Markets seem to have firmly seized onto the hope that we are now close to 1) peak inflation, 2) peak Fed hawkishness and, as a result of the first two, 3) peak US dollar strength. The result was a very solid week for most stocks (with the occasional notable exception, like SNAP which collapsed nearly 40% on Friday alone after terrible sales growth numbers).
But hope combined with some favorable readings from some frankly second-tier data points isn’t usually enough to cause such a substantial bounce (or at least the most substantial one we’ve seen in a few months). However, this particular rally has been spiced up, despite its lack of actual fundamental progress, by one ingredient: prevailing extreme pessimism.
Bank of America investor sentiment data released last week showed:
Recession expectations are the highest since the pandemic and before that the 2008 financial crisis
Stock allocations are at their lowest level since 2008
Cash holdings are at their highest level since 2001
Growth and profit expectations are at all-time lows
Investors are demonstrating the most risk-averse behavior since October 2008
In the eyes of those who follow the “it’s always darkest just before the dawn” narrative, such catastrophic sentiment data heralds the beginning of the transition from bear to bull as it brings up the exciting prospect of the C-word. Capitulation.
Capitulation is often a necessary staging post on the way to a sustainable recovery as sellers exhaust themselves and buyers throw in the towel. But while the evidence shown above might imply this, the Under The Hood data (see below) seem to show that capitulation is apparently not yet upon us, so caution is required.
Volatility always shows up at pivotal market turns but volatility itself is not a signal of that turn. This is a mistake many investors make, using volatility as confirmation bias because they so desperately want the bear market to be over and get back to making easy money again.
And it also needs to be remembered that, from an economic and corporate earnings standpoint, we have not even really started to feel the impact of the soon-to-be full 2.0% of interest rate increases that’s occurred since March.
A strengthening US dollar makes exported goods more expensive overseas and foreign imports cheaper in the US, a double-whammy that punches US exporting corporations in the face since it is estimated that about 40% of the average S&P 500 company’s earnings come from outside the US.
The dollar finally showed signs of topping out last week (partly caused by increasing interest rates in Europe and the Far East), but is still up 17% from a year ago. That means that total S&P 500 company earnings have been reduced by about 6.8% over the course of the last year simply as a result of currency movements. If there is a sustainable turn and the value of the dollar flattens out or even turns down, it will definitely be helpful from this standpoint.
Early in the week, we saw both Apple (AAPL) and Goldman Sachs (GS) announcing plans to slow hiring next year. Goldman Sachs also said that second-quarter earnings fell 47%. Bank of America’s second-quarter profit fell 32% but revenue rose on strong consumer spending and borrowing.
The National Association of Home Builders Housing Market Index (see “FINANCIAL TERM OF THE WEEK” below) unexpectedly crashed by 12 points from 67 in June to just 55 in July. It was the second-largest drop on record and served as a reminder that certain parts of the economy are really beginning to feel the impacts of the Fed’s aggressive policy stance and many buyers have been completely priced out of the market by the simultaneous rapid rise of home prices and mortgage rates. It was noted that many builders have stopped work on projects because the costs for land, construction, and financing were more than the value of the homes being built.
The median existing home price hit another record in June, rising to $416k, up 13.4% from the previous year and increasing from a revised $408k in May. Home sales declined for the fifth straight month. Sales of previously-owned homes fell 5.4% in June from the prior month to the weakest rate since mid-2020. There were 14.2% fewer sales of previously-owned homes last month than there were a year ago.
But stock indexes powered through all these potential headwinds, firm in their apparent new-found conviction in the peak inflation / peak Fed hawkishness / peak US dollar strength theory and given its extra spicy thrust by idea that the awful pessimism among consumers simply can’t get much worse.
Enjoy the rally, goodness knows we all deserve it. But don’t treat it as a bottom yet. There’s no definitive proof that this bear has been vanquished (see “UNDER THE HOOD” below). Remember, if this really is the start of a new uptrend it will, by definition, have legs and provide you with ample opportunities to get on board. But if it suddenly becomes clear this is indeed just another knee-jerk reaction to outside events in an oversold market, the drop to new lows could be swift and painful.
