The Week On Wall Street: The Crossroads

Summary

• In the short term, interest rates aren't the "issue", Washington D.C. is the "issue".
• China’s energy crunch may spark the next global supply chain issue.
• The third quarter is history and the 2021 rally is now at a crossroads.
• Global economic data remains resilient.
• Looking for a helping hand in the market? Members of The Savvy Investor get exclusive ideas and guidance to navigate any climate. Learn More »

Bulat Silvia/iStock via Getty Images

"Even if you're on the right track, you'll get run over if you just sit there." Will Rogers

Suffocating amounts of information are presented to market participants daily. The response to that inflow of data is important. A choice, stay with the old mindset or update our prior notions and respond to what is happening. If done correctly using an open mind, the updating process will allow an investor to move to a different stance sooner. The process also limits the mistake of assigning too much confidence to any one set of ideas.

There have been many instances of what I am referring to during the life of this current bull market. One of the challenges in investing revolves around the idea that we all need to do a better job than the rest of the market when using available information to form a strategy. If you can do that, then throughout many different investment periods, you will tend to invest in securities that produce better returns than the average, which will cause you to outperform the market.

Of course, that would be nice, but an investor need not get so hung up on trying to achieve that. Each needs to have their set of goals in place for their situation in life. After all, that is what matters.

Third Quarter Is History

The third quarter is in the books; my, how this year has flown by. The BEARS ruled September, as the S&P 500's 7-month winning streak was broken with a loss of 4.6%. I wasn't just the S&P 500. All of the major indices suffered losses for the month.

• NASDAQ Comp. -5.1%
• Dow 30 -4.1%
• Dow Transports -4.4%
• Russell 2000 -3.1%

The S&P did manage to record one new high in the month, bringing the total to 20 new highs for the quarter.

In a period that many predicted would be a difficult one for equities, the third quarter saw mixed results. For Q3:

• S&P 500 +0.37%
• NASDAQ Comp. +0.38%
• Dow 30 +1.9%
• Russell 2000 -3.9%
• Dow Transports -5.0%

Despite the poor results in September, the indices maintained their solid across-the-board performance in 2021. Every index has posted a gain of 11+%, with the S&P rallying 15% for the year.

A Bull Market Killer

The same question keeps coming up week after week. What could bring this bull market to an end? Barring that black swan that everyone keeps bringing up, my view on the topic differs from most. First, I don't see the reasons others use to continually highlight this issue. Bull markets usually die of fright, the fear of the next recessionary period. Now there is "change" on the horizon that will affect the economy, but the early analysis does not reveal a recession is imminent. Stay tuned on that front, this is a fluid situation controlled by the dysfunction in Washington D.C.

Last week's article The Biggest Buy the dip test is here, was a precursor to what I believed was about to take place in the markets. This week's market action has left investors with no clear-cut conclusion. The S&P resides 5% from its all-time high and is barely above the lows at the start of this pullback.

The Week On Wall Street

When I measured market conditions before the market opened this week, I noted oversold extremes for both the DJIA and the S&P 500. Extremes that have been established only ten other times since the March 2009 low in the Dow. That left the door open for what turned out to be a one-day rebound rally. That rally was led by Small Caps, Semiconductors, High Beta, and the more cyclical areas like Energy, Financials, Industrials, and Materials. Meanwhile, the VIX watchers saw that index crash from almost 29 to back under 19.

It also brought the bifurcated market back into focus, as anything cyclical enjoyed a BIG day. As quickly as you could say "default", sentiment changed, the rebound rally was snuffed out and a test of the recent lows became more obvious. The NASDAQ was hit the hardest as the algos geared to sell tech on any interest rate increase did just that. The VIX took another run at the mid 20s level.

As the political scene in D.C. unfolded, the stock market was filled with uncertainty, and lows were once again tested across the board. Any rally was modest and snuffed out almost immediately. The BEARS were in control and they had newfound ammunition provided by Washington D.C. Friday's choppy session saw another test of the lows before an oversold bounce took hold that pushed the S&P to a modest gain on the day. All of the major indices suffered losses for the week.

The Political Scene

In what can only be considered "HELL" week in D.C., what we do know as it stands today the government is funded until December 3rd. There is no progress on raising the debt ceiling that has a mid-October deadline.

