The market appears to have decided that the glass is half full, for the moment at least. Last week’s stock price declines, mostly concentrated on Friday, can essentially be put down to the seriously overbought conditions brought about by four straight weeks of gains and two months of solid progress. There wasn’t a whole lot else behind the price slump.
Yes, perhaps economic data out of both New York state and China disappointed to start the week and some late-week Fed-speak attempted to dampen recent exuberance generated by the growing view that the days of rate hikes of more than half a percent at a time may now over.
But the intense pessimism of the first half of 2022 now seems a distant memory already. War in Europe, runaway inflation, an inevitable collapse in corporate profits, a bumbling, behind-the-curve Federal Reserve forced to push the economy into recession; you don’t hear about all this nearly as much these days. A string of solid employment and, more recently, inflation data, much better-than-feared Q2 earnings and a tangible pullback in commodity prices are behind the shift.
The latest Bank of America Global Fund Manager Survey reported that sentiment remains bearish among investment professionals, but is easing for the first time in a good while.
Retail earnings kicked off the week with some good news as both Walmart (WMT) and Home Depot (HD) reported better-than-expected results for Q2. Shares of both retailers have been punished at times in 2022 as investors worried about inflation and a slowing economy. But these earnings provided a sigh of relief. Target (TGT) and Lowe’s (LOW) numbers weren’t as robust, but since investors are currently sporting rose-tinted spectacles, they were relatively forgiving.
U.S. consumers continued opening their wallets last month, shifting savings from falling gas prices to purchases of everyday goods as they continue to weather high inflation and a slowing economy. Overall retail sales were flat in July compared with the prior month’s revised 0.8% increase but the measure of spending that strips out gasoline and auto sales rose 0.7% last month, showing shoppers maintained the ability to spend with much of the spending moving online.
Minutes from last month’s Fed meeting released last week showed the members agreed that inflation was still too high and decided to increase the Fed’s key lending rate by 0.75% to a range of 2.25% to 2.50%. Officials see the fight against inflation as far from over. Recent declines in oil and other commodity prices can be largely dismissed, officials said, because they could quickly rebound just as easily, while gains in stickier categories like rents are expected to be ongoing.
However, the participants indicated that as monetary policy tightened further, “it likely would become appropriate at some point to slow the pace of policy rate increases” while the Fed analyzed the effects on economic activity and inflation. In other words, wait and see.
Frankly, I don’t see any policy shift here or indeed anything new at all and I was a bit puzzled as to why the market reacted so favorably to the release as if it represented some kind of new set of positive information or a sign of movement in a favorable new direction. A steep late-week fall in stocks suggested that maybe some kind of reassessment of this initial impression was going on.
The year-end Fed Funds interest rate (the “terminal rate”) is still expected to be between 3.00%-3.50%. This expectation has not changed for a good while now. Regarding September’s hike in rates, it’s now considered more likely to be half a percent although three-quarters is still on the table.
Put simply however; in order for the Fed to declare the rate hike cycle is ending (the holy grail of peak Fed hawkishness), it’s got to be very confident that:
the labor market will return to a better state of balance between job vacancies and the number of unemployed Americans (not happening yet).
that inflation will gradually be on course to return to the 2% target (not happening yet).
that future inflation expectations will remain well anchored at least near 2% (not happening yet).
We have weeks for these pieces to fall into place, but the recent pace of progress cannot afford to show any signs of slowing down. Otherwise that half-full glass might very quickly start to look a lot emptier.
OTHER NEWS:
Housing grab-bag .. Housing appears to be transitioning from a tailwind to a headwind for the US economy and could well actually subtract from real GDP growth over the next year. Higher mortgage rates and soaring property prices means that, even as they spend more at Home Depot and Walmart, Americans are no longer spending so lavishly on buying new homes. And that's causing home builders to make adjustments.
