October, the elections could be decided in an affable manner, and holiday shopping could be robust with limited disruption from COVID-19.
Some will look at that and say it’s a pipe dream. OK, I get it. We do know that all of those are far from certain. No vaccine at all, the election results could be significantly delayed resulting in complete chaos, and the U.S starts to experience a second wave of COVID-19 similar to what has developed in Europe.
These are just a few examples of issues that could shape the trajectory of the equity market in the short term. When it comes to emotion the message here never changes. It never changes because it is the KEY to being successful. I always advise investors to not let their emotions “take over” as knee-jerk investment decisions dictated by sentiment typically result in subpar performance.
After all how much more evidence does one need than the 2020 COVID “experience”. Anyone selling in March locked-in a 34% decline and missed out on the 55+% record-setting rally that followed. Of course, that is the “extreme” example, but rest assured, there are many variations of that backdrop all resulting in a painful financial experience. By the way, this isn’t “Monday morning quarterbacking”, it’s been the message since April. That message was the result of paying attention to one and only one indicator, the Long-Term trendline, the view from 30,000 feet.
“Noise” plays into emotions, and if they are allowed to take control, it destroys an investor’s “plans”. Having an investment strategy and a plan for when volatility occurs is paramount in helping avoid erroneous, emotionally-driven portfolio changes. In the days and weeks ahead, investors are going to be “tested”. How each investor reacts to these “tests” will determine their success or failure.
The Week On Wall Street
There was no joy for the BULLS in Marketville as trading opened on Monday. Before the exchanges opened here in the U.S., the global selloff started in Asia and swept through Europe. The S&P gapped down and finished off by 1.1%, the Dow lost 1.85%. Interestingly the Nasdaq was flat on the day and the tech sector as measured by XLK rose 0.80% bucking the selling trend. Most of the tech stocks that got hammered in the prior week, posted gains for the day. All of the other sectors finished in the red as the market searches for an intermediate bottom.
The patient Bulls waited for Turnaround Tuesday to arrive and they were not disappointed. Buyers showed up moving the S&P higher for a 1% gain. At the sector level, gains were seen across the board with only Healthcare (XLV) and Autos (CARZ) closing lower. The Consumer Discretionary sector outperformed, notching close to a 3% rally thanks to strength in Amazon (AMZN). The NASDAQ posted the largest gain at 1.7%. Many of the large-cap tech names were strong with the First Trust Internet Index (FDN) up 2.5%.
Wednesday was a day that saw the lurking Bears take advantage of the poor technical setup, the negative “virus” backdrop and gorge themselves on the remains of the Robin Hood gang. The NASDAQ outperformed in the prior session, but it was the biggest loser giving back -3% on the day. The S&P lost -2.4%, while the Dow 30 gave up -1.9%. The Dow Transport index was the winner on the day losing only-1%. No surprise, all 11 sectors were down in the session. Precious metals also fell sharply.
It was clear the Bears were in charge, and they took the S&P down to correction territory (-10.3% on an intraday basis) early on Thursday. From there it was whipsaw action that is reminiscent of a market trying to carve out a bottom. All of the major indices posted small gains for the day. Mixed results at the sector level with Utilities the leader gaining 1% and Biotechs lagging down -1%.
They say the market never bottoms on a Friday, maybe they bottomed on Thursday because all major indices rallied to close out the week. All major indices were up 1.3% or greater with the NASDAQ leading the way up 2.2% on the day. At the intraday low this week the S&P was -10.3% off the highs but closed the week -8% from that top. Despite Friday’s positive session, all major indices except for the Nasdaq lost ground for the week, leaving September as a month to forget for the Bulls.
Rallies off of key pivot points, small divergences in the “technical” view leave investors plenty of clues as to what may come next. Any investor deciding they can’t make use of the “tools” that are available to them regarding the “charts” are doing themselves a disservice.
Reversion to the mean hits the global scene.
With weakness in stock markets around the globe since the start of the month, the average global stock market was 2.4% below its 50-Day moving average as of yesterday’s close. That is the lowest reading since April. Only Switzerland, Sweden, and Japan are above 1% while Russia and South Korea are a more modest 0.1% and 0.3% above their 50-Day MA’s.
In other words, the global equity rally has now turned into a global “pullback”.
Some improvements in the business scene.
PMI data for September suggests business activity in the U.S continued to expand. IHS Markit reported that the preliminary September Markit Manufacturing PMI rose to 53.5, matching the consensus estimate and up from 53.1 in August. This is the highest reading for manufacturing since January 2019. The Services PMI had a slight decline to 54.6 from 55.0, but a little better than the 54.5 consensus expectations. Services firms noted firmer demand conditions and the strongest new business growth in 18 months, with overseas business rising at a “strong pace”, down slightly from August.
