“They stab him with their steel knives, but they just can’t kill the beast.”
-Henley, Frey, Felder (Eagles), 1976
It would be hard to imagine a stock market more divided in performance than what investors and traders went through last week. In reality, what happened was only the first five trading days of the new year. The reallocation of funds as portfolio managers and the volume of transactions they brought with them were as decisive and impactful as anything that has been seen in such a short time for quite a while.
The bird’s-eye view from above showed a Nasdaq Composite and a Nasdaq 100 which were primarily large-cap technology-driven indices, losing 4.53% and 4.46% respectively in just five sessions. As long as these indices easily ditched their 50-day SMAs (simple moving averages), which allowed the downside to exacerbate …
… while risk managers pushed portfolio managers to reduce their exposure. This pressure puts the 200-day SMA, which carries even more weight than the 50-day line, in the crosshairs. Friday’s action allowed both the Nasdaq Composite and the Nasdaq 100 (which does not include financial stocks) to put pressure on the lower bound of the nearly one-year trading channels without becoming technically oversold.
How significant was this price action? For the five-day period, the total trading volume attributable to the S&P 500 (which held its 50-day SMA) reached 1% above the 50-week simple moving average for that index. For the Nasdaq Composite, this trading volume ended the week precisely in line with its 50-week moving average. However, for the Nasdaq 100, total trading volume for the five days totaled the most of any week since September and ended at a 22% premium over the 50-week simple moving average volume for this clue.
Of course, tech wasn’t the only group to move significantly for the week. From the point of view of sector performance, illustrated by the weekly tables of the S&P SPDR ETF, the flow of capital has forced haircuts of between 4.5% and 4.9% on REIT (XLRE), Health Care (XLV) and Tech (XLK), while managers crammed into Energy (XLE) and Finance (XLF). These two ETFs gained an incredible 10.5% and 5.4% (in that order) over the five days.
In my opinion, the equity markets are / have been pulled in two directions by both the evolution of the Treasury yield curve and future expectations regarding the ever-changing path of forward-looking monetary policy. This forces investors to divide the more “growing” sectors into several slices in order to really see what is happening.
Within the technology, we see that although a lot of air has been exhausted from the tires, the output flow has not been uniform. The Dow Jones US Software Index took an incredible hit last week, down 7.9% as former market darlings Datadog (DDOG), MongoDB (MDB) and Zscaler (ZS) all dropped between 18% and 20%. By the way, Zscaler has been a personal favorite, as has cybersecurity as a subset of the industry. I reset Zscaler as long at the end of last week. The position is still small at about 3/16 of what I think would be a full allocation. I have not yet decided whether this will be a trade or an investment. I guess I’ll let the market decide. As I type this position is slightly up from my net base. The Dow Jones US Internet Index, which is part of the communications services sector (XLC), fell 5.1%, despite an overall sector performance of -1.6%.
Back to technology … the Philadelphia Semiconductor index was down 3.8% for the week, while Sarge’s favorites within that group all underperformed the index. Advanced Micro Devices (AMD), Nvidia (NVDA), Lam Research (LRCX) and Marvell Technology (MRVL) all saved between -4.9% and -8.3%. I traded around these positions because I’m not defenseless, but there’s no way to water down what this group has done to my focus group overall, which outside of the semi-finals had what would have been a great week. Readers will recall that my four focus groups for the New Year were semiconductors, big banks, defense contractors, and entertainment. These three groups, plus Ford Motor (F), which is not part of this 2022 target, but a large long position nonetheless, are experiencing rather solid starts.
Blame it on the Fed?
The market was well prepared for the tapering. There, no problem. Financial markets had come to realize that the initial take-off of the central bank’s target for the federal funds rate was shifting to March. What completely surprised financial markets in the publication last Wednesday of the minutes of the last political meeting was the discussion around a possible race towards “quantitative tightening”. The markets have not been set up to contemplate the effective removal of liquidity from the economy or the reduction in the monetary base as early as May perhaps, as there appears to be some urgency. There is no meeting in April, and I really doubt the FOMC will conclude “quantitative easing”, raise short-term rate targets and launch “quantitative tightening” in the same month.
