More and More Investors Are Looking For A Correction Thu, May 27, 2021 The S&P 500 has been hovering around 0.5% below its record highs this week, but without a true test of those highs, sentiment has not moved very far. The American Association of Individual Investors' weekly reading on bullish sentiment fell from 37% last week down to 36.4%. While that is the second week in a row with an absolute move less than a full percentage point in size, the marginally lower reading does leave bullish sentiment at the lowest level since the end of October. Bearish sentiment moved by even less, only rising 0.1 percentage points. At 26.4%, it still is below the reading of 27% from the first week of the month. Outside of that reading, that is the highest level since February. This week's moves left the bull-bear spread little changed at 10. That's down 0.7 points from last week but still above the 9.5 reading from two weeks ago. Once again, the highest percentage of investors are in the neutral camp at 37.1%. As was the case last week, that makes for the highest level in neutral sentiment since the first week of 2020 when it stood north of 40%. Pivoting over to sentiment for equity newsletter writers measured in the Investors Intelligence survey, there were some more interesting moves. Bullish and bearish sentiments were not necessarily anything to gawk at similar to the AAII survey. Bullish sentiment has been on the decline with this week's survey showing a 3 percentage point drop to 51.5%, the lowest level since March 10th. Meanwhile, bearish sentiment moderated from 17.2 to 16.8%. That was the same level as the start of the month. The percentage of respondents "looking for a correction" was more notable. Rather than simply asking whether or not respondents foresee a correction in the technical sense on the horizon (a 10% decline from a high), Investors Intelligence defines a newsletter writer as "looking for a correction" when they are bullish on a list of stocks but at a lower price point. Coming in at 31.7%, the reading is a few percentage points above the historical average of 27.6% and is in the top quartile of the historical range. In other words, it is an elevated reading albeit far from without precedence. What is more significant is that it has been over a year since this part of the survey has seen these levels. In the history of the survey dating back to 1963, there have only been eight other times that the percentage of newsletter writers looking for a correction has crossed above 30% for the first time in at least a year. The most recent of these was in April 2009. In the table below we show the S&P 500's performance in the year following those occurrences. As shown, performance has been generally positive across those past instances with average gains over the following weeks and months and moves higher at least 75% of the time one month, three months, and one year out. Additionally, while there were two times, 1982 and 2009, in which the S&P 500 rallied over the following year without looking back, there were another two times, 2001 and 2007, that at the following years' lows, the S&P 500 would end up lower by double-digit percentage points.
June Swoon? Wednesday, June 2, 2021 Although there was some notable weakness in the middle of May, the S&P 500 Index was able to rally late in the month to finish with a modest gain. Incredibly, this was the eighth year out of the past nine that stocks gained during in May. Who said Sell in May? As we noted a month ago, the worst six months of the year indeed are May through October, so we are still in the thick of a potentially challenging period based on seasonality. “After a nearly 90% rally off the lows, stocks could be ripe for a pullback, especially during the historically weak month of June,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But with the improving economy, coupled with historic fiscal and monetary stimulus, we expect any weakness to be short-lived.” Here are some stats to think about regarding S&P 500 performance in June: Since 1950, June is the 4th worst month of the year (September, February, and August are worse). It has been higher the past 5 years in a row, the longest since a stretch of 6 in a row in the late 1990s. The past 10 years, though, June was up 1.0% on average, ranking as the 7th best month. According to Sam Stovall of CFRA, only 5 market declines in excess of 5% started in June versus an average of 8 for all 12 months (since WWII). In other words, it isn’t common for major market weakness to start in June. Building on this, when the S&P 500 is lower in June, it is down by 2.9% on average. This is the second smallest average loss, with only December better at -2.5%. We wouldn’t be surprised at all if stocks took a well-deserved break in June, but this month is rather misunderstood, as a massive sell-off or the start of significant weakness isn’t likely, as that isn’t what June typically brings. Lastly, last Wednesday marked the 100th trading day of the year for the S&P 500. In fact, the S&P 500 was up more than 10% on the 100th day, which historically is a great start to the year, but also has meant continued strong performance the rest of the year is quite normal. As shown in the LPL Chart of the Day, when stocks are up more than 10% on day 100, the rest of the year has been higher 84.2% of the time and up 8.6% on average, both well above what the average year does. We continue to recommend an overweight to equities and underweight to fixed-income position relative to investors’ targets, as appropriate.