New home construction fell more than expected last month as demand slowed substantially. Housing starts declined from June to the fewest since February 2021. Starts for both single-family homes and multi family units dipped 10%. Every region in the country had a drop in starts, except the Northeast. Building Permits also were down, sliding 1.3% to a 10-month low. The National Association of Home Builders (NAHB) said confidence among its members was the lowest since May 2020.
Sales of previously-owned existing homes slid 5.9% in July from the prior month to a seasonally adjusted annual rate of 4.81 million, the weakest rate since November 2015, not counting the pandemic-related drop in 2020, the National Association of Realtors said Thursday. July sales fell 20.2% from a year earlier.
This was also the sixth consecutive month of existing home sales declines. The last time that happened, Miley’s wrecking ball was swinging through the Billboard charts in 2013.
The number of home sale cancelations also soared in July to another two-year high as buyers continue to pull back. About 63,000 home sales were canceled last month, that’s about 16% of homes that went into contract.
Meme stock nonsense is back again - with the same result .. Bed Bath & Beyond (BBBY) shares had their worst day ever on Friday, falling more than 36% in a matter of hours. Self-styled meme stock influencer Ryan Cohen’s RC Ventures announced Thursday evening that it had sold its entire position in the company. Cohen, who is also the chairman of GameStop, had owned about 12% of the firm’s entire float of shares and had been a guiding light to this latest iteration of the Reddit meme stock crowd who focused on buying up the stock using the Gamestop/AMC January 2021 playbook.
On Tuesday, its stock price soared almost 70% intraday because of a short squeeze (see EXPLAINER: FINANCIAL TERM OF THE WEEK below). It finished the day up 29%. From that point to Cohen’s announcement late Thursday, it gained another 17%. At one point on Thursday, the stock was up almost 450% in August alone.
The seemingly-doomed retailer spent 2021 and most of 2022 closing stores all over the place and massively reducing its workforce. It ended its most recent quarter with a little more than $100 million in cash to stay alive. Analysts now question whether vendors will agree to ship all the holiday merchandise Bed Bath & Beyond needs because of its awful finances.
Needless to say, Ryan Cohen isn’t quite as popular with the retail meme stock crowd now that he has dropped them all like a hot potato, pocketing an estimated $68m in seven months for himself along the way.
Please be careful who you blindly follow like a financial groupie.
Problems in the Metaverse .. Meta’s Mark Zuckerberg has once again been publicly blasted on Twitter and elsewhere and this time it’s not over product-placing his favorite barbecue sauce. Last Tuesday, he Facebook-posted a screenshot from the company’s Horizon Worlds celebrating the game’s release in France and Spain. The image shows his awkward, dead-eyed avatar standing in an empty landscape populated only by a small version of the Eiffel Tower and Barcelona’s unfinished Sagrada Familia.
The reception was brutal, with people saying that it somehow manages to look worse than the world depicted in the decades-old “The Sims” game that used to come on a floppy disk. Not only does Zuck’s world look rubbish apparently, it was also pointed out that it seems to be riddled with virtual sexual assault, child-grooming, racist and homophobic hate speech and the peddling of ludicrous and dangerous conspiracy theories.
His timing wasn’t great either, as this all came out on the same day Fortnite introduced its mega-popular crossover with Dragon Ball Z, bolstering its apparently much more fun, better-looking and (ironically) safer version of the concept.
The company’s whole pivot to Meta seems to not be working very well and is reflected by the action of the stock price which has whacked stockholders, crumbling from over $382 to below $168 in less than a year.
UNDER THE HOOD:
Despite retreating late last week from what was the world’s most obvious short-term overbought condition, there has been a perceptible shift in the market’s underlying condition when you look at its recent body of work. This was the kind of transformation that may be hard to see in real time, but now with several weeks’ gain under the market’s belt, we can step back to see what has happened.
The S&P 500 and Russell 2000 (small cap stocks) indexes both tested their respective key 200-day moving averages last week which is a notably bullish development on the charts, despite the fact that they were unable to maintain themselves north of the average for very long.
