May 8 • 7M

Rushing For The Exits?

05/08/2022. Catch up with all you need to know from the entire previous week in financial markets in less than ten minutes every Sunday by reading or listening to my weekly market review.

 
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In Angles, Anglia Advisors founder Simon Brady CFP® talks about financial markets. This podcast is informational only and should not be used as the sole basis for making any investment decision.

After weeks of hawkish comments by Fed Presidents and refusal to rule out much higher interest rate increases than expected, the Federal Open Market Committee raised its key policy interest rate on Wednesday by one-half percentage point as expected, to a range of 0.75%-1.00%. Central bank chief Jerome Powell lowered future rate increase expectations by effectively ruling out imminent larger hikes.

Traders began to abandon bets for a 0.75% raise in June and July and stocks rose sharply, spurred on by Powell’s (clearly planned and deliberately planted) comment in the press conference that a hike of that size “is not something the committee is actively considering”. This comment was combined with a cautiously optimistic narrative on inflation and so, by the end of Powell's 47-minute press conference, stocks were up over 2%.

The sense began to emerge that the the Fed’s bark on inflation may be worse than its bite. What the Fed seems to be doing is talking tough to try and get the market to do its work for it and push market-determined rates higher while not being seen to be taking extreme measures every month or two by jacking up the Fed Funds rate too far, too fast.

And to a large degree, this tactic has worked - the 10 year Treasury rate went above 3.0%, driven not by the Fed (which has no control over such rates) but by market traders reacting to what Fed presidents were saying almost every day in clearly co-ordinated press conferences. It ended the week well above the 3% level while the midpoint of the Fed Funds rate is still only 0.875%.

I noted in last week’s report that we are now living below the 200-day moving average in the S&P 500 and that “.. this is where the drama takes place”. Well that certainly rang true last week when, after screaming up on Fed-day (Wednesday), the bottom completely fell out on Thursday when the market gave it all back and more with an epic bad day as investors re-evaluated everything (except for energy stocks) and charged for the exits. Anecdotal evidence supports the idea that large investors and institutions are now starting to sell out of their positions rather than hedge them.

The biggest stock market drawdown during the whole of 2021 was 5%. The NASDAQ fell 5% on Thursday alone. Friday failed to provide any kind of bounce-back. Indeed, NASDAQ and Small Cap stocks made yet another leg lower going into the weekend. This extended the streak of weekly stock market losses to five weeks and that hasn’t happened in a decade.

Nothing in the Powell press conference on Wednesday was really good enough to cause a 2% rally in the S&P 500. That was driven by forced short-covering, algorithmic black box trading, options delta hedging, high-frequency trading and giddy day-traders. Similarly though, nothing really justified Thursday’s 5% drop in the NASDAQ. We are just in a wild moment in terms of market volatility.

When the dust settled on Thursday evening, the S&P 500 was down from Wednesday’s open but still above its intra-day lows from Monday. I suspect many institutional and hedge fund traders are getting destroyed by this volatility and my guess is that in the coming weeks, we will hear about some blow-up casualties. As for the basement-dwelling individual day traders messing around intra-day on their laptops with their own money, hasta la vista baby.

The stock market’s headwinds remain unchanged; a generationally hawkish Fed, and real global growth concerns and supply chain issues resulting from both the Ukraine conflict and China’s Zero-COVID policy.

Even though these risks are not getting materially worse, it doesn’t really matter any more because conversely, nothing good is happening to mitigate any of them and in a market where sentiment is this negative, that leaves the path of least resistance as clearly lower. The point being, the recent drop in stocks hasn’t been caused by a lot of incrementally negative news, it’s been caused by a total lack of any good news, so that negative narrative is now defining the market leading to a “sell first, ask questions later” approach.

Friday’s jobs report showed there were 428k new hires last month versus the anticipated 375k. This suggests that the domestic economy is still undergoing steady growth but also indicates that, with more people working, consumers are continuing to spend – driving demand above present supply levels and contributing to inflationary pressures that need to be addressed by even higher interest rates.