Less Than 20% Bearish For the First Time in 115 Weeks Thu, Jun 3, 2021 Bullish sentiment measured through the AAII weekly survey was at the lowest level since the fall last week, but after jumping 7.7 percentage points, it is now at the highest level since the end of April. Not only is it high relative to the past few weeks, but the increase also brings bullish sentiment 6 percentage points back above its historical average. Additionally, the week over week increase was the largest since the week of April 8th when the reading had risen 11.1 percentage points. In recent weeks, neutral sentiment had been surging; topping 37% last week for the highest reading since the first week of 2020. Although it reversed lower this week down to 36.2%, neutral sentiment remains around some of the strongest levels in over a year. With the pickup in bullish sentiment, bearish sentiment plummeted to 19.8% on a 6.6 percentage point decile; the largest since February. Falling below 20%, bearish sentiment took out its March and April lows and is now at the lowest level since January 2018. Not only is that one of the lowest readings in bearish sentiment in recent history, but that drop below 20% brought to an end a 115-week long streak of readings in bearish sentiment above that level. As shown below, that surpassed a three-week shorter streak ending in December 2017 to make for the second-longest such streak on record. The longest streak which ended in December 2010 went on for more than twice as long as this most recent run. Historically, lower readings in bearish sentiment have tended towards weaker performance for the S&P 500 going forward as shown below. But when it comes to the past times that bearish sentiment has broken below 20% for the first time in at least 50 weeks, performance has actually tended to consistently be positive. In fact, across each of the past six instances, the S&P 500 has been higher six months out every time. Granted, for the most part the typical move higher is usually smaller than other periods.
Typical June Trading: Any Early Gains Tend to Fade Especially After Mid-Month Over the last twenty-one years, the month of June has been a rather lackluster month for the market. DJIA, S&P 500 and Russell 1000 have all recorded average losses in the month. NASDAQ and Russell 2000 have faired better with modest average gains. Historically the month has opened respectably, advancing on the first and second trading days. From there the market then drifted sideways and lower into or near negative territory depending upon index just ahead of mid-month. Here the market rallied to create a nice mid-month bulge that quickly evaporated and turned into losses. The brisk, post, mid-month drop is typically followed by a month end rally lead by technology and small-caps.
Small Businesses Can't Find Workers And Are Raising Prices Tue, Jun 8, 2021 The NFIB released its monthly reading on the sentiment of small businesses this morning. In the past, we have noted how the results of this survey are often correlated with political happenings. As such, the index dropped in the wake of the election but found a bottom in January. Since then, it has remained weaker than during the Trump years, albeit it has also improved almost every month this year. That is except for the most recent month. May snapped a three-month winning streak with a slight decline from 99.8 to 99.6. With the headline number slightly lower, breadth in the May report was fairly mixed. Of the ten inputs to the optimism index, half were higher, two went unchanged, and three were lower versus April's readings. Three of those indices that moved higher—Plans to Increase Employment, Current Inventory, and Job Openings Hard to Fill—set new records. While it is not an input to the headline reading, the index for Higher Prices also rose to a new record high. Overall, the survey implied generally strong conditions with a few areas of concern: labor market tightness and inflation. The report showed solid realized sales as the index of Actual Sales Changes rose 4 points to 7. That marks a return to pre-pandemic levels. On net, a higher share of businesses also expects sales to continue to improve, although only at 3, the index is still at the low end of its historical range. In spite of the higher actual sales, a higher share of businesses are reporting worse bottom-line results versus the prior three months as the index for Actual Earnings Changes fell to -11. In an attempt to make up for those weaker margins, a record share of businesses also are reporting that prices are higher than three months ago. A net of 40% of respondents reported that they are raising average selling prices; a record high in the data dating back to 1986. The NFIB noted that price hikes were most common for wholesalers (65% reported higher prices vs. 2% lower) and manufacturers (47% reported higher prices and 1% reported lower). That is consistent with other data of the past few months showing prices are flying higher. Likely as a result of all of this in addition to other labor concerns (more on that below), the Outlook for General Business Conditions fell to -26, the lowest level since 2012 and in the bottom 1% of all months. Additionally, the share of businesses reporting now as a good time to expand ticked lower. One major area of strength, at least in terms of demand, is employment. A net 27% of respondents reported that they plan to create new jobs within the next three months; surpassing the prior record high from August 2018 by a full point. But even though businesses are putting the offers out there, on net fewer businesses reported an actual employment change. In fact, that index fell sharply by 6 points; a move that ranks in the bottom 2% of all monthly changes. Additionally, a record share of businesses reporting job openings as hard to fill as 34% of businesses report their biggest problem to be either the cost or quality of labor. That is indicating significant labor market tightness. As a result, more businesses are or are planning to raise compensation with those indices at the highest levels of the past year and consistent with readings from 2017 up through the onset of the pandemic. Those higher costs are likely one reason for the weaker reading in actual earnings changes and higher selling prices previously mentioned. As for the other side of the production function, capital expenditures are not being raised in any sort of significant way nor are plans to increase expenditures. Potentially to get ahead of the strong demand and labor supply mismatch, businesses are raising inventory levels with a record share of businesses reporting that current inventory levels are "too low". Rising to 8, that index took out the joint high of 7 from last month and December.