But I want to emphasize that, when it comes to accounts with longer-term time horizons (say, about twelve to fifteen years or more), none of this timing or sizing stuff or determining if we are at the bottom yet matters at all. Just keep on systematically buying the right kind of equity exchange traded funds (ETFs) and younger investors (say, forty years old and younger) should lean into this in their various retirement and very long term accounts and actually step up their level of buying if cash flow allows.
OTHER NEWS:
European energy crisis looming? .. Russian energy provider Gazprom last week declared a force majeure for gas supplies to Europe via its Nord Stream 1 pipeline. The company said it could no longer guarantee meeting its contractual obligations due to "extraordinary circumstances beyond its control." before backing off later in the week. But the issue of European use of Russian energy has the capacity to be a very big deal. The development drove energy prices higher, pointing to possibly severe European supply chain disruption and consequent higher inflation growth in the region down the road if Russia continues to hold much of Europe to ransom and the Ukraine war goes on and on.
While Europe bakes in record-breaking heat in July it’s easy to make all the right noises about cutting back on buying energy from Russia. This will be far from the case in six months’ time when large numbers of the continental European population will be freezing in their homes unable to pay their energy bills, possibly facing power cuts or rationing. Germany is apparently already preemptively dimming the brightness of its street lights as an energy-saving measure.
Crypto fraud arrests .. A former employee at popular crypto exchange Coinbase (COIN) and two other men were charged with wire fraud on Thursday in what federal prosecutors called the first insider-trading case involving crypto-currency markets. A indictment unsealed in federal court in Manhattan charged Ishan Wahi, a former product manager at Coinbase, his brother Nikhil Wahi and friend Sameer Ramani with wire fraud and wire fraud conspiracy in what prosecutors described as a scheme to commit insider trading by accessing and abusing confidential Coinbase customer information. More detail here.
UNDER THE HOOD:
Tuesday’s big, broad rally carried most indexes above their 50-day moving averages, which is potentially a good little baby step towards the blue skies investors have been craving. However, a little cold water needs to be poured on the giddy, over-optimistic nonsense that I saw, heard and read at times last week (see my “ARTICLE OF THE WEEK” for more about the charlatans who peddle this shit, and - yes - they are still charlatans and it is still shit even if these unlikely scenarios actually somehow come to pass).
As the major price indexes rally, trading volume is meaningfully contracting. In traditional technical analysis, rising prices on falling volume implies waning power in an uptrend. Higher volatility with lower volume suggests that the market is simply churning, rather than creating a meaningful switch from bear to bull.
The Percent of Stocks 30% or More Below One Year Highs represents the universe of the most beaten-down stocks and is theoretically where the bargains lie. It should be among the first indicators to substantially improve (meaning, in this case, to go substantially lower) at the time of a genuine turnaround. That this indicator reached a fresh new high as recently as July 14 and still remains in an upward trend even as the indexes proceeded to then bounce nicely is a sign that the Demand driving the gains is selective.
In other words, bargain hunters are still absent and that further suggests a lack of risk-taking among the purchases being made. As I have emphasized in recent reports, at the start of sustainable new turnaround advances after significant declines, the surge in buying typically carries every corner of the market higher at the same time and that just isn’t happening yet.
While the current rally could persist a while longer, it does not so far possess the ingredients that typically yield new emerging bull markets.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
It will be a very busy week on both the micro and macro fronts.
Q2 2022 earnings season ramps up big time next week, as more than 150 S&P 500 firms will report - including all five of the big tech names. Apple, Microsoft, Alphabet/Google, Amazon, Meta/Facebook, Pfizer, Intel, Mastercard, Visa, Exxon Mobil, Coca-Cola, McDonalds, Procter & Gamble, UPS, Boeing, General Electric, Chevron, Chipotle, Honeywell, Qualcomm, Ford, T-Mobile, Etsy, Spotify, Whirlpool and Newmont Mining to name but a few.
Mark your calendars for the big event of the week around 2pm ET on Wednesday when the waiting will finally come to an end and we find out whether the Fed raises interest rates by three-quarters of a percent or a full percentage point at the end of its two-day meeting (my money is on them raising by three-quarters of a point). I am sure you are all as excited as I am to find out!