The reconciliation bill, aka human infrastructure legislation, was not brought to a vote on Monday as planned nor was it voted on the rescheduled date this past Thursday. Based on sheer economic principles a watered-down version or no version at all is a positive for the economy and the stock market because any version contains tax increases and ramps up inflation.

The Economy

No matter what one "thinks" about how the inflation scene gets resolved, history tells us we shouldn't be overly concerned with inflation running a little hot while the 10-year remains at very low levels. The operative word is "little". The evidence suggests the S&P does just fine in that backdrop.

Fed chair Powell's testimony this week reiterated his change of approach on the inflation threat. On that note, it will finally dawn on investors that adding another $5 trillion to this economy will only exacerbate this problem and inflation will be more than a 'little" hot. This is THE reason I kept mentioning the spending and tax bill in a negative light. It has zero to do with politics, this is all about the economy and the stock market.

Spending

This is the largest spending bill ever proposed that comes on the back of what was previously the largest stimulus bill in the history of the U.S., and some are talking like it's the weekly trip to the grocery store. What is also being lost in all of the commentaries is the NEED for this unprecedented spending. This economy isn't perfect, but when we see more jobs available than job applicants that situation is presenting an opportunity for ALL to participate and keep the economy going.

I mentioned the NEED for this spending. Upon close inspection, among a host of other concerns, we see the bill is loaded with entitlements for the affluent. This isn't a "bailout" for the "needy" as is being advertised. When there is a $12,500 tax credit for buying an electric car where a couple can make $800,000 a year and still qualify, it's apparent the "supposed" NEED is in question.

These aren't political statements. Add more spending, and the biggest tax of all, inflation, hits everyone. It is Washington's dirty secret that no one is supposed to mention these days. Inflation affects those who may be in need a LOT more than the affluent. Eventually, all of this works its way down to a stock market that will indeed react to this issue. Adding $5 trillion to THIS economy and there is very little doubt inflation is here for quite a while.

Inflation and all of its effects is a BULL market killer. This is a stock market issue.

Can the situation change? Of course. The stock market will indeed sniff out any threat well before the politically biased pundits realize what hit them. So it will be incumbent for all to pay attention to the technicals. Given the recent price action, the market may have already started that process. Clues are being presented that says this "dip" may be "different". This is not the time to play guessing games.

These are red flags, but anyone that has followed me knows I simply can't overreact to a "what if" situation.

Taxes

We've all seen the proposals that will increase taxes to "pay for" the spending, and now it appears ETFs are another target.

ETF Economics

12 million households own ETFs.

92% of those households make under 400k per year.

The median income of those ETF holders is 125K.

Now the ETF industry and its investors are also facing more taxation.

Despite all of the proposals, the problem remains the same. ALL of the "pay fors" add up to ~2 Trillion. The proposed legislation will cost 5.5 Trillion. No one is about to say anyone is "lying" but 2nd-grade math tells everyone contrary to the advertising, this bill isn't paid for.

Economic Reports

There have been some areas of weakness since the recovery started. Given the impact of the pandemic when the economy was shut down, that was to be expected. However, we have seen most of the data settle into a range that is ABOVE pre-pandemic levels. Consumers are still in the game, when they are available houses are being bought. In aggregate, there is nothing to suggest this economy is in trouble or needs assistance.

Manufacturing

September PMI data from IHS Markit signaled a substantial improvement in operating conditions across the U.S. manufacturing sector, albeit the slowest for five months. The seasonally adjusted IHS Markit U.S. Manufacturing Purchasing Managers' Index posted 60.7 in September, down from 61.1 in August, but broadly in line with the earlier released 'flash' estimate of 60.5. The latest data indicated a marked improvement in the health of the U.S. manufacturing sector, despite being the slowest since April.

U.S. ISM beat estimates with a bounce to a 4-month high of 61.1 from 59.9 in August and a 6-month low of 59.5 in July. The index has had a 60-handle in six of the last eight months.

Advance durable goods orders surged 1.8% higher in August, much stronger than expected, after rising 0.5% in July with a 0.8% gain in June. Transportation orders supported last month's rise, climbing 5.5% versus July's -0.4% decline. Excluding transportation, orders edged up 0.2% from 0.8%.

They tell me stocks are up a lot because of the Fed. Perhaps people should also be aware that core durable goods (ex aircraft) are about 17% above pre-Covid levels and it then becomes clear there are some really good things happening in our economy.