June 11th Memory Lane Fri, Jun 11, 2021 As the S&P 500 continues to trade in a relatively sideways range with a slow drift higher, we thought it would be interesting to look at years where the market saw its largest single-day gains and losses on this date in history. Starting off with the bad, you don’t have to go back too far to find the worst June 11th for the S&P 500 as it was only last year. After a nearly three-month rally off the March 2020 COVID lows, stocks were already starting to tread water, but on 6/11, the sellers won out as investors were forced to face reality. The sell-off came one day after Federal Reserve Chairman Jerome Powell highlighted the difficulties facing the American economy, saying that “the pace of recovery remains extraordinarily uncertain.” These cautious comments as well as an escalation in coronavirus infections in the southern part of the United States brought into focus the precariousness of the situation of the time and that the reopening process would not be as smooth as investors once thought. In addition, a number of political polls showed then President Donald Trump falling further behind in polls. By the time the bell closed last year on June 11th, the VIX surged nearly 50% and closed above 40 as the S&P 500 fell 5.89%. Reopening stocks in the travel/leisure, financial, energy, and industrials sectors fell the most, but no area of the market avoided the selling stampede, as Kroger (KR) was the only stock in the S&P 500 to finish the day higher. Last June 11th no doubt caused a lot of stress for investors at the time, but looking at the move from a longer-term perspective, it was little more than a speed bump on the road to recovery. In contrast to last year’s June 11th plunge, the best June 11th for US stocks was more than 80 years ago in 1940. Europe was already embroiled in war and things escalated when Italy joined the war effort of the Germans by declaring war on the French and attacking a British naval base in Malta. Despite the escalation of conflict, the market confidently rallied anyway. The reason? For starters, it was coming off a major plunge in May following the German attack of France and other areas of Western Europe. Besides being extremely oversold, another catalyst for the rally was an address by President Roosevelt at the University of Virginia commencement which has come to be known as the “Knife in the Back” speech. In that speech, FDR ditched his prepared comments and instead called for an end to the United States’ isolationism in response to Italy’s actions. He commented that “On this tenth day of June, 1940, the hand that held the dagger has struck it into the back of its neighbor.” FDR went on to stress that the US couldn’t’ continue its isolationist policy: “Some indeed still hold to the now somewhat obvious delusion that we of the United States can safely permit the United States to become a lone island, a lone island in a world dominated by the philosophy of force.” In reaction to FDR’s speech, the feeling on Wall Street was that the US would take on a more active role in the war effort which caused a surge in industrial, defense, and material companies that would benefit from the Allied war effort. The impact of FDR’s speech was so strong that not only did US equities surge nearly 5% on that day in 1940, but the record June 12th gain was also the following day. Again, though, the gains on 6/11 and 6/12, 1940 came following a 25%+ plunge in less than two weeks, a decline rivaling the COVID plunge in terms of both duration and magnitude. Like the rally off the COVID lows, the equity market rallied sharply in the following weeks regaining more than three-quarters of its May decline over the following six months, but unlike the current period, the gains were fleeting as uncertainty over the war continued to act as a headwind. Lastly, with inflation such a hot topic these days, we thought it would be fun to highlight some prices of goods in a number of ads we came across from the New York Times on that day in 1940. Read them and weep. Manhattan cocktails for a quarter ($4.81 in today’s dollars), dress shirts for under 2 bucks ($36 in today’s dollars), a new fridge for under $115 ($2,200 in today’s dollars), and a funeral for $150 ($2,885 in today’s dollars)? A dignified funeral no less! While prices are a lot higher now than they were then, so is the stock market. Back in June 1940, the S&P was under 10. Today, it's 42,000% higher.
June Quarterly Options Expiration Week and After Historically Volatile The second Triple Witching Week (Quadruple Witching if you prefer) of the year brings on some volatile trading with losses frequently exceeding gains. NASDAQ has the weakest record on the first trading day of the week. Triple-Witching Friday is usually better, DJIA has been up ten of the last eighteen years, but down five of the last six. Full-week performance is choppy as well, littered with greater than 1% moves in both directions. The week after Triple-Witching Day is horrendous. This week has experienced DJIA losses in 27 of the last 31 years with an average performance of –1.14%. S&P 500 and NASDAQ have fared slightly better during the week after over the same 31-year span, declining 0.79% and 0.29% respectively on average.
