I know it may sound strange, but I really think that the markets needed a day like Friday. Was it painful? Was it a shock? Was it based on a new variant? I think it was something totally different altogether. I believe we had a confluence of events that gave the markets reason for pause:
- Double up tax selling final day for 30-day rebuy
- Omicron- retail investor fear only
- 10-year rate decline, massive move from 1.71% to 1.41%
- Oil decline, massive sell-off from $78 to $65
- Lack of participants on Friday, only half day of trading and all on vacation
- A correction that started 11/16 (by my work) needed a toilet flush
- Mutual Fund year-end shenanigans
- Small cap breakdown below 8-month consolidation
To me, a wonderful confluence of items that need a knife and fork to cut into.
A week ago the markets were making all-time highs, but the number of stocks making new lows surpassed the number of stocks making new highs. According to my daily studies, the number of sectors that have the number of stocks rising in their respective sector being a rising number topped out on November the 16th and began to turn down. A couple of days later, the S&P 500 spiked higher- based on Jerome Powell being reinstated by the President and couldn't hold it breakout. This wasn't a good sign. Note the large red bar at the high point in the picture below.
So where are we now? Well, the 1949-1966 secular bull market gained over 500%. In fact, most of the secular bull markets in history have had similar large gains, so this one that we are experiencing is not anything out of the ordinary. Does that mean we won't get pullbacks? Of course not! In fact, we have been overdue for some kind of a digestion. But it will most likely be one to be met with buying, not additional selling. As I like to say, a perfect time to water your flowers (buy more of what is doing good) and pick your weeds (sell what is underperforming). In the picture below, please see the vertical green lines. These proved to be good times to do this. The green line furthest to the right could be another good time. The excessive volume at the bottom of the picture could also support this idea. Yet, if it is not, things could get worse.
I see the equity markets as something that is bent but not broken. The things that are getting my attention are as follows:
- The 10-year US Treasury yield topped out at 1.71% last week and was as low as 1.41% Tuesday of this week. This is bothersome as the economic indicators that we have been getting have been positive and higher than expected; Industrial Production- up 1.6% in October, clearly a sign of growth. Existing Home Sales increased 0.8% in October and median prices were up 13.1% versus a year ago. And Powell said just this week that maybe he will need to begin tightening sooner rather than later. If all of these point to strong and continuing strong growth, why are rates falling? This concerns me.
- Oil prices broke very hard to the downside. This is after Biden made his foolish comment about freeing up 50 million barrels of US reserves. To the layperson on the street, this sounds like a large number until one recognizes that the US consumes 19 million barrels per day. So, he freed up a little more than two days’ inventory. This definitely smells of political positioning rather than an action that truly is helping our petroleum industry or our US consumer. What bothers me about this is that if Industrial Production, Retail Spending, and Homebuilding are stronger than forecasted, the most widely used industrial commodity certainly shouldn't drop from over $78 down to $65 per barrel in under a week.
- Overall commodity prices, exclusive of oil, have also broken hard to the downside. If we are all concerned about how inflation at restaurants and supermarkets have been trending higher, why would they all of the sudden break to the downside? This just doesn't seem right to me. If cash levels are high and the economy is expanding, prices shouldn't break to the downside.
- Even though the strength of the new Variant of the Virus is said to be less strong, and therefore the markets recovered on Monday following Friday's shellacking, internally Monday's action was far from robust and probably led to Tuesday's continued sell-off. Probably a continued algorithm-driven slide—or so it appears given no black swan in sight. Even still, a sell-off is a sell-off until it is done.
So basically, we have moved from a market that was constructive for quite a period to destructive in a short number of days. Was COVID the curveball that threw the markets for a loop? I really don't think so. The market had begun to act tired around mid-November, and you had a trading day on Friday that was an abbreviated trading day coupled with the announcement of a new strain of the Virus. Clearly not a good combination for the bulls. Could this have been a politically-driven event that was shocking enough to support the supposed need for added stimulus—the stimulus that the Democratic majority is trying to push through? Only time will tell. From many of the takes I've read, it would seem that some believe it is March 2020 all over again. In an expectation of history playing out the same way, some were pitching the "COVID Collapse" playbook of stay-at-home stocks and safe havens (even though the Work-From-Home ETF was down on Friday too). I guess another significant drop is possible, but I just don't see it. Perhaps living on the beach has skewed my perceptions but the only way I think we see a repeat of another March 2020 is if we get widespread lockdowns in the US and the President came right on out on Monday and said emphatically that this was not going to happen. So, at the moment, I am actually looking for some sort of bottom in here, either one that's already here or if we get a few more flushing types days should prepare the markets for Santa Claus to come to town.
In the end, the markets (longer-term) are led by the direction of the economy. The most immediate indicators referenced above say the economy is still healthy and continuing to get healthier. On the other hand, I've listed the issues that we are seeing that really seem to bother me, as they are saying quite the opposite. We will probably get an answer fairly quickly, as there is really not a lot of new news after third-quarter earnings are over, and the end of the year is not far off. I normally have a lot more to say, but this time there really isn't much that I can find that I feel is worthy of inclusion. Please don't let this short-term market digestion deplete your ability or desire to go out and shop for loved ones for Christmas. Being a grinch is never a good thing. Stick to the ugly Christmas sweater and call it a day.
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