Risk off.

My weekly market review 9/12/21


It was only a short week with the Labor Day holiday on Monday, but it was a painful one. The stock market’s Back To School Day on Tuesday was marred by news breaking about a possible White House investigation into Chinese government subsidies that may have hurt the US economy as being a potential catalyst for renewed trade tensions and the continually growing anxiety about the COVID Delta variant and doubts about schools. And it just got worse from there.

Goldman Sachs reduced its forecast for U.S. GDP this year, citing likely slower consumer spending in the face of the effects of the disease. Morgan Stanley announced it had cut its US stock recommendation to “underweight” because of what it calls the “possible end of a mid-cycle transition for stocks” (what does that even mean?)

I think regular readers know how little value I place on these kind of forecasts (historically coin flips have had a better accuracy record than this analyst gibberish) but the fact is that the financial media reported them and they seemed to fit with the prevailing risk-off narrative at the time that some of the market forecasts may have been a tad too optimistic lately and that there could be some share price disappointment looming, so investors ran with it and piled on the pain.

The Producer Price Index (sometimes referred to as the inflation measure for wholesalers and therefore possibly somewhat predictive of future retail price trends) rose by more than expected and, on a year-over-year basis, is up 8.3% mainly on the back of the strong persistence of the global supply chain crisis. That is the biggest annual increase since records began back in November 2010.

The New York and Atlanta Federal Reserve presidents both dropped hints during the week that “tapering” of market-supporting asset purchases could well still start before 2021 is out (see last week’s Market Review for why that is important) despite the poor job numbers for August.

There was little respite overseas with the European Central Bank indicating that it was going to start reducing its own market-propping asset purchases and more carnage in China where the latest crackdown, this time specifically on video game manufacturers, crushed shares of widely-held Chinese companies including Tencent and NetEase. The companies were told to put an end to the “solitary focus of pursuing profit” and approval of all new online games was then suspended. Separately, the Transport Ministry reiterated its crackdown on the ride-hailing industry.

This apparent willingness by China to crash its own stock market right now is quite extraordinary and important to keep any eye on.

It also didn’t help that sellers of Bitcoin literally broke the internet trying to dump the crypto-currency on “El Salvador Day” when that country officially adopted it as its currency and Coinbase couldn’t handle the volume of sell orders and crashed. Not a good look when that happens to your national currency and the measure of your net worth on day one. El Salvadorans are already on the streets protesting this quite remarkable decision by their government. To be continued ..

After having made something of a comeback in the lead-up to the Labor Day weekend, market internals fell away again last week. Basically, small cap indexes need to lead us out of this “under the hood” funk that the market has been in for months now despite the mirage of the top six or seven stocks almost single-handedly driving the indexes to new highs as recently as earlier this month and small caps once again underperformed their large cap cousins last week.

To reiterate, while there is this divergence between the levels of the indexes and the performance of the average stock, the market is going to be vulnerable to sharp pullbacks whenever supply spikes. We saw plenty of evidence of that last week and it will be interesting to see how strong the BTFD mentality (which has always ridden in like the cavalry following every little 2% or 3% fall so far this year) will be this time.

This upcoming week will see the release of the latest inflation data on Tuesday and the latest measure of Consumer Sentiment on Friday. Oracle, Zoom, Chevron and Cisco are among the firms either announcing results or holding analyst guidance calls this week and Apple has its latest love-in with itself on Tuesday with another one of its multi-product launch events.


Relatively speaking ..

- The S&P 500 fell more heavily than the tech-heavy NASDAQ-100

- Overseas stocks comfortably outperformed US stocks with only minor losses seen in broad Emerging Markets, despite trouble in China

- Stocks of US Mid and Small-sized firms fell quite a lot harder than Large cap ones

- Value stocks tumbled further than Growth stocks

- The week’s best performing US sector: Consumer Discretionary (two biggest holdings: Amazon, Tesla) - “only” fell by 0.40%

- The week’s worst performing US sector: Real Estate (two biggest holdings: American Tower, Prologis) - went from best to worst in the space of a shortened week, down 3.86%.  

Technical corner .. 

- The proprietary Lowry's measure for US Market Buying Power fell 5 points while that of US Market Selling Pressure rose by 4 points

SPY, the S&P 500 ETF, is holding just above its 50-day and still ahead of its 200-day moving average. It ended the week 1.71% below its all-time high (Sep 2021)

QQQ, the NASDAQ-100 ETF, is still above its 50-day and 200-day moving averages. It ended the week 1.44% below its all-time high (Sep 2021)

Each week I'll link to an interesting article I have come across during the week.

This week: There are still loads of people, including pundits and so-called "experts", spewing outdated ideas that have been shown to be wrong for decades now. It's time to finally call BS on them all. Barry Ritholz does just that

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