Tempering Tech As investors we fight against behavioral biases in every investment decision we make. Our Director of Research Marc Zabicki talked recently about some of these biases in this video. We become attached to our ideas and when we think about selling, “FOMO” kicks in—the fear of missing out. Buying is the easy part. But selling is hard. After maintaining a positive view of the technology sector for a number of years and seeing it do so well, the LPL Research team faced a difficult decision. Value stocks have been leading, benefiting from the economy opening back up again. More inflation, rising interest rates, and higher commodity prices are generally value-friendly macroeconomic factors. But a more positive view of value stocks should be paired with a less positive view of growth stocks—largely technology. “It’s tough not to like technology given the strong fundamentals and rapid pace of innovation from many tech companies,” explained LPL Equity Strategist Jeffrey Buchbinder. “But we expect cyclical value sectors like financials, industrials, and materials to fare better the rest of the year as the economy gets a reopening jolt.” We downgraded our technology view to neutral primarily for these reasons: 1) Reopening. We expect the market’s shift toward reopening beneficiaries and away from stocks best positioned for the work-from-home environment to continue. That means favor cyclical value sectors (financials, industrials, materials, and potentially energy) over the growth sectors including technology as well as consumer discretionary and communication services. 2) Valuations. The price-to-earnings ratio for the technology sector based on estimated earnings over the next 12 months (source: FactSet) is 25—high compared to the sector’s history. The relative valuation—at near a 20% premium to the S&P 500 (25x versus 21x)—is also high as shown in our LPL Chart of the Day. Comparing value to growth based on the Russell 1000 style indexes reveals an even bigger gap—the Growth Index is trading at a more than 60% premium to the Value Index, the most in 20 years. Also consider we expect interest rates to rise over the rest of the year, which could bite into richly valued growth stocks. 3) Neutral relative trend. The sector is near its all-time high and nearly 90% of the stocks within it are above their 200-day moving averages, indicative of a strong trend. But relative performance versus the S&P 500 Index peaked on September 1 and has been drifting sideways to lower since then, as shown in the accompanying chart. The lack of a trend, based on a flat 200-day moving average for relative performance, points to a neutral sector view. Even though we’ve tempered our enthusiasm, we acknowledge the sector still enjoys solid fundamentals. Demand for technology equipment and software won’t go away just because people get out more. In fact, we wouldn’t be surprised to see the sector grow earnings by 40% during the second quarter on a year-over-year basis (FactSet’s consensus estimate is currently calling for near 30%). But the rest of the S&P 500 companies may see something closer to 70%, including doubling of financials’ and materials’ earnings and tripling of industrials’. The downgrade to neutral doesn’t mean we plan to head for the hills by any stretch. A neutral view would imply matching the sector’s weighting in the S&P 500 at 27% in applicable strategies. We believe the sector likely moves higher in the second half of the year, along with the broad market, but we just see better opportunities for outperformance in cyclical value stocks.
Sentiment Shaky Thu, Jun 17, 2021 Although there has not been any sort of dramatic breakout to the upside as the index has fallen over the past few days, the S&P 500 did manage to tag new record highs in the past week for the first time since May 10th. The record-high milestone has done little to shift sentiment though. The AAII survey of individual investor sentiment saw its reading on bullish sentiment rise 0.9 percentage points to 41.1%. While higher, that is still three points below the reading from just a couple of weeks ago. The biggest move was in neutral sentiment as that reading fell 6.4 percentage points to 32.7%. That is the lowest reading in over a month and marked the biggest drop in neutral sentiment since the week of April 8th. Even though that was a big drop, neutral sentiment remains slightly elevated versus the historical average (31.42%) and especially relative to what has been the norm over the past year. The past couple of weeks have seen historically muted readings on bearish sentiment. While that is still the case with this week's readings remaining at the low end of its historical range, bearish sentiment saw a big 5.5 percentage point gain rising to 26.2%. That one-week uptick in bearish sentiment was the largest since last September. It also marked the first time since the end of last month that over a quarter of respondents reported as bearish. While the move was not nearly as large, the Investors Intelligence survey echoed that increase in bearish sentiment with the bull-bear spread in that survey falling from 38.3 to 37.8 after inverse moves in bullish and bearish sentiment. In other words, broadly speaking, optimism has appeared to have peaked for the time being.
Big Drops In The Percent of Stocks Above Their 50-DMAs Fri, Jun 18, 2021 In yesterday's Sector Snapshot, we highlighted how the internals of several sectors have weakened dramatically in recent days. One such measure in which there are drastic differences versus a couple of weeks ago is the reading on the percentage of stocks above their 50-DMAs. In the charts below, we show the changes in this reading across sectors and for the broader S&P 500. As shown, the two sectors which have seen the largest share of their stocks fall below the support of their 50-DMAs are Financials and Materials. Two weeks ago, both of these sectors boasted some of the strongest readings of all sectors, but through yesterday, those readings have fallen over 60 percentage points. Meanwhile, Energy and Real Estate have seen almost all of their stocks trade above their 50-DMAs over the past two weeks without much change. While the declines were not as dramatic as Materials and Financials, Industrials and Consumer Staples have also seen a significant share of their members fall below their 50-DMAs. While most sectors have seen a decline in this reading, Tech and Health Care have been notable standouts with both sectors having more stocks above their 50-DMAs now than two weeks ago. This is indicative of the rotation that has been going on underneath the surface throughout the entire bull market that began when the S&P made its 2020 low after the COVID Crash last March.
