“The investor’s chief problem – and his worst enemy – is likely to be himself. In the end, how your investments behave is much less important than how you behave.” – Benjamin Graham
Remember back when COVID wasn’t the biggest worry facing the markets and global economy? It’s hard to believe that less than eight months ago, COVID was hardly on the minds of most Americans. With the pace at which investors are barraged with data and headlines, it’s hard enough to remember what factors impacted the market yesterday let alone earlier this month or a few months ago. Fast forward to today and the media is all too happy and ready to keep reminding us.
Headlines about surges in COVID-19 cases throughout the Sun Belt and now the Midwest caused some investors to question whether the economic recovery progress made thus far would be “all shook up”. The message here was measured and consistent. At no point did I believe the rise would translate to a decline back to the severely depressed levels of economic activity experienced during the shutdowns. The stock market agreed.
Now there are some real-time indicators that suggest that the trajectory of the recovery lost momentum. As key regions were forced to reinstate restrictions and as the public alarm regarding the spread of the virus heightened, improvement in mobility metrics like airline travel, restaurant bookings, consumer spending oriented trends and business livelihood statistics all may be plateauing.
Many will now jump to conclusions and immediately proclaim a double-dip recession, claiming a “W” recovery is now underway. Since the recovery has been so quick and sharp, a plateau here is certainly understandable and quite frankly is expected. The economy is still being handcuffed as the debate rages on about the best way to proceed while keeping everyone safe. We already have seen a slow acceptance of the notion that it is time to learn to live with the virus. A suggestion that was raised here over a month ago:
“However, there is something called perspective and balance that has to be accounted for as well. Like it or not, this is simply going to be the way it will be as we all cope and learn to live with the virus. Those that seek and need protection will continue to do so, while the rest of society moves on.”
The stock market recognized that early on in this recovery frustrating the people who were forecasting dire outcomes for the financial markets. Investors are now faced with two different scenarios to ponder. On one hand, we will experience a “pause” that could morph into a complete breakdown of the rebound. On the opposite side, there are the green shoots in place that seem to have immunity to the virus. The long-term drivers of growth that were highlighted in the last earnings season, from tech to much of health care, to select areas in consumer discretionary. Not to mention the entire homebuilding sector which has defied the gloomiest of “virus” forecasts.
Also, there is the Fed and Chairman Powell’s comment:
“We ought to do what we can to avoid a prolonged economic downturn”.
Despite the inaction by Congress on further stimulus packages, like it or not, the administration’s executive orders relieved the immediate pressure that many felt was needed to keep the situation on an upward track. At some point, Congress will eventually decide on a full-blown package dealing with “other” issues that concern it.
Since we are talking about politics in D.C., the legality, operational questions, and political impacts will be debated. At some point in time, a fiscal relief deal in the $1.5-2 trillion range is doable. For now, the market decided to “yawn” over the rhetoric coming from both sides. Perhaps the data isn’t aligned with the “talk”, and the stock market has already figured that out.
Since Mr. market seems to agree with what has already transpired, it is sending a clear message telling investors to leave their political bias aside and concentrate on what matters.
Over the weekend, no deal on a stimulus package from Congress. Instead, executive orders from the president set the background as trading opened for the week. The Nasdaq had been up 1%+ on eight of the last nine Mondays and positive on 13 of the last 14, so down Mondays for the index have been pretty uncommon lately. However, we are now in the midst of the rotation from the “new economy” Growth/momentum to “old economy” Value.
The Dow 30 posted a new recovery high closing at 27,790. The Dow Transports rallied strongly to leave that index about 1.5% below the pre-COVID highs. The Russell 2000 was up 1%, the S&P posted gains for the seventh straight day when it eked out a gain of 0.28% while the NASDAQ fell 0.4%.
It took a while but “Turnaround Tuesday” finally arrived on the scene late in the session. Seven straight days of gains for the S&P 500 came to an end. Meanwhile, the Nasdaq is working on a streak as it underperformed the S&P 500 for the third straight day. The Nasdaq (QQQ) was the big loser again dropping 1.7%. The Dow 30 (DIA) and the Russell 2000 (IWM) gave back 0.30% and the broader-based S&P 500 (SPY) lost 0.80%. The financials as measured by the Financial ETF (XLF) held most of their early gains, up 1.1% on the day.