Make no mistake … if you raise short-term rates and start dipping into the money supply throughout the first half of the year, you can stop inflation. In fact, you will stop inflation if at the same time the problems induced by a negative pandemic in supply chains abate, but understand this: we are in new territory. The Fed has never tried to unwind a balance sheet of nearly $ 9 billion before. No one in power was more than a young person the last time the Fed had to try to slow consumer inflation, and the monetary and fiscal lessons learned then may not apply now. Finally, the pandemic remains unpredictable. Expect success in containing inflation to meet a real struggle to sustain economic growth.
The madness of monitoring job creation
From a macroeconomic perspective, the past week was dominated by December employment data. Of course, there were signs of what is perceived to be a tight labor market as participation and wage growth improved, as did the unemployment rate. How many jobs were created in December? No one really knows. Certainly not just anyone at the Bureau of Labor Statistics.
If we follow the ADP jobs report, the US economy created 807K jobs in the private sector in December. If we follow the BLS household survey, in December 651,000 new people found employment. If you follow the BLS establishment survey, there were 199,000 new hires for the month, which would be really low, and this weakness was found in private sector hires. This puts the ADP report and BLS establishment survey data released for December in direct conflict with each other.
The point is, if the Bureau of Labor Statistics is so poor at collecting and publishing employment-related information, then how on earth can we trust anything the agency publishes? Oh, and don’t forget … each number is also salt and pepper to taste. We know people have found work. The disparity between establishment and household surveys, which has been significant for two months now, suggests that the “off the book” labor market is probably quite active.
The inability to tax these profits for the US Treasury is a great catalyst for looking into working with the Federal Reserve Bank on creating a true US crypto dollar that could replace cash. Today or tomorrow? No. In our lifetime? How old are you? Definitely maybe. By the way, Bitcoin dropped nearly 11% last week.
The coming week
Once again, Friday will be the key to the week at hand. Along the way, we’ll review December’s data for consumer and producer prices, which is sure to shake the markets. No one wants to see a handful of sevens for the overall year-over-year CPI, which is likely on Wednesday. Friday not only brings data on retail sales and industrial production for December, but also on the start of the fourth quarter earnings season as the big banks begin to release information.
I am strongly considering taking profits in this space ahead of the numbers as these banks have a habit of increasing their profits and then struggling for at least two weeks or so. There is no doubt that banks rely heavily on traditional banks as a source of income have benefited from them in recent times. Wells Fargo (WFC) and Bank of America (BAC) were the leaders.
Expectations, according to FactSet, call for year-over-year S&P 500 earnings growth of 21.7% on revenue growth of 12.9%. This will be a deceleration from third quarter profit growth of 39.8% on revenue growth of 17.8%. It will also likely slow full-year profit growth to something like 45.2% on full-year revenue growth of 15.9%. Projections for calendar year 2022 see earnings growth of 9.4% over revenue growth of 7.6%, and much of this work was done before we fully understood the Fed’s preference to switch. on the balance sheet perhaps in the first half of the year. , before the midterm elections. We will see.
The S&P 500 closed Friday at 21.25 times 12 months of forecast earnings while losing 1.29%. The Nasdaq 100, even in the midst of the carnage, is still trading at just under 28 times forecast earnings while shedding 0.64%.
Economy (All Eastern hours)
10:00 a.m. – Wholesale stocks (November): Expecting 1.2% m / m, last 2.5% m / m.
The Fed (All Eastern hours)
12h00 – Speaker: Atlanta Fed. Raphaël Bostic.
Highlights of today’s earnings (Consensus expectations for BPA)
Before the Open: (CMC) (1,19), (TLRY) (-.07)
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