Memory Lane: The Best and Worst Days of This Week Through History Mon, Jun 21, 2021 With a 500-point decline in the Dow last Friday and a 500-point gain today, volatility in the markets has picked up, but days like the last two pale in comparison to the most extreme up and down days of the upcoming week in market history. For these two extremes, we have to go all the way back to 1950 and 1931. The worst market day of the current week in the history of the S&P took place on 6/26/1950 when the S&P fell 5.4%. Stocks jolted downward that day on the uncertainty surrounding the Communist invasion in Korea with North Korean tanks crossing over the 38th parallel and invading the South Korean capital of Seoul. President Truman condemned the ‘latest aggression in Korea in defiance of the Charter of the United Nations' and pledged his full support of U.N. efforts to end the fighting. The nature of the support and whether American troops would be sent to Korea if the U.N. requested them, however, was left unanswered. The fact that the Soviets were considered responsible for this aggressiveness brought into focus the fact that like Korea, Germany was a split country with a lack of military force in place to prevent a Soviet-sponsored proxy invasion. The worrying implications of the invasion resulted in heavy price action reminiscent of the fall of France on 5/21/1940 (-9.14%) as volume surged to the highest levels since that day. The S&P's decline on June 26th, 1950 had been preceded by a year-long bull run marked by a resurgence of public participation in markets. At the market open, imbalances were so wide between bids and offers that it took certain issues upwards of an hour to open for trading, and once they opened for trading, selling was exacerbated by stop-loss orders. Liquidations continued to come through the market in waves, with trading periodically coming to a standstill only to be interrupted by larger volumes of even more aggressive selling, with the low of the day being the close. How bad was the selling? For the entire day, only 59 of the 1,256 (4.7%) issues traded were up on the day. Radio Corporation was the heaviest traded issue of the day on 124,000 shares, slipping 2 1/4 points to a price of 19 5/8, Chrysler lost 7 to 73, and General Motors fell 6 3/8 to 90 1/8. Selling in June 1950 continued right up through mid-July and the S&P dropped about 14% from its peak to trough. As bad as the day was, the market would erase this loss by 9/15, less than two months later, and it kept rallying from there. The best market day of the current week in the history of the S&P took place on 6/22/1931 when the S&P rallied 10.5%. Over the weekend of 6/21/1931, President Hoover unveiled a proposal to put a one-year moratorium on upwards of a quarter billion dollars of World War I reparations and war debts owed to the United States. Hoover noted that "The purpose of this action is to give the forthcoming year to the economic recovery of the world and to help free the recuperative forces already in motion in the United States from retarding influences from abroad." Wall Street initially loved Hoover’s plan to help alleviate the Great Depression in Europe, and investors, previously starved for good news, cheered the plan. Those Wall Street firms with international connections reported a surge in foreign demand for equities, and professional traders sought out the most shorted stocks and caught the shorts flat-footed squeezing them out of their positions. The brighter economic outlook also provided a lift to commodity prices. Unfortunately, the bullish party ended early, and just as the losses from 6/26/1950 were erased within two months, the gains from 6/22/31 were gone by early September. Hoover’s moratorium, which didn’t have anywhere close to universal support in the US and Europe, didn’t pass in Congress until that December. In that ensuing period, though, Germany would have not just a currency crisis but a banking collapse as well, and then soon after Great Britain abandoned the gold standard. As optimistic as Wall Street was on 6/22/1931, all of the gains were erased by 9/8 of that year, and the market continued its slide right up through mid-1932 when it made the final Great Depression lows - 70% below where it closed on 6/22/31!
Claims Disappoint But Resume Improvements Thu, Jun 24, 2021 Last week, jobless claims saw a significant one-week uptick off the pandemic lows, and while claims are still elevated around some of the highest levels since mid-May, there was an improvement this week with a 7K decline to 411K. Granted, that also did not live up to expectations of a decline back down to 380K which would have been just 6K above the pandemic low. On a non-seasonally adjusted basis, claims through regular state programs actually came in below 400K falling 14.7K to 393.1K. A sequential decline in the non-seasonally adjusted number for the current week of the year is somewhat unusual as this reading on jobless claims has historically risen two-thirds of the time. While regular state claims were lower, claims through the Pandemic Unemployment Assistance (PUA) program were higher. The past several weeks have seen steady improvements in PUA claim counts with a low of 71.2K at the beginning of the month, but after rising for two straight weeks now, it is back above 100K for the first time since the first week of May. Since the last week of April, continuing jobless claims have been pretty choppy with every other week seeing a rise in claims. Granted, the weeks in between in which claims have fallen have seen larger declines than the previous week's increase. This week was yet another example of this as claims fell 144K to erase last week's 17K uptick which brought claims to a new pandemic low of 3.39 million. In other words, continuing claims are not improving in as consistent of a manner as they did for most of the past year, but nonetheless, they have continued to improve. When including other programs on top of regular state claims, the improvements have been more consistent, but the most recent week (June 4th) did see a small uptick in total claims from 14.866K to 14.871K. In the charts below we show continuing claim counts (non-seasonally adjusted) for all programs. This data is lagged an additional week to the most recent release of claims for regular state programs, but the overall trend continues to be one of improvement. While total claims were higher, the PUA program did experience a large 175K decline, although that was offset by a 107.9K uptick in PEUC claims and a 97.7K increase in Extended Benefits. We would also note, as we did last week, that this is the last week of data before half of the states began to withdraw from pandemic era unemployment relief. that means data in the weeks to come is likely to see overall claim counts fall on account of fewer states reporting for certain programs.