The unemployment rate held steady at 3.6% and the number of unemployed was unchanged at roughly 5.9 million. At this pace, unemployment will be below pre-pandemic levels by July.

Even if a company has great ideas, fantastic products, kick-ass software, creative and charismatic management, solves serious problems with its widgets and life-changing innovation, absolutely no-one cares right now. These kind of fundamentals don’t mean shit at the moment and investing in individual stocks as if they do is going to make you very poor, very fast. Josh Brown mockingly called it “fundamental happy-talk” this week and (as usual) he’s 100% right, that’s exactly what it is.

Stop betting on one horse because you think you have some kind of an edge (you don’t!) and buy the whole damn field. Remember that every current market decline feels like a catastrophe, every prospective future decline looks like a big scary risk yet every past decline always looks like a huge missed opportunity.

Take your time, there’s no hurry any more. 2020’s FOMO is long dead. For longer term investments, quietly (or even not so quietly) start plotting to load up on broad index or sensible factor-based ETFs (go easy on buying the no-profit tech garbage). One day, your future self will thank you for it.


Other News:

2 job openings per unemployed worker .. The latest Job Openings and Labor Turnover Survey (JOLTS) showed US job openings rose to an all-time high of 11.5 million in March, exceeding the number of unemployed workers by far more than 5.6 million, the widest gap ever recorded. There used to always be more unemployed Americans than jobs available in every month until early 2018 when things flipped to more jobs being available than unemployed workers to fill them. COVID and lockdown and its creation of millions more unemployed workers reversed the trend back, but in May 2021, it flipped back again and has not looked back since.

And not only are firms finding it difficult to fill positions but are also struggling to retain existing employees. Figures released last week also show that an unprecedented number of workers quit their jobs in March.

Bond carnage .. Zero coupon bonds are down 40% in 2022, long-term Treasury bonds have lost almost 20%, that’s a steeper decline than the S&P 500 so far this year. This surpasses the previous record for Treasury bonds, a loss of 17% in the twelve months ending in March 1980. The broad bond market has performed worse so far in 2022 than in any complete year since 1792 except one. That was back when Frederic Chopin completed Ballade No. 4 In F Minor in 1842, as a deep depression was bottoming out.

Bonds were supposed to be the safe haven part of your portfolio to offset that crazy stock market volatility, remember? It’s worth keeping in mind why you own bonds at all (unless you are like 30 years old or younger and saving for retirement in which case you shouldn’t own any bonds whatsoever). Bonds were never meant to make you rich, they are meant to stop you from becoming poor while paying you some sort of income along the way. And they will likely resume that role again one day. There’s just no way to know when.


Under The Hood:

Over the course of the last week or two there has been a rapid re-expansion in Supply and a simultaneous and equivalent contraction in Demand. If the market were nearing the end of its decline, this trend would typically be slowing, not accelerating. Only 15% of stocks are above their 30 day moving averages, a number from which it has historically been essentially impossible to generate a meaningful immediate rebound - the equivalent of a car running on gas fumes that needs to get somewhere 250 miles away.

If a bottom were forming you’d expect the most beaten-down Small Cap stocks to be, at the very least, stabilizing since this is where any recovery will eventually begin. Instead, the number of Small Cap stocks 20% or more below their highs (i.e. in what is generally accepted to be in a bear market) actually rose even as the indexes popped higher at times last week and now sits at a new recent-high above 60%.

Another cause for concern is that, even following the carnage of Thursday’s market incineration (and Friday’s non-rebound), stocks are not yet at over-sold levels from which to fashion a solid bounce. For instance, “over-sold” for the closely-followed stat of the percent of all stocks above their 30-week moving average is considered to be when it falls below 15%. At the close of business after Thursday’s bloodshed, it stood at 45%.

Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.


The upcoming week’s calendar .. 

We're past the peak of first-quarter earnings season, but there are still several notable companies left to report next week including Disney, Toyota, Simon Property, Occidental Petroleum, Norwegian Cruise Lines, BioNTech, Palantir, Rivian Automotive, Tyson Foods and Electronic Arts.

