It's Monday evening. The wreckage of the stock market is scattered everywhere. The Delta variant is bringing COVID back. Renewed lockdowns are a certainty. The Federal Reserve is tacitly admitting that inflation is back. Republican pushback on funding IRS enforcement is threatening the infrastructure bill, passage of which has been already baked into current stock prices. Oil has just tanked and crypto has sunk even further down the toilet with all of Bitcoin's 2021 gains freshly wiped out and the previously highly-touted theory that it was a hedge against inflation now in ruins. The previous week's narrative of “peak growth" suddenly evolved into "peak everything". The professional doom-mongers who have predicted thirty-six of the last three recessions are all over CNBC gleefully proclaiming that the end is nigh and giving it a large amount of "I told you so!". It was scary.
Until it quickly wasn't. By the end of the week, the Dow had advanced 373.70 points, or 1.1%, to a record 35,061.55, closing above 35,000 for the first time. The S&P 500 index gained 2%, to 4411.79, while the Nasdaq Composite climbed 2.8%, to 14,836.99, both also record highs. One chief investment officer described Monday as a "compressed, let’s-cram-all-our-neuroses-into-one-day kind of selloff" which is a good description. But then focus switched to frankly blockbuster earnings reports coming from large parts of corporate America and a very robust "Buy The Dip" mentality from investors as far as the major indexes were concerned.
While the fear and panic of Monday was clearly an overreaction and the doom-mongers had to eventually crawl back under their rocks for a while (until the next time CNBC gets a chance to wheel them out again), it has to be said that the euphoria and complacency brought about by the four day recovery act (which, incidentally, took the S&P 500 to now more than double its pandemic low of March 2020 of just over 2191) is similarly unwarranted, given the still-internally-damaged state of the market and the obvious breadth problem that the market is experiencing:
- Although the S&P 500 finished the week at yet another record all-time high, 60% of stocks are not even within 10% of their 52-week highs.
- Both Buying Power and Selling Pressure ended Friday afternoon at exactly the same levels that they began Monday morning.
- Since the end of May, the largest holdings in the S&P 500 (the top 10% in terms of market cap) have risen an average of more than 4%. The other 90% of holdings have lost an average of over 2%. When we focus on the smallest 10% of stocks in the index; it’s even worse, these stocks have experienced an average one-month decline of over 7%.
There's a lot more to come this week in terms of earnings, including from most of the major US tech giants and it will be interesting to see when the market's recent “Stepford Wives-type" schizophrenia and divergence between the happy, smiling external image presented by its indexes and the quite concerning state of affairs “under the hood” finally resolves itself one way or the other.
I have to say, I’m not hopeful that this divergence will be resolved for a while yet and so I feel somewhat cautious right now, at least in the shorter term.
Relatively speaking ..
- The tech-heavy NASDAQ-100 outperformed the S&P 500
- US markets outperformed international developed while emerging markets suffered a China-driven slump after recovering somewhat the previous week
- Mid cap got a rare win this week, ahead of large and small cap
- Growth stocks again strongly outpaced value
Technical corner ..
In the overall US stock markets;
- The proprietary Lowry's measure for Market Buying Power and that of Market Selling Pressure both ended the week unchanged
- SPY, the S&P 500 ETF, is currently well above both its 50-day and 200-day moving averages. It ended the week at a new all-time high (July 2021)
- QQQ, the NASDAQ-100 ETF, is currently well above both its 50-day and 200-day moving averages. It ended the week at a new all-time high (July 2021)
ARTICLE OF THE WEEK:
Each week I'll link to an interesting article I have come across during the week ..
This week .. An excellent compare-and-contrast of investing vs gambling and the commonalities and the differences between the two.