Memory Lane: The Best and Worst Days of This Week Through History Sun, Jun 27, 2021 The week before July 4th is often a quiet one for stocks as traders look to make it a vacation and tack on some days before or after the holiday. That doesn't mean it's always quiet, though. Throughout the S&P 500's history, there have been a number of big up and down days during the current week of the year. Below we highlight one of the worst and best; one from 1933 and the other more recently back in 2009. Starting off with one of the worst days back on July 2nd, 2009, with the market closed on Friday, July 3 rd in observance of the July 4th holiday, the release of the June Employment report was moved up to Thursday, but after the number was released, investors probably wished the report had been canceled altogether. Economists expected total job losses of 365K in June, but the actual decline came in significantly higher at 467K compared to May’s loss of 322K, thus breaking a 4-month streak of lower job losses. The employment report had a raft of other record figures included within it as the unemployment rate climbed up to 9.5% - a level not seen since 1983. The average length of unemployment increased to 24.5 weeks- the highest level since the government began tracking that statistic 1948- and the average workweek for rank-and-file employees in the private sector (80% of the workforce) slipped to 33 hours- the lowest level since the government began tracking that number in 1964. June’s losses brought the total number of jobs lost since the beginning of the recession to 6.5 million, erasing the total number of jobs gained in the previous nine-year expansion. The only other time that happened was back during the Great Depression. The weak employment numbers raised fears that the deepest and longest recession since the 1930s still had some time to go before a recovery would be underway, and investors looked at the data and questioned whether they had been too optimistic in bigging up stocks from the March 9th lows. The S&P 500 opened lower and continued to sell off into the close as investors took profits ahead of the upcoming earnings season. Economically sensitive areas of the market got hit the hardest with the Dow Transports dropping 3.7%. After rallying 40% from its March low to its June high, the S&P 500 was down about 2.5% heading into the report, so the 7/2 decline brought the total decline to over 5%. While a 3% decline is always painful, relative to the level of market volatility during that period, it wasn’t particularly extreme, and by July 13th, the S&P 500 was already back above its pre 7/2 highs, and it continued higher throughout the rest of the summer. Chart watchers were greeted with a puzzling move on Monday, July 3rd, when the market opened with large blocks of rails and industrial issues trading substantially higher than Saturday’s close (yes, there was a time when the stock market was open on Saturdays). Fundamental investors focusing on macroeconomic factors had a range of positive economic news to choose from, including reports of sharp increases in railway car loadings, copper inventories for 1933 being depleted at double the rate as 1932, as well as the moderate rise in prices not having affected the reports of Chain Stores. Volume was frantic at the open as the tape ran as much as ten minutes behind the floor’s transactions in the first hour. A statement from President Roosevelt on the federal government’s position regarding the international currency measure proposals from the World Economic Conference in London released by Secretary of State Hull was interpreted as both nationalist and inflationist. “The sound internal economic system of a nation is a greater factor in its well-being than the price of its currency in changing terms of the currencies of other nations.” President Roosevelt continued by calling upon the World Economic Conference to direct its efforts to remove trade barriers and stressed the importance of a sound internal economic system in order to reach ultimate stability. Roosevelt’s statement was met by both praise from supply-side economists like John Maynard Keynes and Irving Fisher and dismay from the gold-standard countries. The reaction of stock prices was far-reaching, with pivotal issues that had been sluggish, breaking out of their range to the upside. Numerous rails and specialties rallied on large volumes while more defensive-oriented Utility stocks experienced more modest gains. Volume on the NYSE at the close was placed at 6,720,000 shares with 266 stocks hitting new highs for the year and zero new lows. Many observers argued that inflation was behind the move in share prices as the President subordinated all efforts to his campaign for higher domestic price levels (including taking the dollar off the gold standard in April and introducing an amendment to the Agriculture Adjustment Act which drastically expanded the government’s power over monetary policy in May). However, indications that the inflation movement was not the sole inspiration for the advance could be seen in the action of the bond market where prices rose sharply and yields declined. The rally from 7/3/33 didn't last long, though, as the day's gains were erased by 7/19/1933, and the S&P 500 didn't trade meaningfully above those levels at any point in the next year. While the S&P 500 stalled out around its July 1933 levels, keep in mind that in the months leading up to that date, the S&P essentially doubled.
