By Pete Biebel, Senior Vice PresidentPrint This Post
Three consecutive gap-up openings to start the week lifted the major averages to record gains (for the month of April) by midweek. It seemed that the promised monetary and fiscal stimulus along with the decrease in the number of new COVID cases domestically and the proposed gradual reopening of our economy were all the market needed to celebrate the hope that a return to normal was just around the corner.
But the last two sessions of the week brought disappointment. On Thursday it was in reaction to the European Central Bank’s rescue plan; the Euro STOXX Index fell 1.9% and an index of European banks lost 5.5%. Stocks here gapped down that morning and traded lower all day. On Friday it was negative reactions to earnings news from several mega-cap companies. Again, the market gapped lower and made new lows for the week as the day went on. The decline in stock prices on Thursday and Friday wiped out the roughly 4% gains that the major averages had enjoyed early in the week. That reversal, from new recovery highs to losses for the week, suggests that the market may be turning a corner as well; its five-week rally may be taking a turn for the worse.
Net for the week, the S&P 500 Index (SPX) lost a mere 0.21%. The Dow Jones Industrial Average (DJIA) was just a tick worse at -0.22%. And, the NASDAQ Composite Index (COMP) lost 0.34%. The relatively small size of those net losses doesn’t seem to be such a bad omen. However, the path to those losses: huge early week gain, new recovery highs followed by a late-week collapse, may be forewarning that the market has lost its mojo.
Nearly half of the S&P industry sectors, including several of the weaker sectors, managed to get through the week with net gains. The Energy sector topped the list by climbing about 3 ½% thanks to the continuing rebound in crude oil prices. The next four best performing sectors last week were Communication Services, Basic Materials, Financials and Industrials. All four registered gains between 1% and 2%, but all four are still trading below their 200-week moving averages.
Echoing that theme of outperformance by lagging sectors was the Russell 2000 Index of small-cap stocks (RUT). RUT plowed through the week to a 2.6% gain, crushing the performance of all the large-cap indices. But, RUT, even with last week’s outsized gain, is still down more than 24% year-to-date.
In recent weeks, I have written about the common percentage retracement levels for rebound rallies. Using SPX as a gauge, those levels were at about 2650, 2795 and 2940. The first leg up of the rally stalled near the 2650 level for about a week-and-a-half. Then, SPX shot up to the high 2700s in early April and see-sawed around that level until last week. With an eye on the third retracement level, last week I wrote, “…climbing above 2880 would likely see an extension into the low-2900s.” Last Wednesday, SPX traded slightly and briefly in the mid-2900s before ending the day at 2939. But then Thursday and Friday saw gap-down openings with follow-through selling. SPX fell as low as 2820 before ending the week near 2832.
It’s been a heck of a rebound, though not completely unexpected. Back in late-March I wrote, “Repeat after me, ‘The most impressive short-term rallies occur as rebounds in continuing downtrends.’ The market is rallying through the vacuum left by the preceding whoosh down, and the averages need to rally enough to convince a significant percentage of market participants that a new bull market has begun.” I will freely admit that the rally extended further than I expected. I believed there was a very good chance the rebound would stall at that first retracement level and the market would make a lower low. Then, when the rebound stalled around that second retracement level, I thought the odds favored a downturn from there. With last week’s moonshot and reversal near the third retracement level, and with more and more business show guests proclaiming that the new bull market has begun, I believe that caution is warranted.
It wouldn’t take much to have the averages resume their uptrends. Just moving beyond last week’s high would confirm that the uptrend is still intact. Perhaps the most reliable signal that the market has turned the corner and begun a new mark-down phase would be seeing SPX break below its low of two weeks ago near 2727. Taking out that level would likely trigger a decline into the 2500 – 2600 range.
If such a weakening should occur, the nature of the market action could tell us a lot about the trend’s sustainability. A gradual, slow, grinding decline, especially if it holds above that 2727 level, could turn out to be just a brief timeout before another attempt at higher recovery highs. More damaging would be the sort of steep, air-pocket declines like those seen in the first half of March. Wide-range down days with lopsided advance/decline ratios would likely see continuing follow-through declines.
We have now turned the corner on the new Earnings Season. The past two weeks have had the most reports and the biggest names. The number of quarterly releases, while somewhat reduced this week, is still likely to provide some fireworks each day.
The economic report calendar turned the corner weeks ago, but in each new week the reported data covers more of the time since the downturn. Some of the consensus estimates for this week’s data, including Factory Orders and Vehicle Sales, predict record declines. Friday will bring the first official update of the Unemployment Rate with estimates from economists ranging from a little over 12% to just under 19%.
You may not be in the habit of watching the parade of economic reports, but one number worthy of your attention may be the weekly Continuing Unemployment Claims. The series of multi-million weekly initial unemployment claims has been big news in recent weeks. The Continuing Claims number, which tracks the number of jobless workers who are still receiving benefits, is typically a much less important data point. One popular economist proposed last week what seems to be a reasonable theory: that a peak in continuing claims, whenever it happens, would likely signal the bottom for the recession. Last week, that number, reported a week in arrears, stood at just under 18 million.
|Monday 5/4/2020||Factory Orders, March, M/M||0.0%||-9.5%|
|Motor Vehicle Sales, April, SAAR||11.4mm||7.1mm|
|Tuesday 5/5/2020||International Trade, Trade Deficit, March||$39.9B||$44.0B|
|PMI Services Index, April||39.8||27.0|
|ISM Non-Manufacturing Index, April||52.5||37.9|
|Wednesday 5/6/2020||ADP Employment Report, April||-27K||-20,000K|
|Thursday 5/7/2020||Initial Jobless Claims||3,839K||2,991K|
|Non-Farm Productivity, Q/Q, SAAR||+1.2%||-5.0%|
|Unit Labor Costs, Q/Q, SAAR||0.0%||+4.9%|
|Consumer Credit, March, M/M||$22.3B||$15.0B|
|Friday 5/8/2020||Employment Situation, Non-Farm Payrolls||-701K||-21,250K|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.