Adjusted for seasonal factors, the IHS Markit Flash U.S. Composite PMI Output Index posted 54.4 at the end of the third quarter, down slightly on 54.6 seen in August. The index’s quarterly average was the highest since the opening three months of 2019. The composite index is based on original survey data from IHS Markit’s PMI surveys of both services and manufacturing. Although the pace of expansion slipped slightly from that seen in August, the solid upturn in private sector output was a marked improvement following the substantial drops in activity during the second quarter, with the downturn having peaked in April at the depths of the pandemic.
Chris Williamson, Chief Business Economist at IHS Markit:
“U.S. businesses reported a solid end to the third quarter, with demand growing at a steepening rate to fuel a further recovery of output and employment. The survey data therefore add to signs that the economy will have enjoyed a solid rebound in the third quarter after the second quarter slump.”
“The question now turns to whether the economy’s strong performance can be sustained into the fourth quarter. Covid-19 infection rates remain a major concern and social distancing measures continue to act as a dampener on the overall pace of expansion, notably in consumer-facing services. Uncertainty regarding the presidential election has also intensified, cooling business optimism about the year ahead. Risks therefore seem tilted to the downside for the coming months, as businesses await clarity with respect to both the path of the pandemic and the election.”
The Richmond Fed index rose to a two-year high of 21 in September, after climbing to 18 in August from 10 in July, zero in June, -28 in May, and a -54 all-time low in April. Analysts saw a prior all-time low of -44 in February of 2009. The ISM-adjusted Richmond Fed rose to a two-year high of high 59.3 from a prior two-year high of 57.5 in August and 55.8 in July versus a cycle-low of 39.0 in April and an all-time low of 38.8 in February of 2009. Today’s solid readings join firmness in last week’s Empire State and Philly Fed figures. The sentiment indicators have remained strong through Q3 with an up-tilt in available September data, as production rises in the face of plunging inventories and rising sales.
The 0.4% U.S. August durable goods orders rise undershot estimates, after out-sized gains of 11.7% in July, 7.7% in June, and 15.0% in May.
Seasonally adjusted initial jobless claims remain in the elevated upper 800K range with this week’s release rising by 4K to 870K. That was worse than expectations of a reading of 840K which would have marked a 26K improvement from last week.
U.S. existing home sales report tracked market optimism with a 2.4% rise to a 14-year high pace of 6 million in August, following two record-large gains to a prior 13-year high pace of 5.8 M in July and 4.7 M in June from a 3.9 million pace in May that marked a 10-year low. The median sales price rose 1.7% to a new all-time high of $310,600 in August, after a $305,500 (was $304,100) prior all-time high in July, and a $294,500 all-time high before that in June, leaving an 11.4% year-over-year gain. The seasonal pattern usually leaves an annual peak in June for the NSA median price data each year, but this year ran a couple of months late. Existing home sales look poised for a 267% Q3 growth pace that more than reverses a -62% Q2 contraction rate, after a 4.8% pace in Q1.
Lawrence Yun, NAR’s chief economist:
“Home sales continue to amaze, and there are plenty of buyers in the pipeline ready to enter the market. Further gains in sales are likely for the remainder of the year, with mortgage rates hovering around 3% and with continued job recovery.”
“Over recent months, we have seen lumber prices surge dramatically,” Yun said. “This has already led to an increase in the cost of multifamily housing and an even higher increase for single-family homes.”
“The need for housing will grow even further, especially in areas that are attractive to those who can work from home. As highlighted in NAR’s August study, the 2020 Work From Home Counties report, remote work opportunities are likely to become a growing part of the nation’s workforce culture. This reality will endure, even after a coronavirus vaccine is available.”
“Housing demand is robust but supply is not, and this imbalance will inevitably harm affordability and hinder ownership opportunities,” he said. “To assure broad gains in homeownership, more new homes need to be constructed.”
The median existing-home price for all housing types in August was $310,600, up 11.4% from August 2019 ($278,800), as prices rose in every region. August’s national price increase marks 102 straight months of year-over-year gains.
Total housing inventory at the end of August totaled 1.49 million units, down 0.7% from July and down 18.6% from one year ago (1.83 million). Unsold inventory sits at a 3.0-month supply at the current sales pace, down from 3.1 months in July and down from the 4.0-month figure recorded in August 2019.
Scarce inventory has been problematic for the past few years, an issue that has worsened in the past month due to the dramatic surge in lumber prices and the dearth of lumber resulting from California wildfires. Properties typically remained on the market for 22 days in August, seasonally equal to the number of days in July and down from 31 days in August 2019. Sixty-nine percent of homes sold in August had been on the market for less than a month.