Source: Federal Reserve Economic Data

Chicago PMI dropped another 2.1 points to 64.7 in September. It is a second straight decline after tumbling 6.6 points to 66.8 in August. And it is the 3rd slip in four months and the lowest since February's 59.5 as the difficulties in the auto sector amid chip shortages, and labor supply issues continue to plague the regional index. But it has held above the 60-mark since March. The 75.2 print from May tied December 1984 for the highest since 77.0 from February 1973 and compares to the record 81.0 from November 1973. The 3-month moving average slipped to 68.3 versus 68.8 in August.

Richmond Fed manufacturing index declined from 9 in August to -3 in September. The indexes for shipments and new orders fell below 0 for the first time since May 2020, but the third component index - employment - remained positive. Manufacturers continued to see low inventories and lengthening lead times and backlogs of orders. Firms reported weakening local business conditions, but they were optimistic that conditions would improve in the next six months.

Dallas Fed's manufacturing index slumped 4.4 points to 4.6 in September after dropping 18.3 points to 9.0 in August. This is the lowest since the -19 print from July 2020. The index was at a cycle high of 37.3 from April. The components were mixed. Prices paid were little changed at 55.3 from 55.7 and prices received rose to 44.6 from 39.8. Capex bounced to 30.0 from 21.6.

Consumer

Personal income edged up 0.2% in August and spending rose 0.8%. These follow respective July gains of 1.1% and -0.1%. Compensation increased 0.4% versus the prior 1.01% pop. Wage and salary income posted a 0.5% gain from 1.1% previously. Disposable income inched up 0.1% versus 1.1% previously. The savings rate dipped to 9.4% versus the prior 10.1% jump. The chain price index increased another 0.4%, as it did in July, with the core rate up 0.3%, also as in July. On a 12-month basis, the headline price index rose to a 4.3% y/y clip from 4.2% y/y. That's the fastest going back about 31 years. The core rate was steady at 3.6% y/y, the highest since the early 1990s as well.

The Conference Board's consumer confidence index drop to a 7-month low of 109.3 from 115.2 in August, reflected an expectations index declined to a 10-month low of 86.6 from 92.4 and a present situation index drop to a 5-month low of 143.4 from 148.9.

Source: Consumer conference Board

Federated Hermes:

"Back-to-School spending from June through August 2021 has risen by a powerful 16.2% on a year-over-year (y/y) basis and by 19.2% versus BTS in 2019. That compares with more typical y/y increases in those three months ranging from 2.7% to 5.8% over the previous four years."

"Ordinarily, all of this would augur well for Christmas, whose retail sales usually are 80-90% positively correlated with BTS results. But storm clouds are forming on the horizon, led by the uncertainty caused by the Covid-19 delta variant."

An unprecedented 73 container ships are stacked up outside of the Los Angeles and Long Beach ports, according to the Marine Exchange of Southern California, a backlog that has doubled over just the past month. This logjam worsens the growing supply-chain bottleneck, preventing retailers from fully stocking their shelves ahead of the critically important holiday shopping season. If a consumer finds their Christmas item next week at full price, they should buy it, because there's no guarantee the item will still be in stock closer to Christmas, with little chance it will be priced at a discount.

Another potential impact may come from the fact that the Labor market recovery remains "slow". Although initial weekly unemployment claims plunged 95% over the past 18 months from their peak at 6.15 million in April 2020, they have backed up by 12% over the past two weeks.

Despite all of those problems consumers are spending. The Chicago Fed's weekly tracker of retail sales spending was released this week. As shown below, the series tends to correlate very well to hard data from the Census excluding auto sales.

Source: Bespoke Investment Group

That suggests that despite weaker consumer sentiment consumer spending is still in good shape and sitting at levels much higher than the pre-pandemic norms. We have seen multiple examples throughout this recovery. This is another data point that confirms the notion to question the trillions of dollars in additional spending.

Housing

The pending home sales index surged 8.1% to 119.5 in August, stronger than expected, and is a strong rebound from the -2.0% drop to 110.5 in July and the -2.0% slide to 112.7 in June. This is now the highest since the 123.4 from January and compares to an all-time peak of 130.3 from August 2020. Monthly sales posted gains across all four regions with the Midwest rising 10.4%, followed by an 8.6% gain in the South, 7.2% in the West, and 4.6% in the Northeast. The NAR's report noted rising inventories and moderating prices helped support the August bounce.