June's Best and Worst Performing Russell 1,000 Stocks Tue, Jun 29, 2021 The month of June, the second quarter, and the first half of 2021 are almost in the bag. In the table below, we take a look at the best and worst performers in the Russell 1,000 month to date. For the best performers, we look at the 21 names that are up at least 25% MTD. As for the other side of the performance spectrum, we show the 20 worst performers. Topping the list with a 75.6% MTD rally through yesterday's close has been Virgin Galactic (SPCE). A large portion of that has come in the past few sessions alone with a 38.87% gain last Friday which has been partially erased early this week. Given that huge one-day jump, SPCE is over 90% above its 50-DMA and as such, it is the stock that is currently the most extended above its 50-DMA in percentage terms of the whole Russell 1,000. The next best performer in the index has been a recent IPO (debuted on April 15th), TuSimple Holdings (TSP). The stock was also up over 70% in June through yesterday's close leaving it just off its high from June 14th. After TSP and SPCE, there is a big drop in the percent change this month as Iovance Biotherapeutics (IOVA) is next up with a gain of 45%. That move has reversed some of the declines earlier in the year, although the price is still half of its 52-week high. It is a similar story for Fastly (FSLY) and Skillz (SKLZ) which are also more than 50% below their respective 52-week highs. Additionally, IOVA, FSLY and Sunrun (RUN) are the few names that are still down on the quarter even after being some of the top performers in June. Pivoting over to the worst performers, there are 38 stocks in the Russell 1000 that are down double digits month to date. By far the worst of these has been CureVac (CVAC). Similar to how a significant portion of SPCE's gains came from a single day, most of CVAC's losses are a result of a 38.99% decline on June 17th. The catalyst for that decline was the announcement that the company's COVID-19 vaccine was only 47% effective. The next worst performers are two more Health Care stocks that plummeted on disappointing trials data: Exelixis (EXEL) and Sage Therapeutics (SAGE). Of the 20 worst performing Russell 1,000 stocks, EXEL is the closest to a 52-week low. One of the next worst performers is the polar opposite. Upstart (UPST) is up massively off the past year's lows, and even after the 16.41% decline MTD, the stock is still up over 200% on the year. While many Health Care names are at the bottom of the list of month-to-date performance, one other notable theme is reopening plays. Cruise liner Carnival (CCL) as well as multiple airlines like America (AAL) and Southwest (LUV) also found their way onto the list. Additionally, with metals like gold and copper broadly falling off their highs after significant runs over the past year, Reliance Steel & Aluminum (RS), Newmont (NEM), and Freeport-McMoRan (FCS) are also a few of the worst performers this month.
Russell 2,000 (IWM) No Longer in Favor in Q2 Wed, Jul 7, 2021 The final quarter of 2020 and the first quarter of this year saw small caps come back into favor as the Russell 2,000 consistently outperformed the S&P 500 during that stretch. From the late September test of its 200-DMA to the mid-March highs, the Russell 2,000 rose rallied around 65% versus the S&P 500's gain which was less than half of that. As such, the ratio of the two indices shown below, and highlighted in last night's Closer, ripped higher. That outperformance has been absent over the past quarter though. In the second half of March, the ratio peaked then made a sharp reversal lower. Throughout Q2 and continuing into Q3, the ratio has continued to trend lower as the Russell 2,000 has trended sideways, hovering around its 50-DMA.
Value Has Given Up The Ghost Fri, Jul 9, 2021 In the last few months of 2020 and throughout 2021, the S&P 500 Value ETF (IVE) was consistently outperforming its growth counterpart (IVW). Since its most recent high in early June, though, IVE has given up the ghost falling 2.5%. Although not a dramatic decline, IVE's drop has coincided with a rally of 7.3% in IVW and an even larger 12.5% rally off the May 12th lows. With growth having gained so much ground on value, on Tuesday, IVW's year-to-date performance actually moved above that of IVE. That has continued to be the case through the rest of the week as IVW is currently outperforming IVE on a year-to-date basis by almost a full percentage point. Additionally, looking at the past year's relative strength between the two ETFs, the recent divergence in performance has resulted in relative strength reverting back to zero meaning growth and value have roughly performed in line with one another over the one year span.