Last week, Selling Pressure reached multi-month lows and Buying Power hit multi-month highs before both reversing a little later in the week. One of the nagging problems with the rally had previously been the lack of any meaningful buying of the most beaten-down stocks. The Percent of Stocks 20% Or More Below One Year Highs had stayed stubbornly high, but over the past week or so it fell sharply to drop below the key 50% level. While this is not an especially strong reading of itself, it is below a threshold observed in very weak markets and is definitely heading in the right direction.
On the opposite side of the strength spectrum, the Percent of Stocks At Or Within 2% Of One Year Highs has finally lifted off from single digits to reflect rising Demand intensity. Here, too, it is not currently a super-powerful reading in a historical context, but its trajectory is now very much positive. Conversely, the Percent of Stocks At New Lows has dried up to near-zero.
There are still plenty of technical concerns that prevent a declaration of victory for the bulls. Trading volume is still terrible, dramatically reducing the quality and validity of signals shown by price action and, despite Friday’s pullback, we are still experiencing overbought conditions, as shown by still-elevated Relative Strength Index readings (see LAST WEEK BY THE NUMBERS below).
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
A bunch of technology and retail companies will report their Q2 2022 results this week, including Salesforce, Zoom, Nvidia, Dell, Intuit, VMware, Snowflake, Macy’s, Dollar Tree, Dollar General, Nordstrom, Williams-Sonoma, Burlington Stores and Ulta Beauty.
Federal Reserve nerds will be tuning into the central bank's annual bash in Jackson Hole, Wyoming at the end of the week with economists and officials excitedly discussing this year's theme of “Reassessing Constraints on the Economy and Policy”.
Economic data coming out includes manufacturing and services purchasing managers’ indexes for August and the durable goods report and personal income and spending figures for July.
====
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 33% (up from 32% the previous week)
→Neutral: 30% (down from 31% the previous week)
↓Bearish: 37% (unchanged from 37% the previous week)
Net Bull/Bear spread .. ↓Bearish by 4 (Bearish by 5 the previous week)
Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Weekly sentiment survey participants are usually polled on Tuesdays or Wednesdays
Source: American Association of Individual Investors (AAII).
LAST WEEK BY THE NUMBERS:
finviz.com
- Last week’s best performing US sector: Consumer Defensive (two biggest holdings: Proctor and Gamble, Coca-Cola) - up 1.8%
- Last week’s worst performing US sector: Communications Services (two biggest holdings: Meta/Facebook, Alphabet/Google) - down 3.1%
- The S&P 500 fell further than the NASDAQ-100
- US Markets fell by less than International Developed Markets which in turn fell by less than Emerging Markets
- Mid and Small Cap stocks underperformed Large Cap
- Growth stocks did worse than Value
- The proprietary Lowry's measure for US Market Buying Power is currently at 184 and fell by 14 points last week and that of US Market Selling Pressure is now at 149 and rose by 10 points over the course of the week
- SPY, the S&P 500 ETF, is above both its 50-day and 90-day moving averages but is still below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 61**. SPY ended the week 11.6% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF is above both its 50-day and 90-day moving averages but is still below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 57**. QQQ ended the week 20.0% below its all-time high (11/19/2021).
** RSI readings range from 0-100. Readings below 30 tend to indicate an over-sold condition, possibly primed for a technical rebound and above 70 are often considered over-bought, possibly primed for a technical decline.
- VIX, the commonly-accepted measure of anticipated upcoming stock market risk and volatility implied by S&P 500 index option trading (often referred to as the“fear index”) ended the week higher at 20.6 but remains below its 50-day and 90-day moving averages and its long term trend line.
ARTICLE OF THE WEEK:
This week .. As the idea of brunch as a social event continues making its comeback, here are some highly recommended spots in New York for this sacred meal.
EXPLAINER: FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia (may be edited at times for clarity).