Analysts came up with a variety of reasons for the reversal, but in my view, it was strictly technical. Resistance at old highs is formidable. During the session, the S&P came within 5 points of the February high, and the selling began then intensified. The theme for the day was to sell the “winners” as gold and silver were also casualties down 5.6% and 14.7%, respectively.
A new day and bulls shook off the weakness of Tuesday’s last couple of hours with a flurry of “Across the Board” Buying. All eyes were on the S&P 500 to see if it can join the NASDAQ indices by getting back above its February peak to make a new all-time high (3,386 closing basis; 3,393 intraday basis). It got a little closer and on Wednesday the index did set a new recovery high with a close at 3,380. Close but no cigar. It is not so unusual for a stock or an index to have trouble pushing through resistance on the first attempt. Technology bounced back with the Nasdaq Composite leading the charge up 2.1%. The S&P recaptured all of the previous day’s loss by gaining 1.4% while the Dow 30 added 1%.
The tug of war was on as the S&P saw more downside probing and closed down 0.20% on Thursday. The Dow 30 posted was also down 0.20% but investors turned back to the Nasdaq which bucked the trend gaining 0.3%. Technology and Communication Services stocks outperformed. Precious metals continued to regain some of the losses from earlier in the week.
The trench warfare just below the February highs in the S&P continued as the trading week ended. A tight trading range resulted in the index closing flat on the day and the week at 3,372, some 14 points away from the all-time high. Buckle up, next week could get interesting.
If an investor notes the across-the-board improvement in the Industrials, the recent pick-up in the Financials, the Russell 2000 small caps, and the beleaguered Dow Transports which are now up by 12+% since July 28th, the cumulative picture being presented is crystal clear. Those that hung their collective hats on the notion that this stock market was about a handful of stocks and was a “trap” are now scratching their heads because they didn’t take the time to let the situation play out, instead they jumped to conclusions.
In the meantime, Savvy Investors who continue to look at the ENTIRE situation continue to reap the rewards. Stay focused on the “Market of Stocks”.
July U.S. PPI report beat estimates with gains of 0.6% for the headline and 0.5% for the core, as prices continue to ratchet higher after big coronavirus hits in March and April. The July PPI pop is the biggest gain since October of 2018. This updraft mostly reflected a 5.3% July rise for energy prices that allowed a big 0.8% rise for goods prices despite a -0.5% drop for food prices. Analysts also saw a big 0.5% July rise for service prices, with a 0.8% July rise for trade services.
CPI rose 0.6% in July on both the headline and core, beating expectations, following respective June gains of 0.6% and 0.2%. On a 12-month basis, the headline rate accelerated to 1.0% from 0.6% y/y previously, with the ex-food and energy component rising to 1.6% from 1.2% y/y. Strength in energy prices paced the upside, climbing another 2.5% from 5.1%. Transportation costs were also firm, rising 2.9% after the prior 2.5% increase in June, but following big declines from the start of the year. New and used car prices bounced 1.3% following a -0.2% dip in June. Apparel prices were up 1.1% from 1.7% previously, after big declines from March through May. Medical care costs were firm with another 0.4% gain, the same as in June and following increases of 0.4% to 0.5% since March.
The NFIB Small Business Optimism Index increased 6.2 points in June to 100.6 with eight of the 10 components improving and two declining. Owners anticipate improving sales as the economy continues to re-open with sales expectations rebounding to a net 13% after April’s lowest reading in survey history (a net negative 42%). Small business owners continue to be optimistic about future business conditions and indicate they expect the recession to be short-lived.
Chief Economist Bill Dunkelberg:
“Small businesses are navigating the various federal and state policies in order to reopen their business and they are doing their best to adjust their business decisions accordingly. We’re starting to see positive signs of increased consumer spending, but there is still much work to be done to get back to pre-crisis levels.”
July retail sales increased by 1.2% and were up 1.9% excluding autos. The former is a little weaker than expected, while the latter is stronger. Those follow upwardly revised June surges of 8.4% and 8.3% respectively, and enormous rebounds of 18.3% and 12.3% in May. Sales excluding autos, gas, and building materials surged 1.9% versus the prior 8.5% jump. Vehicle sales declined -1.2% after rising by 9.1% in June. Gas station sales were up another 6.2% following June’s 14.8% increase.