Diverging Breadth and Frothy Sentiment Today’s selloff did not catch the Advance/Decline Line off guard. As you can see in the chart above, as the S&P 500 and NASDAQ logged minor new highs yesterday and DJIA did last Friday, market breadth has been diverging. NYSE Composite and S&P 500 breadth have flat-lined over the past week while Russell 2000 and NASDAQ breadth turned clearly lower. This indicates a market running out of gas as advancing issues are unable to outpace decliners and in the case of the NAS and R2K decliners have been beating out advancers over the past week. This bad breadth scenario comes at the outset of the seasonally weakest time of the year from mid-July through October – AKA the “Worst Four Months.” In addition, bullish sentiment had reached dangerous levels in the face of a dearth of bears. The chart below courtesy of the venerable Investors Intelligence U.S. Advisors Sentiment Report shows the difference of the Bullish Advisors % less the Bearish Advisors %. When this gets above 40 it’s a warning sign and with 60.8% Bulls and 15.5% bears the difference is now 45.3%. The weekly CBOE Equity-Only Put/Call ratio tracked in Barron’s “Market Lab that we have followed for years, has also reached extremely complacent levels lately. Put/Call retreated from the modest fear level of 0.59 at the May lows back down to 0.41 the first two weeks of June and logging 0.43 and 0.44 the past two weeks. We have been getting defensive and in a neutral posture since our April 22 Best Six Months Seasonal MACD Sell Signal for S&P 500 and DJIA and have been preparing for our MACD Sell Signal for NASDAQ’s Best 8 Months which appears imminent.
Sleepy Small Caps Mon, Jul 12, 2021 In the couple of years headed into the pandemic, the Russell 2,000 traded in a range having failed to take out its August 2018 high. After falling harder than large caps during the COVID crash, the Russell 2000 surged off of those lows having rallied 128.5%. Over the last six months, though, small caps have been stuck in another sideways range. As shown below, while the index had been on a strong run at the end of 2020 and into January of this year, the push higher has stalled out over the past several months. While positive over the last six months (top-left chart), the Russell's 8.29% gain has been middling relative to history ranking in just the 58th percentile. Further, with the index having trended sideways over the past few months, there has only been a 13.82% range between its 6-month closing high and low. That is actually at the low end (20th percentile) of the index's historical six-month ranges. That lack of volatility comes after a historic move to the upside though. As shown in the right-hand charts below, while current performance readings are coming back down to Earth given the past few months narrower range, the past year has seen record year-over-year changes. In fact, even after falling dramatically, the current reading is still in the top 3% of all year-over-year changes. The 52-week high/low range similarly hit record levels in the past year which have since cooled off but they too remain in the top decile of the index's readings. In other words, the Russell 2,000 has been somewhat flat over the past several months, but it should make sense following the past year's massive historic move higher.
Inflation Expectations Surge Mon, Jul 12, 2021 The New York Fed released its monthly Survey of Consumer Expectations (SCE) earlier today, and expectations for inflation over the next year surged to the highest level (4.8%) in the history of the survey (since June 2013). As shown in the chart below, inflation expectations have roughly followed actual levels of y/y CPI over the years, so with CPI surging to 5.0% in May, the spike higher in expectations shouldn't come as too much of a surprise. While the one year ahead forecast on the part of US consumers surged, expectations for the next three years have been more restrained, suggesting that consumers, like the Fed, expect these inflation pressures to be temporary. In each month's survey, respondents are also asked for their expected rate of earnings growth over the next twelve months. In this case, there's a pretty big divergence between expected inflation (4.8%) and expected earnings growth (2.64%). In fact, the spread between the two has now widened out to a record 2.16 percentage points (second chart). There's only so long that inflation can grow at nearly twice the rate of earnings growth. Among other questions, the SCE also asks consumers about their views towards the stock market. In this month's survey, only 40.2% of consumers expect stock prices to be higher one year from now. In an environment where most sentiment surveys are overwhelmingly bullish, this survey of stock prices seems somewhat restrained. One interesting aspect of this part of the survey, though, is that in early 2020, when most sentiment surveys saw a spike higher in bearish sentiment, this one saw bullish sentiment surge to the highest level in the history of the survey.
Inflation Concerns Surge Tue, Jul 13, 2021 The NFIB surveys small businesses each month asking respondents what the most pressing problem is for their business. In the May report, the most prominent problems were government regulations and taxes with 35% of businesses reporting as such. The next biggest problems were the cost and quality of labor. While labor-related issues remain a pressing concern for the bulk of businesses going unchanged at 34% in June, government-related problems fell off a cliff. The combined reading fell from 35% down to 29%. The combined six-point drop was the largest since an identical-sized month-over-month decline from December 2014 to January 2015. Another area to see a significant decline was Competition from Big Business which fell 2 percentage points to 6%; the biggest one month decline in a year. That was matched by an increase in the number of firms reporting poor sales as their biggest issue. In an earlier post, we noted how the June NFIB survey of small businesses showed a surge in prices and wages. As such, the percentage of businesses reporting inflation as the biggest problem surged to the highest level in over a decade. That index alone rose 5 percentage points to 13%. November 2008 was the only other month on record in which this reading rose by as much as it did in June. While it was a far less alarming increase, there was also an uptick in the percentage of businesses stating the cost/availability of insurance is an issue, although, the current reading is still below that of just a couple of months ago. As previously mentioned, while businesses are less concerned with government-related problems, substituting for inflation concerns, the NFIB's index of Economic Policy Uncertainty has been ticking higher over the past few months and is now at the highest level since around the time of the election although the current reading is still much more modest than back in the fall.
