By Pete Biebel, Senior Vice PresidentPrint This Post
Last week the market mimicked the previous weekend’s SpaceX launch, rocketing into the stratosphere. It lifted off on the opening bell Monday and never looked back. The second stage fired Friday morning, fueled at least partially by the surprisingly good employment data. The averages, major and minor, all gapped-up sharply that morning and continued higher into midday when they leveled off, apparently having reached a proper orbiting altitude.
What the market didn’t do last week was to reveal any concern over the social violence of the previous weekend. By Sunday evening, the demonstrations had become far more peaceful and incidents of looting and arson became far less frequent. The expense of the demonstrations, damaged businesses, torched police vehicles and the costs for the extra police and National Guard activities fell most heavily on the cities and states. The one factor the market will be watching is whether there’ll be an increase in COVID infections in the wake of the demonstrations. The market is already sensitive to the possibility of spike in infections as the economy reopens. The next week should reveal whether the large number of socially non-distant demonstrators contributed to spreading the virus.
For the week, the NASDAQ Composite Index (COMP) advanced 3.42%, briefly touching a new intraday high before closing a mere three points below its February record. Not bad at all. The S&P 500 Index (SPX) escaped the gravitational pull of its 200-day moving average and climbed nearly 5% last week. The Dow Jones Industrial Average (DJIA) outflew them both, soaring 6.81%, boosted by significant rebounds in several of its component stocks. The highest fliers were in the previously underperforming smaller-cap indices. The Russell 2000 Index of small-cap stocks (RUT) shot up 6.94%. Even more surprising, the equal-weight S&P 500 Index gained 9.63% for the week, nearly double the gain of its cap-weighted brother.
Four of the five best-performing U.S. equity sectors last week were ones that had been laggards in the early weeks of the rally. Financials gained more than 11% and Industrials tacked on nearly 10%. Real Estate and Materials were each up more than 7%. The absolute size of the gains in those four sectors may indicate that much of the buying power was brought on by short-covering and was not solely driven by perceived value. That same rush of short-covering is probably also partially responsible for the huge gains in many airline and cruise company stocks. Two sectors that had rocketed higher in April had less exciting trajectories last week. The technology sector rose just over 3% and healthcare managed an anemic 0.74% increase.
The list of the poorer performing sectors for the week is dominated by interest rate-sensitive groups. The yield on Ten-Year Treasuries also rocketed higher last week. The 10-Year yield ended the previous week at 0.648%. That rate had shot up to as high as 0.957% by Friday and ended the week at 0.904%. That’s nearly a 40% increase in just one week. The 10-year yield is now at its highest level since mid-March. That sudden spike in rates held back the performance of investment-grade bonds and senior loans, and also took some of the glimmer off gold’s recent rally.
Eight weeks ago, in my April “Fold or Raise,” I theorized, “Months from now, looking back at this Easter weekend, we’ll probably see that it was at or very near the inflection point for the market. The market’s gains last week have brought us to the point where the right thing to do now is to either buy everything or sell everything.”
Clearly the “buy everything” alternative would have been the way to go, though I certainly didn’t believe it at the time. Now, last week’s potentially climactic buying binge may have brought us to another inflection point.
Looking back a bit further, I remember a conversation I had with a couple of our advisors late on Friday, March 20. SPX closed just above 2300 that day, having plunged from 3100 at the beginning of the month. It had been a very bleak period for our clients and our advisors. In that conversation, I explained that the week had probably seen the sort of climactic panic selling that is typical of lows. I remember specifically telling them at the end of the conversation, “I’ll bet you a dollar that the market is up next week.” I don’t know if that provided much comfort or inspiration, but the market was indeed higher the next week and just about every week since then.
I think we’re pretty much in the opposite situation now. Though no advisors have called to complain about the size or persistence of the rally, there are many other signs that make me willing to bet that the market loses ground this week. The Relative Strength Index has climbed into overbought territory, and is at its highest level since mid-January, higher even than at the February market high. Sentiment indicators, like the number of call option contracts that traded relative to the number of put options, are also flashing warning signs. And, on a fundamental basis, valuations are even richer now than they were at the highs. But the real clincher is that the market action last week was pretty much the opposite of what it was at the low in March. While calling it panic buying is probably not accurate, the buying and short-covering in small-caps and weak sectors like airlines and cruise companies had that capitulation sort of volume and urgency. There’s not much doubt that the economy has bottomed, at least temporarily, but stock valuations are already at levels that expect a full and speedy recovery.
Even if the market does trade lower this week, it could just be the beginning of a consolidation phase and wouldn’t necessarily foretell further damage. As I described last week, the market’s current position from a technical perspective is similar to that of mid-February. The averages are so far above any danger levels that they could retrace several percentage points without causing any technical damage. The first sign of trouble might be if/when SPX falls back below its 200-day moving average. That average currently stands just below 3008, so it would take a decline of about 6% before any technical alarms are triggered.
The list of economic reports this week doesn’t include anything that’s likely to ignite the sort of market action that Friday’s employment data did. However, the Fed announcement on Wednesday afternoon is always a good excuse for a bout of volatility.
|Tuesday 6/9/2020||JOLTS Job Openings, April||6.191mm||5.750mm|
|Wholesale Inventories, April, M/M||-0.8%||+0.4%|
|Wednesday 6/10/2020||Consumer Price Index, May, M/M||-0.8%||0.0%|
|CPI, less Food & Energy, May, M/M||-0.4%||0.0%|
|FOMC Policy Announcement and Press Conference|
|Thursday 6/11/2020||Initial Jobless Claims||1,877K||1,500K|
|Producer Price Index, May, M/M||-1.3%||+0.1%|
|PPI, less Food & Energy, May, M/M||-0.9%||-0.1%|
|Friday 6/12/2020||Import and Export Prices, Imports, May, M/M||-2.6%||+0.8%|
|Import and Export Prices, Exports, May, M/M||-3.3%||+0.9%|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.