Clothing sales climbed 5.7% after June’s 98.8% jump, and the 180.1% bounce in May. Electronics were hot, rising 22.9% from 37.6%. Furniture sales were flat after a 37.4% gain. Building materials declined -2.9% from the prior 0.8% increase. Food/beverage sales edged up 0.2% from -1.5%. Eating, drinking sales increased 5.0% following June’s 26.7% gain. Sporting goods sales dropped -5.0% after rising 27.6%.
The 0.3 increase in the University of Michigan sentiment survey to 72.8 in August trimmed some of the weakness in July when the index fell to 72.5 from 78.1 in June. Michigan sentiment, as well as confidence more generally, is stabilizing, following the modest July pullback that capped the May-June bounce from April’s bottom.
For other August surveys, the IBD/TIPP index rose to 46.8 from a five-year low of 44.0 in July versus a 59.8 cycle-high in February and a low from the last recession of 37.4 in June and July of 2008.
The Bloomberg Consumer Comfort index has averaged the same 44.3 in August as seen in July versus a 41.0 June average and a six-year low of 34.7 in mid-May. Analysts saw a cycle-high 66.2 average in January and a 24.1 low from the last recession in November of 2008.
One of the top economic concerns heading into this week was that the renewed restrictions on social movement in sunbelt states would stop the economic recovery in its tracks by causing some of the gains in employment to reverse. We were already starting to see signs of that trend in prior releases of the weekly jobless claims report, and economists and investors were bracing for even worse this week. Fortunately, those fears did not manifest in the data.
Many of the “worst-case” projections aren’t showing in the data as well.
For the first time in 21 weeks, jobless claims dropped below a million (963K), which was below consensus forecasts for 1.1 million. Continuing claims also came in lower than expected but by a narrower margin. 963K is still high by all historical comparisons outside of the last several months, but it indicates a continuation of a move in the right direction. Regarding stimulus talks, if it was going to take a sense of urgency to get Democrats and Republicans to agree, the stock market trading right near record highs and jobless claims back below a million aren’t providing any ammunition.
JOLTS reported job openings rose 518k to 5,889k in June following the 375k bounce to 5,371k in May. The May rebound broke the three-month pandemic slide to 4,996k in April which was the lowest since the end of 2014. Openings were at 7,185k a year ago. The 7,520 from January 2019 is the all-time high. The JOLT rate improved to 4.1% from 3.9% and is the best since February. June hirings declined -503k to 6,696k after jumping a record 3,152k to a historic peak of 7,199k in May which broke four months of declines. U.S. Q2 nonfarm productivity surged at a 7.3% rate, bouncing from the -0.3% contraction in Q1 and a 1.6% growth clip from Q4. Unit labor costs surged 12.2% last quarter, following a 9.8% Q1 gain and versus a 1.7% rate in Q4. Output contracted at a -43.0% from -6.1% in Q1 and 2.8% in Q4. Employee hours plunged -43.0% from -6.1% previously and 1.2% in Q4 gain. Real compensation climbed 24.8% after 8.1% in Q1 and 0.9% in Q4. The price deflator was down -3.6% from 0.8% and 1.2% in Q4.
Mortgage applications rose 6.8% last week as interest rates dropped to near record lows. Much of the strength, however, was driven by refis as opposed to purchasing applications.
Preliminary Eurozone Q2 GDP results showed output dropped by 12.1%. The biggest contraction on record and entering a recession. Germany, France, Italy, and Spain all posted record declines in GDP as lockdowns imposed to contain the spread of the coronavirus pandemic hit activity and global demand.
Auto sales in China rose 16.4% to 2.11M vehicles in July to mark the fourth month in a row of positive growth, according to the China Association of Automobile Manufacturers.
Chinese Industrial Production increased 0.98 percent in July of 2020 over the previous month. In line with the last three months of data.
Retail sales in China declined by 1.1 percent year on year in July 2020. This was the seventh straight month of contraction, but the slowest pace of contraction in retail trade since the pandemic. People continue to avoid crowded places, including shops, restaurants, and cinemas amid the COVID-19 crisis.