The 4.8% new home sales’ surge to a robust 14-year high pace of 1+ million in August followed a robust 125k in upward revisions. The median price fell -4.6% to $312,800, leaving a -4.3% year-over-year drop. The month’s supply of homes plunged -8.3% to an all-time low of 3.3, while home inventories fell -3.1% to a three-year low of just 282k. Sales in the south rose 13.4% and accounted for a whopping 63% of all new home sales in August, and the big upward new home sales revisions back through May mostly reflected boosts in the figures for the south. Analysts now expect a 985k new home sales pace in Q3 that would mark a 14-year high, leaving a 286% growth rate.
No letup in the mortgage market despite mortgage rates ticking up to highest levels since mid-August. Mortgage apps up 6.8% with refis up 9% (86% y/y) and purchases up 3% (25% y/y).
The flash IHS Markit Eurozone Composite PMI fell for a second successive month in September, dropping from 51.9 in August to 50.1, indicating only a very marginal increase in business activity. Having rebounded sharply in July and, to a lesser extent, August from COVID-19 lockdowns during the second quarter, the PMI has since indicated a near stalling of the economy at the end of the third quarter as rising infection rates and ongoing social distancing measures curbed demand, notably for consumer-facing services.
Chris Williamson, Chief Business Economist:
“The eurozone’s economic recovery stalled in September, as rising COVID-19 infections led to a renewed downturn of service sector activity across the region. A two-speed economy is evident, with factories reporting that production growth was buoyed by rising demand, notably from export markets and the reopening of retail in many countries, but the larger service sector has sunk back into decline as face to-face consumer businesses in particular have been hit by intensifying virus concerns.”
“Job losses also picked up in the service sector as more companies became worried about costs and overheads. Fortunately, factories saw slower staff shedding as pressure on capacity begins to emerge, suggesting the overall rate of job cutting has peaked. Encouragement comes from a further improvement in companies’ expectations for the year ahead, but this optimism often rests on infection rates falling.”
At 55.7 in September, the headline seasonally adjusted IHS Markit / CIPS Flash UK Composite Output Index remained above the 50.0 no-change level for the third consecutive month to signal a sustained increase in private sector output. However, the latest reading was down from 59.1 in August and the lowest since June.
Chris Williamson, Chief Business Economist at IHS Markit:
“The UK economy lost some of its bounce in September, as the initial rebound from Covid-19 lockdowns showed signs of fading. It was not surprising to see that the slowdown was especially acute in services, where the restaurant sector in particular saw demand fall sharply as the Eat Out to Help Out scheme was withdrawn. Demand for other consumer-facing services also stalled as companies struggled amid new measures introduced to fight rising infection rates and consumers often remained reluctant to spend.”
“Encouragingly, robust growth in manufacturing, business services and financial services has offset weakness in consumer-facing sectors, meaning the overall rate of expansion remained comfortably above the survey’s long-run average, which adds to expectations that the third quarter will see a solid rebound in GDP from the collapse seen in the second quarter.”
“However, jobs continued to be cut at a fierce rate in September as firms sought to bring costs down amid weak demand, meaning unemployment is likely to soon start rising sharply from the current rate of 4.1%. The indication from the survey that growth momentum is quickly lost when policy support is withdrawn underscores our concern over the path of the labour market once the furlough scheme ends next month, and raises fears that growth could fade further as we head into the winter months, especially as lockdown measures are tightened further.”
Japan has not joined the rebound party and continues to flounder under the siege from COVID.
Au Jibun Bank Flash Japan Composite PMI.
While we are officially “in-between” earning seasons there are companies that are reporting results. This past week KB Home (KBH), Nike (NKE), and Darden Restaurants (DRI) beat estimates handily. These results confirm my view that the “key” drivers to my strategy are still in place.
First, earnings estimates remain too low. The analysts were very “light” in their earnings assessment of these companies.
Second, the homebuilders will continue to benefit from a very strong housing market. KBH joins D.R. Horton (NYSE:DHI) and Lennar (NYSE:LEN) posting extraordinary results. Net orders for KBH increased by 32% in the last quarter, helping to post its best results since 2005.
Third, the transition to “online” retail remains strong and it appears to be a lasting trend. NKE digital sales were up 82% and that beat last quarter online sales when the global economy was “locked down”.
Fourth, the consumer whether here in the U.S. or overseas is in good shape. Nike’s sales in China were up 6%. Darden showed that restaurants can thrive by being innovative. The company raised guidance and re-initiated its dividend. Remember the country is still not “open”. It also showed that the U.S. consumer is far from dead.
