By Pete Biebel, Senior Vice PresidentPrint This Post
Another week of gains in the broad averages left me grasping for some suitable imagery that could present an accurate visible representation of the market’s current overextended circumstance. While it may be a bit of a stretch, I opted for spandex. Not just any old spandex, but that overstuffed, stretched-to-the-limit spandex appearance like rubber bands on a marshmallow. Another series of fat gains last week further bloated the averages to new record highs, further stretching the fabric of the market. It’s not the price level of the averages that provokes that image, it’s the pace of the advance that has packed so many points into such a tight time frame. Since its crash diet last spring, the market has gobbled up new highs at a voracious rate. The mega-cap tech stocks have gorged themselves on the accelerated adoption of their technologies that the shelter-at-home environment has forced. And, the generous fiscal and monetary liquidity enhancements have enabled the market to easily wash down its rapid gains.
The 2.5% to 3.5% gains in the major averages last week further stretched their already extended conditions. The S&P 500 Index (SPX) ended the week at 3508, a new high. That left it about 28% above its 200-day moving average; that’s roughly the same gap it stretched to at its February high. The NASDAQ Composite Index (COMP), the performance of which has been dominated by those mega-cap tech stocks, has rallied more than 70% in five months. It ended last week at a new high just below 11,700, nearly 19% above its February high. COMP is now 26% above its 200-day moving average; it hasn’t been stretched to that extent in more than 15 years. The overstuffed condition doesn’t mean that the averages need another crash diet; but it does suggest that their appetite over the next few months is likely to be suppressed. It doesn’t mean that a pullback of any significance is due, but at a minimum, a timeout seems likely.
Most international indices also were higher for the week. Only a smattering of the fixed-income sectors had losses. The benchmark Ten-Year Treasuries sold off significantly, pushing their yield up from 0.63% to 0.72% in just a week. As a result, the interest rate-sensitive utilities sector was the only of the U.S. equities sectors that had a loss last week.
Even with the extended condition, the market might be a little more mouthwatering if not for the deteriorating breadth of stocks participating in the advance. Again last week, even with SPX posting gains in each session, most days had more declining issues than advancers. On Wednesday in particular, the day with the fattest gains of the week, the advance/decline ratio was three-to-two negative on the NYSE and four-to-three negative on the NASDAQ.
The increasing speculative excess in the trading activity is another less-than-appetizing aspect of recent market action. For the first time ever, the underlying share volume of option trading has recently exceeded that in stocks. Not only is option trading activity at its highest ever, but also the skew of call option volume versus put option volume is at a historical extreme. There has also been a noticable uptick in the relative trading volume of very short-term options. Trading volume in single-stock options, with expiration dates within two weeks, now accounts for about 75% of trading in all expirations. Until recently, that ratio had been near 50%.
There still has been no indication that the uptrend is reversing. I can repeat something I wrote last week: “With the major broad indices at new highs, there is no overhead resistance; the sky’s the limit.” There’s also a wide gap between where the indices currently stand and any potential danger levels. SPX ended Friday just above 3508. The first short-term sign of a potential trend reversal would be a significant break of the 3390 level, more than 3% below Friday’s close. The first key level below that would be SPX’s 50-day moving average in the 3280 area.
If things seem a little odd on Monday morning, it might be because of several random “adjustments” all happening on the same day. Stock splits in some high-profile names will become effective Monday as will a reconstitution of the DJIA. Keep in mind that DJIA is a rather dowdy old index. It has just thirty component stocks and it is greatly under-representative of the technology sector. If COMP and SPX are the present-day equivalent to yoga pants, DJIA is the mom jeans. It is an anachronism that most people recognize as measuring market performance, so its yin and yang continues to be reported by the media. Consider also that a stock split in a high-priced DJIA component stock will tend to reduce that stock’s impact on the value of DJIA. A one percent move in the post-split stock will have a smaller impact on DJIA than a one percent move in the pre-split stock had. Such a stock split would not change the stock’s impact on COMP or SPX.
Just a couple big-name companies are due to report earnings this week. The most potentially impactful of the economic reports come late in the week. The Thursday Initial Claims number and Non-Farm Payrolls on Friday seem to be the best candidates to prompt a market reaction. Traders have given up on hoping for any news anytime soon on the stimulus package negotiations. In the event that Congress finally agrees on a compromise, it will potentially have an instant impact, with the specifics of the plan and the final price tag impacting the level of bullishness or bearishness.
Let me know if you didn’t like the spandex reference. I can always work on some new material.
|Monday 8/31/2020||Dallas Fed Manufacturing Survey, General Activity||-3.0||-1.0|
|Tuesday 9/1/2020||PMI Manufacturing Final, August||53.6||53.6|
|ISM Manufacturing Index, August||54.2||54.5|
|Construction Spending, July, M/M||-0.7%||+1.1%|
|Wednesday 9/2/2020||Motor Vehicle Sales|
|ADP Employment Report, August||+167K||+950K|
|Factory Orders, July, M/M||+6.2%||+6.0%|
|Durable Goods Orders, July, M/M||+11.2%|
|Durable Goods Orders, ex-Transportation, July, M/M||+2.4%|
|Fed Beige Book|
|Thursday 9/3/2020||Initial Jobless Claims||1,006K||950K|
|Goods and Services Trade, Trade Deficit, July||$50.7B||$57.0B|
|Non-Farm Productivity, Q2||+7.3%||+7.4%|
|PMI Composite Final, August||54.8||54.7|
|Friday 9/4/2020||Employment Situation, Non-Farm Payrolls, August||+1,763K||+1,400K|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.