Corporate earnings reports slow down to a more moderate pace relative to the last couple of weeks. The standout and of course the big surprise has been forward guidance. The three-month rolling average of companies raising guidance is at a record high. If an investor looks closely during this earnings season, there is plenty of “visibility” out there.
Over the last three months, 18.6% of companies have raised guidance on a net basis (vs. lowered guidance). Who would have thought that amid a pandemic more companies than ever would be practically tripping over themselves rushing to raise guidance? If one did believe that the earnings forecasts were way too low (yours truly), they were roundly criticized for being too bullish.
The Political Scene
The tit for tat back and forth between the U.S. and China continued today as the Chinese government said it will sanction 11 Americans in response to sanctions the US announced towards 11 Chinese officials on Friday. As of yet, no details have been released as to what the sanctions will entail. Another “non-event” for the equity market.
President Trump announced a Middle East peace deal between Israel and the United Arab Emirates this past week. Another BEAR talking point may have been neutered.
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, 10-year bounced off the bottom and closed trading at 0.71%, rising 0.14% for the week. For the Treasury market, that is a huge move.
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.
The 2-10 spread was 30 basis points at the start of 2020; it stands at 57 basis points today as the yield curve steepens.
Historically, when the S&P 500 has been at or within 1% of an all-time high, bullish sentiment has been around an average of 40%. Bearish sentiment, on the other hand, has typically been around 25.5%.
With the S&P 500 less than one percent away from its February 19th closing high on Thursday, bullish sentiment from AAII stands at 30%, roughly 10 percentage points away from what could be expected when the S&P 500 is so close to an all-time high. Although the bullish sentiment is lower than might be normal for where the S&P trades, it did pick up considerably week over week, rising 6.75% in what was the largest single weekly increase since March 5th when it rose by 8.3%. Even after that increase, though, the bullish sentiment was lower than what we saw a month ago on July 16th.
Not many believe in this stock market or this rally.
Oil prices remain a conundrum. The $42.50 zone remains as resistance, and while it first looked like oil would fall from that level, it then turned around and quickly spiked above it before pulling back beneath it. I don’t know if that was just to squeeze shorts or just a result of the explosion in Lebanon increasing Middle East tensions, but for now, oil looks confused and anyone trading it is probably just as confused.
A break higher has room up to near $50 while a break lower has a chance of going at least to $35. Until it makes up its mind, though, it’s hard to be anything but neutral on it.
Crude oil inventories excluding strategic reserves remain elevated, but have continued to grind lower with this week’s 4.5 million barrels draw marking a third consecutive week-over-week decline. Crude inventories are now at similar levels to early April.
Inventories were lower partially in part due to a sizeable drop in domestic production. Domestic production fell by 0.3 mm bbls/day to 10.7 mm bbls/day. That was the biggest single-week decline and the lowest level of domestic production since June 12th. Imports were also lower.
As for petroleum products, gasoline inventories experienced their first draw in nearly a month as demand rose to its highest level since mid-March. The price of WTI continues to trade in a very tight range since early June, closing this week up by $0.64 at $42.16.
The Technical Picture
Resistance at old highs (S&P 3386) is difficult to overcome, so any pause or a possible dip would be perfectly normal here. There was plenty of downside probing as the week drew to a close.
There was upside probing as well. During the last three trading days, the index poked above the old high at 3,387 before retreating. Not much has changed in the last three weeks as ALL trend lines continue to slope upwards. I’ll leave it up to others to “guess”, “hedge”, and call this as an intermediate top.
No need to guess what may occur; instead I take the approach that concentrates 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.
Individual Stocks and Sectors
Many say the NASDAQ is a bubble and stocks no longer reflect reality. I am starting to think just the opposite. The majority is often wrong and this time may be no different. Many areas of technology (both large and small caps) have seen business get better due to the lockdown. While we could see “rotation” out of technology, I am not overly concerned. That is considered “reversion to the mean” and is to be expected. While I have made minor adjustments, I have not abandoned the growth areas of the market.
