11/14/21. Catch up with the entire previous week in financial markets in less than ten minutes every Sunday by reading or listening to my weekly market review.
We are all familiar with the term ‘melt-down’ but the US stock market appears to be experiencing a ‘melt-up’ with constant new all-time highs and occasional price moves lower being routinely viewed by many simply as good buying opportunities (BTFD).
Other factors also point to the current path of least resistance being higher stock prices. The US stock options market is showing unusually strong demand for call options over puts and is simultaneously implying higher volatility, particularly in the largest names. This positioning is not what you would normally expect to see in steadily rising stock markets and it shows confidence in the fact that stock prices will move up quite significantly over coming months.
The remaining weeks of 2021 will be filled with 2022 economic outlook reports and the general sense is that they will be positive for the most part, at least in terms of retreating COVID and the easing of supply chain issues leading to increased economic expansion and growth.
And let’s just throw in the passage of a $1.2 trillion infrastructure bill that will boost economic activity significantly and Pfizer announcing work on its potentially game-changing anti-viral oral pill.
And then there’s sheer momentum, which is just as much a thing in financial markets as it is in physics class. The S&P 500 rose on 17 of 19 days. The last time that happened was in 1971. Its eight day winning streak was the best since 1997. The tech-heavy NASDAQ saw this happening, said “Here, hold my beer!” and went on an eleven day streak of its own.
There is one enormous fly in the ointment, though. Inflation. We saw last week that there are no signs of it cooling off, indeed it is continuing to heat up. Firstly for starters, we were told that the Producer Price Index (PPI) which is basically a measure of wholesale inflation (the prices of raw materials entering the rear gates of the factory) was up 8.6% year-on-year which is the highest since the index was created in its current form in 2009. It was up 0.6% in October alone, an increase from September’s growth rate.
The very next day we were presented with October’s Consumer Price Index (CPI) which is the measure of retail inflation (the prices of the finished goods coming out of the front gates of the factory) and it was really, really ugly. Retail inflation was up 6.2% year-on-year, the highest rate since July 1982 when “Don’t You Want Me?” by The Human League topped the music charts. It rose 0.9% in October alone, way ahead of estimates and more than double the rate of increase in September. But even stripping out the more volatile factors of food and soaring energy costs didn’t help that much, that rate was 4.6% and the last time it was that high was back in 1991 when we were blasting Nirvana in our Sony Discmans and getting scared by “Silence of the Lambs” in movie theaters. There was nowhere to hide this time, no matter how you sliced the numbers, it was clear that inflation is back. At least for the time being.
As investors digested all this, the rising stock price train came to a screeching halt and Wednesday’s and Thursday’s focus was all on inflation fears, although by Friday’s close the market’s upward arc appeared to have resumed as the dip was bought yet again.
The big fear, of course, is that continued or even further increasing inflation could derail the Fed’s Goldilocks plan to gently cut back on bond purchases until it is finally done with it towards the end of next year and only then begin to think about raising interests rates maybe in early 2023. To combat rampant inflation, interest rates may have to be raised earlier than planned. Indeed Fed Funds futures markets are pricing in a likelihood (because they can do that!) of 73% that the Fed will have raised rates by the time it is done with its June 2022 meeting. One month ago that likelihood was priced at 28%.
Other news ..
- Sociopath Elon Musk’s narcissistic antics from the previous week affected the entire stock market last week as Tesla fell 16% in 3 days just in anticipation of him selling as instructed by the Twittersphere. By pulling that ridiculous Twitter poll stunt, he put millions of us at risk of losing money in our retirement accounts which are likely heavily exposed to Tesla due to its high weighting in large cap index funds. Then, in a move straight out a dumb middle school brat’s playbook, he followed up with a grossly insulting infantile online message aimed at the Chairman of the Senate Finance Committee who had justifiably called Musk out for his nonsense. Stay classy, Elon. Truly a role model for us all. Not.
- Online broker Robinhood disclosed a security breach affecting millions of its customers, and said that the infiltrator had demanded an “extortion payment”. The Securities and Exchange Commission’s Division of Examinations had already previously identified “deficiencies” in Robinhood’s security practices in prior reviews and is likely to be very cross upon hearing this news.
- Figures released last week showed that there were over 10.4m job openings in the US. Part of the problem though is that, with the so-called “Great Resignation” going on as well as many hundreds of thousands of COVID deaths and debilitations in the workforce, there are currently over 3m fewer people in the country actively looking for work today than there were before the pandemic.
Under the hood .. As strong stocks get stronger, there is clear evidence that previously weaker stocks (mostly in the small cap universe) are now also improving. The major stock market indexes all ended lower for the week but, from a technical standpoint, declines like this are modest at most and actually healthy. This is especially true after just having experienced the positive streak that I described earlier and the market needed a breather.
In short, the majority of stocks are now in intermediate or long term uptrends. Given these steady technical improvements and the reduced possibility of a major decline with new highs in the measures of the breadth of participation in the gains, the balance of probabilities favors viewing market pullbacks as buying opportunities.
The upcoming week ..
As we start to move into the final phase of Q3 earnings reports, both US and Chinese retailers and e-commerce giants will dominate next week; Walmart, Target, Alibaba, JD.com, Home Depot, Lowe’s, TJX and Advance Autoparts among others. Non-retail highlights will include earnings reports or investor days from Johnson and Johnson, Nvidia, Cisco, Applied Materials, Qualcomm, Bristol Myers and more.
A lighter set of economic data releases next week, but we will learn the latest data on Retail Sales, the Housing Market Index, new home construction and new building permits.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
Relatively speaking ..
- Last week’s best performing US sector: Materials (two biggest holdings: Linde, Sherwin-Williams) - up 2.58%
- Last week’s worst performing US sector: Consumer Discretionary (two biggest holdings: Amazon and Tesla), thanks Elon! - down 3.52%
- Flipping from the previous week, the S&P 500 handily outpaced the tech heavy NASDAQ-100
- Emerging Markets rebounded spectacularly after a miserable streak, comfortably winning out over US Markets and Overseas Developed
- Mid Cap was the week’s winner, ahead of Large and Small
- Another flip from the previous week, Value beat Growth
Technical corner ..
- The proprietary Lowry's measure for US Market Buying Power rose by 3 points while that of US Market Selling Pressure was flat for the week.
- SPY, the S&P 500 ETF, is above both its 20-day moving average and its 50-day. It is also above its long term trend line and has been since 09/08/2021. SPY ended the week 0.35% below its all-time high (11/8/2021).
- QQQ, the NASDAQ-100 ETF, is above both its 20-day moving average and its 50-day. It is also above its long term trend line and has been since 09/16/2021. QQQ ended the week 0.98% below its all-time high (11/5/2021).
ARTICLE OF THE WEEK:
Each week I'll link to an interesting article I have come across during the week.
This week: Fast Risk vs. Slow Risk. Understanding the difference is important.
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