A short squeeze is an unusual condition that triggers rapidly rising prices in a stock or other tradable security. For a short squeeze to occur, the security must have an unusual degree of short sellers holding positions in it. The short squeeze begins when the price jumps higher unexpectedly. The condition plays out as a significant measure of the short sellers coincidentally decide to cut losses and exit their positions.
When a heavily shorted stock unexpectedly rises in price, the short sellers may have to act fast to limit their losses. Short sellers borrow shares of an asset they believe will drop in price in order to buy them after they fall. If they're right, they return the shares and pocket the difference between the price when they initiated the short and the price when they buy the shares back to close out the short position. If they're wrong, they're forced to buy at a higher price and pay the difference between the price they set and its sale price.
Because short sellers exit their positions with buy orders, the coincidental exit of these short sellers pushes prices higher. The continued rapid rise in price also attracts buyers to the security. The combination of new buyers and panicked short sellers creates a rapid rise in price that can be stunning and unprecedented.
As noted, short sellers open positions on stocks that they believe will decline in price. However sound their reasoning, a positive news story, a product announcement, or an earnings beat that excites the interest of buyers can upend this. The turnaround in the stock’s fortunes may prove to be temporary. But if it's not, the short seller can face runaway losses as the expiration date on their positions approaches. They generally opt to sell out immediately even if it means taking a substantial loss.
That's where the short squeeze comes in. Every buying transaction by a short seller sends the price higher, forcing another short seller to buy. Active traders will monitor highly shorted stocks and watch for them to start rising. If the price begins to pick up momentum, the trader jumps in to buy, trying to catch what could be a short squeeze and a significant move higher.
Short Squeeze Example:
Consider a hypothetical biotech company, Medicom, which has a drug candidate in advanced clinical trials.
There is considerable skepticism among investors about whether this drug will actually work. As a result, there is heavy short interest. In fact, 5 million Medicom shares have been sold short of its 25 million shares outstanding. That means the short interest in Medicom is 20%, and with daily trading volume averaging 1 million shares, the short interest ratio is five. The short interest ratio, also called days to cover, means that it will take five days for short sellers to buy back all Medicom shares that have been sold short.
Assume that because of the huge short interest, Medicom had declined from $15 a few months ago to $5. Then, the news comes out that Medicom’s drug works better than expected. Medicom’s shares jump to $9, as speculators buy the stock and short sellers scramble to cover their short positions.
Everyone who shorted the stock between $9 and $5 is now in a losing position. Those who sold short near $5 are facing the biggest losses and will be frantically looking to get out because they are losing 80% of their investment.
The stock opens at $9, but it will continue to rally for the next several days as the shorts continue to cover their positions and the rising price and positive news attract new buyers.
+1 (646) 713-2225 | SIMON@ANGLIAADVISORS.COM | WWW.ANGLIAADVISORS.COM | FOLLOW ANGLIA ADVISORS ON INSTAGRAM
This material represents an opinionated assessment of the market environment based on assumptions at a specific point in time and is always subject to change at any time. No warranty of its accuracy is given. It is not intended to act as a forecast of future events, nor does it constitute any kind of a guarantee of any future results, events or outcomes.
The material contained herein is at no time ever intended to constitute tax, legal or medical advice. It is also wholly insufficient to be exclusively relied upon as research or investment advice or a basis for any investment decisions. The user assumes the entire risk of any actions taken based on the information provided in this or any other Anglia Advisors post or other communication.
Posts may contain links or references to third party websites for the convenience and interest of our readers. While Anglia Advisors may have reason to believe in the quality of the content provided on these sites, the firm has no control over, and is not in any way responsible for, the accuracy of such content nor for the security or privacy protocols the sites may or may not employ. By making use of such links, the user assumes, in its entirety, any kind of risk associated with accessing them and making any use of information provided therein.
Clients of Anglia Advisors may maintain positions in securities and asset classes mentioned in this post.
If you enjoyed this post, why not share it with someone or encourage them to subscribe themselves?