The Political Scene
This past week as the House passed a spending bill to keep the government open through December 11th. I sometimes wonder if we’d all be better off if they did close.
The stories on Wall Street this week suggested that the death of Supreme Court Justice Ginsburg all but destroyed the chance for the two sides to agree on a stimulus bill. It is truly is a bizarre world when the people sent to Washington can’t agree on what is best for their constituents because of a Supreme court vacancy. A simple “streamlined COVID-related” spending bill is all that may be necessary now, but perhaps that is too simple.
The house continues to float and will now apparently vote on its latest 2.4 trillion dollar package. Similar 2-3 trillion dollar stimulus packages have been labeled non-starters for weeks now.
Up until September 15th, the stock market was yawning as the two sides kept sparring, and I’m not convinced the latest market weakness has anything to do with the perceived notion that more spending is required. However, I believe there are a scant few that will follow my thought process on this issue, and that is what makes a market.
A trading range under 1% for the 10-year Treasury note has been in place for quite some time. After making a run to the top of that range in June, then testing the lows again, the 10-year bounced off the bottom and closed trading at 0.66%, falling 0.04% for the week.
The 3-month/10-year Treasury curve inverted on May 23rd, 2019, and remained inverted until mid-October. The renewed flight to safety inverted the 3-month/10-year yield curve once again on February 18th, 2020, and that inversion ended on March 3rd. The 2/10 Treasury curve is not inverted today.
Source: U.S. Dept. Of The Treasury
The 2-10 spread was 30 basis points at the start of 2020; it stands at 54 basis points today.
Bullish sentiment, as seen in the AAII weekly survey has once again moved much lower. Just 24.8% of responding investors this week reported as bullish. While this is a low reading, this week’s reading is slightly higher than two weeks ago at 23.7%. Bearish sentiment rises to 46%. These sentiment levels are more apt to be seen at market lows.
If we toss out the COVID low, the last time the “Timers Index” was this bearish was September 2019, right before the S&P 500 broke out at 3,025 and added 1,300+ points.
EIA data released today on petroleum stockpiles showed crude inventories including SPR drew for a second week in a row, falling 2.4 million barrels. Following a big rebound over the past two weeks, domestic production was slightly lower, falling from 10.9 million barrels/day to 10.7 million barrels/day.
Similar to crude inventories, gasoline inventories also experienced a draw as demand has begun to head higher once again albeit demand has been somewhat flatter over the past few months with the current reading still below levels from earlier in the summer.
The price of WTI rose above the resistance level of $42.50 for a couple of weeks, then turned around and tested the $35-$36 support level. Despite all of the worries about global growth this week WTI lost $0.73, closing at $40.15
It matters little to Energy stocks these days. As measured by the Select Energy ETF (XLE), Energy shares are being “liquidated”, not sold, “liquidated”. Many individual oil stocks are near their March lows.
The Technical Picture
Key short-term support levels were tested and failed this past. Each time one of them went by the wayside the selling intensified signaling the importance of these pivot points. My indicators show the S&P in an oversold condition, but remember markets can stay that way for a while.
How quickly the indices stabilize in the short term is a tricky forecast. The intermediate bottom may have been established this week or there could be more weakness ahead, sending the index to test further support levels. With the index residing in the middle of the trading range, establishing a reliable forecast now is simply “guesswork”. I’ll leave that to others.
No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long-Term view, the view from 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.
Short-term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short-term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from the overall performance.
The skeptics like to pound their stories to generate the most fear. The problem is most of the commentary these days is not only shallow, but it is also ridiculous.
“Oh my, The Nasdaq 100 (NDX) has fallen off a cliff and it’s killed anyone that remains long these stocks. The darlings of the market have fallen 8% in September alone, and is 10% off the old high.”
The only investors that were killed were the folks that sold near the bottom when the skeptics told everyone to sell because the indices were headed lower.
The Nasdaq 100 has rallied 62% off the March lows. However, an investor didn’t have to buy at the exact lows to be in the “green” this year. They just needed to stay “emotionless” and “smart” when the majority told them to sell. Anyone that did that and remained in this position is up 27% for the year, and that includes the latest drawdown.
When it comes to investing jumping to a conclusion is the quickest road to the poorhouse.
Corporate stock buybacks. The naysayers used that data point to make their bearish case telling investors these buybacks were THE reason the stock market remained elevated, and when they disappeared the market would fall and fall hard. Buybacks have all but disappeared this year and the S&P 500 during an unprecedented economic lockdown posted new record highs. You can’t have the story about buybacks more wrong than what the skeptics have tried to sell for 5+ years now.