Global Economy

The next shock in the pipeline for China's economy, and the global supply chain: an energy crunch.

As China cracks down on energy use, it could lead to a shortage of everything from textiles to electronic components. The crackdown on power consumption is being driven by rising demand for electricity and surging coal and gas prices as well as strict targets from Beijing to cut emissions.

Morgan Stanley estimates that if production cuts continue at the current pace for the rest of the year, that could drag down GDP growth in the fourth quarter by around 1 percentage point. It may not be that bad if the government starts to allow some wiggle room on the targets in the next month or so.

It appears the tail is wagging the dog.

We have seen weaker economic data coming out of China recently and the latest report shows some stabilization.

The Caixin China Manufacturing Index rose from 49.2 in August to 50.0 in September. This indicated that business conditions stabilized at the end of the third quarter, after a slight deterioration in the previous month. Nonetheless, the latest reading was the second-lowest seen for the past 17 months. The higher headline index figure was partly driven by a renewed upturn in overall sales during September. Though only slight, it was the first time new work had increased for three months. Underlying data suggested this was largely driven by firmer domestic demand, as export sales continued to decline. Several companies commented on improved customer numbers.

The rest of the world is experiencing manufacturing results that are at or ABOVE pre-COVID levels.

Canada

Canada's manufacturing sector concluded the third quarter of 2021 with another robust expansion. Despite a rise in COVID cases, output and new orders rose at historically elevated rates. The headline seasonally adjusted IHS Markit Canada Manufacturing Purchasing Managers' Index registered 57.0 in September, little changed from 57.2 in August. The latest reading extended the period of growth to 15 successive months, with the latest expansion among the sharpest in the 11-year history of the survey.

Eurozone

Slowdowns are being experienced, causing the headline PMI to fall by its largest margin since April 2020, right at the start of the COVID-19 pandemic when virus containment measures were being implemented across the currency bloc and globally. The final reading of the IHS Markit Eurozone Manufacturing PMI for September of 58.6 was a fraction below the preliminary 'flash' print of 58.7, but a notable step down from 61.4 seen in August and the lowest since February.

The U.K.

Supply chain delays, slower new order growth, and rising material and labor shortages all constrained the UK manufacturing sector in September. At 57.1, down from 60.3 in August, the seasonally adjusted IHS Markit/CIPS UK Purchasing Managers' Index fell to a seven-month low. So while that sounds ominous, the index remains at or above pre-pandemic levels.

Japan

Japanese manufacturing firms continued to indicate a softening improvement in operating conditions in September. Both output and new orders fell into contraction for the first time since the turn of the year, as pandemic restrictions and heightened supply chain disruption dampened activity in the manufacturing sector. The headline au Jibun Bank Japan Manufacturing Purchasing Managers' Index eased from 52.7 in August to 51.5 in September, signaling a softer, more marginal improvement in the health of the sector. The latest increase marked the second successive slowdown in manufacturing performance and was the lowest reading since February.

India

The recovery of the Indian manufacturing industry was extended to September, as companies benefited from strengthening demand conditions amid the easing of COVID-19 restrictions. Rising from 52.3 in August to 53.7 in September, the seasonally adjusted IHS Markit India Manufacturing Purchasing Managers' Index highlighted a stronger expansion in overall business conditions across the sector. For the second quarter of the fiscal year 2021/22, the PMI averaged 53.8, a sizeable improvement from 51.5 in the opening quarter.

S. Korea

Businesses operating in the South Korean manufacturing sector indicated a further improvement in operating conditions in September. Renewed growth in output levels and a quicker expansion in new orders meant that the pace of growth accelerated in comparison to August. At 52.4 in September, the seasonally adjusted South Korea Manufacturing Purchasing Managers' Index rose slightly from 51.2 in August, signaling a stronger improvement in the health of the manufacturing sector. That said, the latest reading was below the average recorded in 2021 so far.