The economic calendar is headlined by the Consumer Price Index (CPI) index of retail inflation for April (see FINANCIAL TERM OF THE WEEK below). The headline CPI is expected to increase 0.2% month over month, following a 1.2% increase in March. That would bring the year-over-year rate of headline inflation down to 8.1% (from 8.5%). Core CPI is expected to increase 0.4% month over month, following a 0.3% increase in March. That would bring the year-over-year rate of core inflation down to 6.1% (from 6.5%).

The Producer Price Index (PPI) measure of wholesale inflation comes out next week as well.

Among other data out next week will be the University of Michigan's consumer sentiment index for May.

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INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):

  • Bullish ↑ 27% (16% the previous week)

  • Neutral → 20% (25% the previous week)

  • Bearish ↓ 53% (59% the previous week)

  • Net Bull/Bear spread .. Bearish ↓ by 26 (Bearish ↓ by 43 the previous week)

Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Bull-Bear spread: Bullish by 8
All numbers rounded. Source: American Association of Individual Investors (AAII)

LAST WEEK BY THE NUMBERS:

- Last week’s best performing US sector: Energy (two biggest holdings: Exxon Mobil, Chevron) - up 10.3%

- Last week’s worst performing US sector: Real Estate (two biggest holdings: American Tower, Prologis) - down 4.5%

- Once again, the NASDAQ-100 underperformed the S&P 500

- Emerging Markets and International Developed Markets both had a horrible week with US Markets a little less horrible

- Not a lot in it, but Large Caps lost a bit less than Small and Mid

- Value actually finished the week slightly higher (helped by its high energy component) but Growth was significantly lower

- The proprietary Lowry's measure for US Market Buying Power rose by 3 points last week while that of US Market Selling Pressure fell by 1 point

SPY, the S&P 500 ETF is currently below both its 50-day moving average and its 90-day and remains below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 39**. SPY ended the week 13.9% below its all-time high (01/03/2022)

QQQ, the NASDAQ-100 ETF, is currently below both its 50-day moving average and its 90-day and remains below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 38**. QQQ ended the week 23.5% below its all-time high (11/19/2021)

** RSI readings range from 0-100. Readings below 30 indicate an over-sold condition, possibly primed for a technical short term rebound and above 70 are considered over-bought, possibly primed for a technical short term decline.


ARTICLE OF THE WEEK:
Each week I'll link to an interesting article I have come across recently.

This week: A mesmerizing representation of the US stock market in 2022.


FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia (may be edited at times for clarity).

CONSUMER PRICE INDEX (CPI)

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living.

The CPI is one of the most frequently used measures of inflation and deflation. It may be compared with the producer price index (PPI), which instead of considering prices paid by consumers looks at what businesses pay for inputs.

Inflation is the decline of a given currency's purchasing power over time; or, alternatively, a general rise in prices. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.

The CPI is what is used to measure these average changes in prices that consumers pay for goods and services over time. Essentially, the index attempts to quantify the aggregate price level in an economy and thus measure the purchasing power of a country's unit of currency. The weighted average of the prices of goods and services that approximates an individual's consumption patterns is used to calculate CPI.

The U.S. Bureau of Labor Statistics (BLS) reports the CPI on a monthly basis and has calculated it as far back as 1913. It is based upon the index average for the period from 1982 through 1984 (inclusive), which was set to 100.2 So a CPI reading of 100 means that inflation is back to the level that it was in 1984, while readings of 175 and 225 would indicate a rise in the inflation level of 75% and 125% respectively. The quoted inflation rate is actually the change in the index from the prior period, whether it is monthly, quarterly, or yearly.


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This material represents an opinionated assessment of the market environment based on assumptions at a specific time and is always subject to change. No warranty of its accuracy is given. It is not intended to act as a forecast of future events, nor does it constitute a guarantee of any future results. The material is insufficient to be relied upon as research or investment advice. 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.
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