So here is some food for thought. When companies start to re-initiate their buyback programs as we slowly get back to a normal economy, that could be a HUGE tailwind that blows the skeptics aground with their perma bear arguments.
Alternative energy is the wave of the future. In what can only be described as ironic, the state that has a power grid that doesn’t work tells everyone they have to drive electric cars.
Therein lies a potential opportunity. If the “leaders” promoting the green energy world are serious, it will take a lot of money and infrastructure to make those kinds of “announcements” come to fruition.
The opening quote is particularly meaningful these days. Investors are overwhelmed with information. The “economy” watchers fill their commentary with talk of the next stimulus package they have been clamoring about for weeks claiming that is the reason stocks are weak. “Virus” watchers tell investors and anyone that wants to listen about countless data regarding vaccines, testing, case counts, etc. The stock market watchers tell us about “value”, overpriced technology stocks and remind us this is the “2000 bubble” all over again. Many of the traders are complaining that nothing is working now. Tech names are getting hammered, the old economy names are up one day down the next, all trading around the headlines.
A bevy of information for sure. However, if you are an investor in the equity market, most of what is being discussed in the financial circles these days need to go in one ear and out the other. There is little need to stop and “process” most of the same rhetoric that has been regurgitated for months. It’s the same theme and for the most part, their story has misled investors for at least five months. Yes, that’s correct the market has been UP for five straight months heading into September. Which brings us to the topic of what is going on in the equity market today.
Is it so surprising that after five UP months in a row that the sixth month is DOWN? They give us information, but I suggest there is little knowledge in their message because the stock market is a very unique place. Ironically it is interesting that anyone delivering a Bullish message is said to be locked into the same old boring message week after week. When the stock market remains in a bullish trend, that boring message should be interpreted as knowledge of how the market works.
I leave guessing when any trend is going to change to others that peddle information sans knowledge. I’m not sure why the “average” pundit can’t impart some “knowledge” in their wheelbarrow full of information they keep pushing around. Instead, they keep overloading investors with what turns out to be a pile of useless “information”.
For example, here is a little bit of market knowledge. There is a simple “reason” for why the indices are weak now. Pullbacks, corrections, and drawdowns are part of the investment scene and after a 55%+ gain off the lows, this is a “normal” situation. So instead of extrapolating all of the worries to the worst-case scenario, an investor might just consider tempering their view with some of the positives. Instead of pushing them aside because the negative talk is the loudest, wrap your arms around some knowledge by learning to understand the stock market’s nuances.
Given “seasonality” and other concerns that come after a 55%+rally, it won’t be an easy road for anyone bullish. That is not surprising, it’s expected. Despite my view that the Fed is a non-event for investors, the rhetoric, and now the nail-biting over the upcoming election looms. The ever-present COVID headlines also consume the average investor’s time. That makes for a recipe for an equity market filled with a heavy dose of volatility.
Of course, if there weren’t so many concerns about what the “challenger” brings to the table regarding the election, the situation would look less murky to me. I would then label the present environment as a much-needed pause to regroup, assess the economy, move forward, and not much more. However, investing isn’t easy, and these issues are thrown at all of us to test the resolve and conviction of market strategies.
Despite the short-term issues, when I review the entire picture, I tend to draw a different conclusion than many others. Of course, my strategy and situation may be quite different from yours. My risk tolerance may not be aligned with any other reader here. So if you are looking for specific instructions to buy “XYZ” here, advise anyone to put hedges in place, go net short and raise a bundle of cash, you will be disappointed. That is considered “information”. Anyone can dole that out.
I’m here to put forth a more important message. The message that contains the only view that counts. The view from 30,000 feet. How to use and profit from that is what I call “knowledge”.
The “information” some seek is worthless without that “knowledge”. For sure there are many ways to be successful in the investment world.
Being successful over a long period is quite another matter.
Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation.
In different circumstances, I can determine each client’s situation/requirements and discuss issues with them when needed. That is impossible with readers of these articles. Therefore, I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.
to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to Everyone!
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Disclosure: I am/we are long EVERY STOCK/ETF IN THE SAVVY PLAYBOOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My portfolios are ALL positioned to take advantage of the bull market with NO hedges in place.
This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me.
IT IS NOT A BUY AND HOLD STRATEGY. Of course, it is not suited for everyone, as each individual situation is unique.
Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel calmer, putting them in control.
The opinions rendered here, are just that – opinions – and along with positions can change at any time.
As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die.
Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time. The goal of this article is to help you with your thought process based on the lessons I have learned over the last 35+ years. Although it would be nice, we can’t expect to capture each and every short-term move.