By David Nelson, CFA CMT
Questioning the catalyst for the S&P 500’s first down week in a month investors went into the weekend looking for answers. Whenever we don’t have a clear explanation about price momentum or the lack there of, we scrub the numbers searching for a data point or factor to placate our fears.
Last week’s scapegoat was options expiration a theory put forth by Goldman’s research team and picked up by some of the leading financial media including this headline from Bloomberg.
Goldman points out that stock options volumes are at record highs and that 64% of all options trading this month were in Amazon (AMZN), Tesla (TSLA), Apple (AAPL), NVidia (NVDA) and Alphabet (GOOGL) representing more than $7 Trillion in market cap. I’m not disputing the potential disruption, but it ignores the elephant in the room and the simple fact that markets are up a staggering 97% off the pandemic lows and running a little low on fuel. The truth is underneath surface the technical picture is less than robust.
S&P 500 2 Years
Source FactSet
I’m old school and for us old timers point and figure charting is the Holy Grail. The NYSE Bullish Percent Index is still in decline showing 56% of stocks are on point and figure buy signals declining since June.
Source StockCharts.com
I think it’s safe to say a good deal of the recovery is represented in current prices. In the face of clear inflationary pressures, the flattening yield curve points to something a little less robust than talking heads would like to believe.
A maturing bull market doesn’t mean the end of life as we know it but the melt up mentality that has driven the last 15 months is over.
As I pointed out in last week’s post estimate revisions have likely peaked. Growth moving forward can still be strong but it’s important not to extrapolate this quarter’s 60% growth forward. The flattening curve helps explain the recent catch up in long duration equity or large cap secular growth.
Hero to Zero
Source FactSet
Fame and adulation are fleeting even in equity markets. Today’s winner is tomorrow’s loser. It took only a few weeks to for the Small Cap juggernaut that exploded off the heels of the March 23 bottom through the first quarter to move from leader to laggard. Today it trails its big cap brothers and sister’s year to date.
Source FactSet
We’re seeing similar movement within S&P sector performance. Energy (XLE) is still the hands down winner this year and Utilities (XLU) bring up the rear but July paints a decidedly different picture.
Source FactSet
FOMC
Minutes from the last FOMC show the Fed is still unconvinced on the recovery. The $120 Billion per Month in Fed purchases adds to its $8.2 Trillion balance sheet. All of this is taking place with Washington negotiating a $3.5 Trillion stimulus along with a bi-partisan $1 Trillion infrastructure package.
Source Wall Street Journal
The 2nd quarter will likely be peak growth slowing in subsequent quarters. None of this should be a surprise or even alarming but it begs the question what the new normal look will like on the heels of the greatest combined fiscal and monetary stimulus of all time.
Earning’s Parade
Earning’s kicked off last week with several of the major banks and investment houses getting the Bronx Cheer following some very strong reports. Ignoring the clear positives regarding M&A, capital markets and trading investors saw only that net interest margins were challenged and likely to remain that way if the yield curve fails to steepen. For the Financial Sector, the glass morphed from half full to half empty.
We’re still very early in the season but I think it’s safe to say that this week is just the warmup act before the Mega Cap headliners take the stage. Apple, Alphabet, Amazon, Tesla, Facebook and Microsoft report later in the month.
*At the time of this article some funds managed by David were long AAPL, GOOGL, AMZN, FB & MSFT
