By Pete Biebel, Senior Vice PresidentPrint This Post
The major averages went through a lot of gymnastics on their way through last week, a week that ended with two winning indices balancing a couple losers. Prices alternately leapt higher with the flexibility of an acrobat and then tumbled lower with the grace of a rock. A couple midweek stumbles dropped the averages to what would be their lows of the week by Thursday morning. The market apparently wasn’t buying the Powell/Yellen tightrope walk in their Congressional testimony on Tuesday and Wednesday. The market’s routine was going to need a strong finish to save the week. The averages were mixed in Friday afternoon trading when, in the final 75 minutes of the week, stocks vaulted higher into the close, the gymnastic equivalent to nailing the dismount.
The S&P 500 Index (SPX) was just hovering near breakeven for the week on Friday afternoon when the rush of buying began. That late push lifted the index to a 1.57% net gain for the week. The Dow Jones Industrial Average (DJIA) likewise vaulted from near breakeven to a small net gain (+1.36%) for the week late Friday. Both SPX and DJIA ended the week at record highs. The NASDAQ Composite Index (COMP) leapt 1.7% in the final hour-and-a-quarter that afternoon but failed to get back into positive territory for the week. Where COMP slipped 0.58% last week, the Russell 2000 Index of small-cap stocks (RUT) did a face-plant. Despite rallying nearly 2% late-Friday, RUT had a net loss of nearly 3% for the week.
The most reasonable explanation that I heard for the late-session rally was that massive sell orders from one or more hedge funds early in the day forced traders into a defensive posture; when that selling dried up late in the day, stocks were able to rally back through the vacuum. Much of the huge liquidation seemed to be focused on Chinese internet stocks. The combined threats of those stocks being delisted from American exchanges and increased regulatory scrutiny have caused those former big winners to considerably underperform the overall market in recent weeks.
Tech/internet stocks and cyclical stocks did the splits again last week. Many of the growth stocks that were market leaders through 2020 have come under pressure as higher interest rates and a reopening economy have encouraged traders to favor defensive, cyclical stocks at the expense of high-growth companies. More than a dozen of the biggest winners from the 2020 work-from-home, shop-at-home and exercise-at-home regimen are now down 20% to 40% from their highs; and, a few are down even more than that.
Last week, the S&P Communications Services Sector Index, which is dominated by a few of those internet darlings, lost about 3.6%. The Consumer Discretionary sector, in which two of last year’s big winners account for 35% of the sector’s weight, also had a losing week, down about 0.6%.
The best of the U.S. equity sectors was the stogy old Consumer Staples group. That sector gained about 3.2% for the week with Real Estate close behind at +3%. The Technology sector was third best, up about 2.3% thanks largely to big rebounds in semiconductor stocks. Three other of the more cyclical sectors, Materials, Utilities and Industrials, were next-best with gains about 2% for the week. Four of those six, Staples, Real Estate, Materials and Industrials all ended the week at record highs.
Another indication of the degree to which the smaller value stocks have outperformed the mega-cap growth stocks recently can be found in comparing the weighted and unweighted versions of the S&P 500. SPX is the market capitalization weighted version; the biggest companies get the larger weights in the index. Just five stocks (the five largest) represent nearly 22% of the index. And, just the largest ten companies are over 30% of the weight. Those ten stocks have roughly the same weight in the index as the 400 smallest companies combined. There’s also an equal-weight version of the S&P 500 that some analysts prefer to use as a basis for their relative strength calculations. That version consistently underperformed SPX in recent years as the mega-cap stocks led the market higher. In calendar year 2020, SPX gained 18.4% while the equal-weight version was up less than 13%. In recent months, the relative performance has flipped. Year-to-date, SPX is up about 6% while equal-weight is up about twice as much. The little guys are besting the big guys for a change. Since their pre-election, late-October lows, SPX is up about 21% compared to over 32% for the equal-weight index.
Turning to the charts, COMP and RUT are looking a little peaked while DJIA and SPX are still looking fairly chipper. COMP fell below its 50-day moving average in early March and has been unable to sustain trading back above it. At least last week’s low was well above the early-March low near 12,500. If that level is taken out, I would expect COMP could quickly slide another 500 points. RUT, which had led all other averages higher through the first ten weeks of the year, has been by far the weakest of the four indices over the past couple weeks. RUT was very extended in early-March, about 35% above its 200-day average; it was overdue for a timeout at a minimum. Last week it fell below its 50-day average on Tuesday and dropped another 4% to 5% over the next day-and-a-half. While RUT was able to recover much of the loss in the late-week rebound, and end the week at its 50-day average near 2221, its low on Thursday was very near it early-March and early-February lows, around the 2100 level. If RUT can climb back above its 50-day early this week, last week’s lost will be a distant memory, but falling below 2100 would be a very negative development.
SPX’s low last week was very near its 50-day average near 3874. It ended the week about 100 points above that level. Having ended the week at new highs, SPX and DJIA have no overhead resistance. The 4000 level on SPX seems like an easy target, but there really wouldn’t be any reason for concern if the index churned in the 3900 – 4000 range for a few days. Taking out last week’s lows would be the first sign of trouble.
Coming into the end of the quarter, the market could be susceptible to higher volatility over the next few days. End-of-quarter rebalancing might force large funds to cut back on some of their winning positions in stocks and allocate the proceeds to the suddenly cheaper bond market. Perhaps offsetting some of that bias could be risk parity funds which might shift more capital into equity positions now that volatility levels have subsided.
Economic reports in the coming weeks are expected to generally reaffirm hopes for a speedy expansion. The dip in the consensus for the Dallas Fed numbers sticks out like a sore thumb but is likely the result of the recent severe winter storms there. The Consumer Confidence data on Tuesday may be the most prominent statistic on the level of the public’s optimism. Expectations are for similar healthy increases in both manufacturing surveys on Thursday. The consensus numbers for Friday’s employment statistics are looking for a large increase in payrolls and another 0.2 percentage point decline in the unemployment rate following a one-tenth point decrease in the previous month.
|Monday 3/29/2021||Dallas Fed Manufacturing Survey, March||17.2||12.5|
|Tuesday 3/30/2021||Case-Shiller Home Price Index, January, M/M||+1.3%||+1.2%|
|FHFA House Price Index, January, M/M||+1.1%||+1.0%|
|Consumer Confidence, March||91.3||96.4|
|Wednesday 3/31/2021||ADP Employment Report, March, M/M||+117K||+500K|
|Chicago PMI, March||59.5||60.3|
|Pending Home Sales Index, February, M/M||-2.8%||-2.7%|
|Thursday 4/1/2021||Initial Jobless Claims||684K||699K|
|PMI Manufacturing Final, March||58.6||59.0|
|ISM Manufacturing Index, March||60.8||61.3|
|Construction Spending, February, M/M||+1.7%||-0.8%|
|Friday 4/2/2021||Motor Vehicle Sales, March, Annual Rate||15.7mm||16.5mm|
|Non-Farm Payrolls, March, M/M||+379K||+619K|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.