By Pete Biebel, Senior Vice PresidentPrint This Post
The regularly scheduled programming of steadily rising stock prices was preempted last Monday when share prices suddenly plunged lower. Some of the major averages had their worst day of the year. Popular opinion had it that the steep sell-off was blamed on the market’s concern over the alarming increase in Covid infections involving the Delta variant and the potential for that to derail the economic rebound. The interruption turned out to be another one-day phenomenon. Later in the week it became apparent that Monday’s loss was just another one-day digression from the market’s seeming inexorable path higher. Sorry. Never mind.
Last Tuesday, I thought I already had the perfect title for this week’s article. Following the catastrophic action on Monday, surprise, surprise, stocks rocketed higher the next day. This followed the dance steps that were choreographed in the two prior steep declines and instant recoveries. In my article two weeks ago, I noted that we had just seen the second brief but violent interruption in the market’s recent gains, followed immediately by an equal or greater offsetting rebound in the very next trading session. I suggested then that, “It seems that the surest way to get a 1+% gain is to have a 1+% loss the day before.”
As the market rebounded on Tuesday, I was suspicious of the rally’s sustainability. Sure, the S&P 500 Index (SPX) held at its 50-day moving average at its Monday low, but it had also clearly broken the uptrend off its mid-June low. After the two earlier miracle reflex rebounds, especially in light of the deterioration in market breadth since then, it seemed that this knee-jerk rally had the potential to fail. Yes, it was going to inveigle the dip buyers to reflexively rush in at what seemed to be a bargain opportunity, but the recent worsening of the advance/decline and new highs/new lows ratios hinted that the odds of a three-peat, automatic rebound were greatly diminished. If the Tuesday rebound had stalled and if the averages had subsequently taken out their Monday lows, then things could have gotten mighty messy.
In anticipation of such a scenario, I thought the title “The Third Time’s a Chasm,” would have been a great fit. It changes just one little letter in a very common expression by just one little alphabetic tick, yet the implication is the total opposite. Fortunately, I was dead wrong. Last week’s reversal after a plunge in the prior session was every bit as charming as those on June 21 and July 9.
After recovering nearly all of the Monday losses on Tuesday and closing near their highs that day, the coast was clear for the averages to continue higher for the balance of the week. SPX ended the week above 4400 for the first time, gaining nearly 2% for the week. The NASDAQ Composite Index (COMP) gained nearly 3%; it also reached a new high. The Dow Jones Industrial Average (DJIA) was restrained by relatively lackluster performance in some of its industrial and energy components and added just a bit more than 1% for the week, but that was enough to see it close above the 35,000 level for the first time.
Much of the selling on Monday was likely technically driven. The increase in Delta-variant infections might have been a good excuse for the gap-down opening, but making new lows for the month, after having set record highs in the previous week, was a sell signal for short-term traders. Some of the subsequent rebound was probably also technically driven based on COMP and SPX holding near their 50-day averages on Monday and closing near their highs on Tuesday.
Again, several of the mega-cap tech stocks were key contributors to last week’s rally. The rejuvenation of those stocks after many months of listless performance has been one of the most notable features of market activity in recent months. As those names have powered higher, their outsized contribution to the gains in COMP and SPX have veiled the deterioration in the performance of the broader market. Their influence was evident in the three sectors in which these big stocks are the largest components: Technology, Consumer Discretionary and Communications Services. Those three sectors were the biggest winners last week with gains of about 3%, give or take a quarter-point.
The Wall Street Journal U.S. Dollar Index was up modestly on the week, but it was enough to keep the Dollar near its highest level since April. The stronger Dollar contributed to the poorer performance of many international equity indices. Emerging market averages were especially weak with the largest losses coming in Brazil and China.
The stock market seems to be none too sure about what the bond market is saying or whether it is speaking the truth. The benchmark 10-Year Treasury Note yield, which had rebounded a bit in the prior week from its lowest level in four months, sunk to an even lower low, below 1.20% last Monday. It briefly dipped below 1.14% Tuesday morning before ending the day near 1.20%. The 10-Year yield spent most of the rest of the week between 1.20% and 1.30%. The fact that the 10-Year rate erased the early-week decline may not have been good news for stocks, but it eliminated something that could have been bad news.
Last week’s recovery and subsequent rally clearly put a bullish bias on the market’s short-term outlook. Having cleared my old target range centered on the 4355 level, SPX seems bound for the next target range centered on the 4490 level. Unfortunately, the condition that led me to doubt last Tuesday’s rebound, the significant deterioration in market breadth as the averages made new highs, is still present. Again, those divergences are merely a negative omen, not necessarily an indication that the averages must end their climb. In the week ahead, I’ll be watching to see if SPX, which ended last week just below 4412, can avoid dipping back below the mid-4300s.
While it’s unlikely to happen this week, I’ll be on guard for another 1+% decline with a reflex rebound that fails. Now that the instant reversal pattern has become routine, we’ll need to be alert for a recurrence that violates that pattern. Will the fourth time be a charm or a chasm?
The week ahead features more stimuli than a rock concert. This will be the biggest week of the earnings season with headline acts, including the biggest names in the hit parade, reporting each day. The FOMC policy statement and press conference on Wednesday afternoon could result in a mosh pit of volatility. The economic report calendar, like an extended jam, is long, but probably uninspiring.
|Monday 7/26/2021||New Home Sales, June, SAAR||769K||800K|
|Dallas Fed Manufacturing Survey, July||31.1||32.0|
|Tuesday 7/27/2021||Durable Goods Orders, June, M/M||+2.3%||+2.1%|
|Durable Goods Orders, ex-Transportation & June, M/M||-0.1%||0.0%|
|Case-Shiller Home Price Index, May, M/M||+1.6%||+1.5%|
|FHFA House Price Index, May, M/M||+1.8%||+1.8%|
|Consumer Confidence, July||127.3||124.9|
|Richmond Fed Manufacturing Index, July||22||21|
|Wednesday 7/28/2021||International Trade in Goods – Trade Deficit, June||$88.1B||$88.7B|
|Wholesale Inventories, June, M/M||+1.1%||+1.1%|
|FOMC Policy Statement & Press Conference|
|Thursday 7/29/2021||GDP, Q2, First Estimate, SAAR||+6.4%||+8.0%|
|Initial Jobless Claims||419K||390K|
|Pending Home Sales Index, June, M/M||+8.0%||-0.8%|
|Friday 7/30/2021||Personal Income, June, M/M||-2.0%||-0.7%|
|Personal Consumption Expenditures, June, M/M||0.0%||+0.6%|
|Chicago PMI, July||66.1||66.1|
|Consumer Sentiment, July||80.8||80.8|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.