Asean

Manufacturing conditions across the ASEAN region stabilized during the closing month of the third quarter, according to the latest IHS Markit Purchasing Managers' Index data. The headline PMI registered on the 50.0 mark that separates expansion from contraction during September, rising from August's 14-month low of 44.5. This signaled no-change in manufacturing conditions on the month, thereby ending a three-month sequence of deterioration. The average reading over the third quarter, at 46.3, was the lowest since the second quarter of 2020 and second-lowest on record, however.

Food For Thought

Corporate Buybacks always seem to draw controversy. We continue to hear that stocks are up a lot because huge corporate buybacks are the culprit. Let's not forget the largest amount of buybacks by S&P 500 companies ever was $800 billion in 2018.

The S&P was down 4% that year.

From an investment standpoint, the banks may have a slew of fundamental reasons why they are attractive now. That may come into question if the latest nominee Saule T. Omarova is confirmed as currency comptroller. Omarova is more than just a finance industry critic - she has proposed essentially ending the banking industry as we know it by letting the Federal Reserve take on the deposit accounts of all Americans.

The "pushback" from the banking industry has already been "loud and clear".

Sentiment

Survey results from the American Association of Individual Investors have shown investor sentiment has taken a more negative tone. 28.1% of respondents this week reported as bullish versus 29.9% last week. While lower, that is still several percentage points above the recent low of 22.4% from a couple of weeks ago.

Bearish sentiment picked up the bulk of those losses to bullish sentiment as 40.7% reported pessimistic sentiment this week. That is the highest reading in exactly a year. With bearish sentiment has risen by 13.5 percentage points since the low of 27.2% in the week of September 9th, it is now a full standard deviation above its historical average of 30.55%.

About two weeks ago we saw all six of the large investment banks issue 10%-20% correction warnings, and now with this recent investor poll, contrarians should be starting to celebrate all of the negativity out there. Euphoria is not part of the investment scene today.

Earnings

The Delta variant has undoubtedly had an impact on supply chains, along with economic activity globally in recent months. This has weighed on estimate revisions in the lead up to Q3 earnings season, as growth and margins come more into question for companies. The biggest downside to Q3 EPS estimates since 6/30 has been to Consumer Discretionary, Industrials, and Consumer Staples.

However, the data varies greatly at the individual company level as the median estimate revision for Consumer Discretionary stocks has been +5.7% (sharply different than -6.1% for the cap-weight sector) with casinos and a few large retailers weighing on the cap-weight data. Similarly for Industrials, the median estimate revision has been +2%, much better than the -3.9% cap-weight reading as estimate revisions vary greatly at the company level (airlines stand out as an area weighed on with the Delta variant).

On the flip side, Energy stands out as the strongest estimate revision. Materials look strong but very dependent on the individual companies. Technology and Communication Services have also seen good upside, continuing their fundamental momentum through economic digitization.

Overall, we can expect the Delta variant impact to show up in Q3 results, along with "wage growth" issues likely acting as a headwind to the overall growth and resulting in more volatility of results at the individual stock level.

However, I continue to view the intermediate-term fundamental backdrop as strong with upside to consensus estimates. A diluted "tax" increase or NO tax increase will also go a long way in my confidence that EPS will be robust in the quarters ahead.

The Daily chart of the S&P 500 (SPY)

I've already commented that this recent pullback has a different "feel" to it. It's now been shown that it also has a different "look" to it. Prior recoveries were quick and when initial support levels were broken in the past the S&P quickly rebounded to recapture that trend line. That is NOT the case today.

S&P 10-1

However, while we see the technical situation is bending it hasn't broken just yet. This is still a 5% correction after an 11-month rally. There is a multitude of scenarios that could take place in the short term. All of them will be driven by the political headlines. In the meantime, the longer-term uptrend remains in place. I mentioned last week that this pullback/consolidation phase will be very difficult to navigate. This week's price action confirms that view.

My Playbook Is Full Of Opportunities For 2021

While the "technicals" remain resilient the "fundamentals" are driving the bus now. The bus drivers are taking turns but they all reside in Washington D.C. The algos are having a field day as the headlines from every direction on every issue are negative. Interest rates, Inflation - oil, natural gas, and home prices increase, consumer confidence tanks again, Powell's re-nomination questioned, China's power issue, debt ceiling/default. A $5 trillion spending package, new taxes, and on and on.

So the market is vulnerable but we're already in a "Correction". I may sound like a broken record, but much of the market has been "correcting" since early this year.