For all the criticism the U.S. has received for its handling of the COVID pandemic, the last thing many people would have expected was to see the S&P 500 knocking on the door of its record high less than six months after the last high. Even more surprising is how much further other areas of the world are from their respective highs. Europe’s STOXX 600 is still down more than 14% from its 2020 high in local currency terms, and the Nikkei is more than 5% below its high from January.
At the start of the week, the U.S. had conducted 65 million coronavirus tests in our population of 330 million. India comes in second at 11 million tests with its population of 1.3 billion.
The Federal Government’s Operation Warp Speed has announced funding in the amount of 2.1 Billion to accelerate the development of a COVID vaccine while maintaining standards for safety and efficacy.
The Transportation Security Administration reports more than 831K passengers boarded commercial jets last Sunday. That is the first time activity has been higher than 800k since March 17th.
Similar to the many other negatives that continue to plague the dialogue these days, the stock market has seemingly considered other “facts” and assessed the situation for what it is.
Anyone that isn’t aware (Congress, etc.) of what a massive undertaking it is to try and be the gatekeeper for all that is evil in this world needs to look at some facts.
Perhaps the “pollyannas” need to brush up on their research before they start grandstanding and making fools of themselves.
In Full Disclosure: I own shares of Facebook (FB).
Where is the Buyback army? You know the folks that kept saying the stock market was being propped up by corporate stock buybacks. Since the pandemic came on to the scene, companies have stopped their buyback programs dead in their tracks.
However, while they stopped buying stocks, the Nasdaq posted 32 new all-time highs and the S&P is within 1% of a new all-time high.
I posted data time and time again indicating their “theory” was nonsense back then. It remains nonsense today, and when they come back with it, it will be nonsense at that time as well.
How can the equity market be on this upward trajectory near new highs when we are still seeing COVID hotspots pop up? That is a question that is being asked of every investment advisor across the country. Unemployment is at 10%. Some states are still in draconian lockdowns. That adds to the confusion out there. Soothsayers are telling investors to avoid stocks and get into gold, silver, and bitcoin.
Understanding how the stock market works then putting that knowledge into practice takes experience and discipline. Anyone that is waiting for a COVID vaccine or for all of the news to get better before they make a withdrawal from their money market fund to invest in equities has already made a huge mistake. When all looks rosy the stock market will have made a top and be headed down. It has happened before and this time will be no different.
Making mistakes and investing go hand in hand. We all make them. At one time or another, every investor has made the same mistake twice, some do that over and over. That isn’t so unusual, it’s all part of the learning process that at times is quite painful. The successful investor recognizes this and they do their best to limit that behavior.
One of the most recent and glaring mistakes revolved around the notion that only a handful of stocks was leading the market higher and that was a sure sign of a complete breakdown ahead. That notion has “trapped” so many investors, so many times in this bull market the number can’t be calculated. It is one of the favorite themes to “roll out” when any pundit or investor can’t seem to grasp what the stock market is telling them.
This time around I noticed a difference. The number of investors making this same mistake grew. Many that were never watching that metric suddenly “bought” into the notion that this key data point would be the undoing of the rally. Not many investors have patience. Not many take the time to look around, they latch on to a theme and run with it. They continue to run while the data is changing as they refuse to let the situation “play out”. They make the same mistake over and over.
This article opened with data points on recent market price action that shows how the rally has broadened out as the S&P approaches new highs. They cover only a small amount of the other technical positives that I have found lately. Any market participant that pounded the table with the “handful of stocks” theory will now either slip into the night or come back with yet another reason to tell investors why THEY can’t be wrong.
Human nature tells us to have a contingency plan. Simply because of the way our minds work, we all concentrate on what could go wrong. Sadly not many look at what could go right. That very simple theory is why the mainstream media, analysts and many investors can’t grasp why the S&P is near all-time highs. Not many understand why the NASDAQ composite has posted 32 new all-time highs in a year when the economy was shut down. ANY investor who factors in what could go right is a step ahead of the crowd.
What went wrong and what could go wrong is easy. That is why most investors gravitate to that way of thinking. What could go right is harder and it is the reason why people don’t bother to take the time to look around at the entire situation.
The economic recovery remains tricky; no one is saying this will be easy. There are many risks out there, but there is always a risk in the markets. However, keeping an open mind to ALL of the possibilities by mixing in what could go right will help any investor reach their goals.
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.
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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.
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