Other, far less spectacular, economic data out next week will include the National Home Price Index, the preliminary Durable Goods report, personal income and spending data, the Consumer Confidence Index and the first estimate (to be further updated twice in the coming weeks) for Q2 2022 gross domestic product (GDP).
Finally, the Fed's preferred measure of inflation, the Core Personal Consumption Expenditures (Core PCE) price index comes out a couple of days after they make their interest rate call on Wednesday.
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US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 30% (up from 27% the previous week)
→Neutral: 28% (up from 27% the previous week)
↓Bearish: 42% (down from 46% the previous week)
Net Bull/Bear spread .. ↓Bearish by 12 (Bearish by 19 the previous week)
Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Source: American Association of Individual Investors (AAII).
LAST WEEK BY THE NUMBERS:
finviz.com
- Last week’s best performing US sector: Consumer Cyclical (two biggest holdings: Amazon, Tesla) - up 7.0%
- Last week’s worst performing US sector: Utilities (two biggest holdings: NextEra Energy, Duke Energy) - down 0.5%
- The NASDAQ-100 outperformed the S&P 500
- International Developed Markets had a better week than US Markets with Emerging Markets bringing up the rear
- Repeat of last week with Mid Cap eking out another unusual narrow win over Large and Small Cap
- Growth beat Value
- The proprietary Lowry's measure for US Market Buying Power is currently at 169 and rose by 12 points last week while that of US Market Selling Pressure is at 185 and fell by 22 points over the course of the week
- SPY, the S&P 500 ETF, is now above its 50-day moving average but below its 90-day and also below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 56**. SPY ended the week 17.4% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, is now above its 50-day moving average but below its 90-day and also below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 57**. QQQ ended the week 25.3% 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 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 lower again for the third week in a row at 23.0 and is below both its 50-day and 90-day moving averages. It has now also slipped just below its long term trend line.
ARTICLE OF THE WEEK:
This week .. As the obnoxious “I told you so-ers” are frantically rewriting their histories and retro-fitting their previous views to the current market conditions in preparation for taking entirely unjustified victory laps as soon as they possibly can, it’s important to frequently remind ourselves that There Will Always Be Sorcerers.
FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia (may be edited at times for clarity).
NATIONAL ASSOCIATION OF HOME BUILDERS HOUSING MARKET INDEX
The NAHB/Wells Fargo Housing Market Index (HMI) is a monthly sentiment survey of members of the National Association of Home Builders (NAHB). The index measures sentiment among builders of U.S. single-family homes, and is a widely watched gauge of the U.S. housing sector. Since housing represents is a large capital investment and spurs additional consumer spending on appliances and furnishings, housing market indices help to monitor the overall health of the economy.
The National Association of Home Builders is a federation of more than 700 state and local associations with 140,000 members. About one-third are home builders and remodelers, and the rest professionals from related fields such as mortgage finance and building materials supply. NAHB builders account for some 80% of the new homes built in the U.S.
Since 1985, the HMI has been based on a monthly survey completed by NAHB builders, which was generating some 400 responses as of 2007. In completing the survey, builders rate housing market conditions and outlook based on their recent experience.
The HMI is a weighted average of three factors (present sales, future sales and traffic), designed to range from 0 to 100. HMI readings above 50 reflect a generally favorable market view and outlook in the industry.
It fell to a record low of 8 in January 2009, and set a record high of 90 in November 2020. Last week’s reading was 55.
The index displays a close correlation with U.S. single-family housing starts, which measure the number of privately-owned homes on which construction started in a given month. Housing starts are a key economic indicator and the report is supplied monthly by the U.S. Census Bureau.
As a gauge of home builder sentiment, the HMI provides valuable clues on the near-term direction of housing starts. It is released at 10am ET typically on the 11th business day of the month, which is the day before the housing starts data are released by the Census Bureau.
The HMI has historically closely tracked housing starts and building permits. Its complete recovery from the depths of the 2008-2009 global financial crisis has outpaced the rebound in housing starts, however.
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