Bespoke Investment Group:

"The average stock in the market is 2.4% below its 50-day moving average, 14% of stocks are down at least 20%, and 49% of stocks are down over 10%."

So basically half of the market is already down 10% or more. Notably, however, breadth readings remain off of their lows of the past few months. We have already seen the NYSE and NASDAQ exchanges become "washed out" with less than 30% of stocks above the 50-day moving average. I'm not sure that means we are closer to the end of this "dip" than the beginning of it, but unless we are going into a full-fledged BEAR market plenty of stocks have already "corrected"."

Short-Term Positives With A Long-Term Caveat

For the moment let's put all of the D.C. dysfunction to the side and concentrate on what the situation looks like without interference. Remember what has been said earlier. I believed the bias for the 10-year Treasury would be to the upside and with a move to 1.53% this week that has played out and we could get a grind higher. That should support the relative performance of the more economically sensitive areas (i.e. energy, financials, industrials, select consumer discretionary).

I also remain positive on the fundamental backdrop for small caps with strong earnings growth and revision trends, along with an attractive valuation vs. the large caps. Like the more economically sensitive areas, a grind higher in interest rates could act as the catalyst for renewed small-cap momentum.

However, let's stop right there and cite the IMAGINED issue versus the REAL issue.

Investors have short memories and the algos have no memory at all. The latter react to headlines. The fact is we've already seen a 1.74% 10-year Treasury rate in March. Let me jog your memory. Rates rallied from 1.10% in January to 1.74%. The S&P had a bumpy ride BUT rallied from 3,700 to 3,980 in that time frame. The NASDAQ was also volatile. The index set a new high in February, established the low for 2021 in March. When the dust settled the rally tallied 4%.

So the market sells off and it's all about rising interest rates. NONSENSE. This time around we do have a problem, but it isn't rising interest rates. We have already proven that a 1.53% Treasury note is NOT a problem. The problem is Washington D.C. and I've highlighted the issues over and over. The problem is the "troubles" are mounting and they could now become reality. Amazingly, NO ONE wants to discuss the FACTS because it's deemed politically incorrect. After all, cite D.C. as a problem, and it's automatically considered a "political" statement. If one wishes to follow that line of thinking they are acting like an ostrich with their head in the sand.

It's time to realize what I have been calling the biggest threat to this BULL market, policy error, and no matter how many want to avoid the issue it is FACT. Eventually, if all of the negatives become reality, they pile up, and the stock market will indeed react to this issue. D.C antics have always been a buying opportunity. This time can be different because of what also has the possibility of taking place with the tax and spending bill.

Small Caps

Small Caps continue to hang in there. So far no warning signal from this group. We've tested both ends of the trading range since February and 8 months later are right back where we started. The Russell 2000, which I've noted repeatedly has done absolutely nothing is at the same price it was on February 26th. I do note that the index didn't even break under its August lows as the S&P 500 did during this last bout of weakness. If there is going to be trouble in the economy small caps will lead the way lower.

Consumer Discretionary

Last week's commentary:

"Here is a sector that I continue to like, as the group tested support but has already rebounded nicely."

Another new high for the Discretionary ETF (XLY) this week before check back to support. The trend continues to look very positive.

Energy

Last week; I keep my exposure to the sector at elevated levels.

A technical breakout on Monday, followed by resilient prices action in a difficult week. Energy policy around the world has finally impacted the price of oil. Excessive investment in solar and wind and underinvestment in the fossil fuel industries have distorted the supply-demand equation. This is now a SECULAR issue. It has zero do with OPEC, hurricanes, and other disruptions.

An argument can easily be made that the price of oil stays resilient and that bodes well for the Energy sector (XLE).

Financials

My view has been consistent even during the quick pullback during the last selling event:

"I continue to believe the bias in rates is to the upside and I plan on maintaining an overweight allocation for the sector."

The banks also showed some grit this week as the 10-year treasury trades around 1.50%. I finally saw some outperformance from the "regionals" as that Bank ETF (KRE) rose 3.9% this week while the large-cap banks (XLF) posted a slight loss.

Technology

The 10-year Treasury rate rises and the algos kick in and sell technology. The charts of the NASDAQ composite and the technology ETF (XLK) are posting similar results. Both are in a short-term downtrend given the weak price action. I maintain my overweight positioning in "quality" tech stocks that are will do just fine in the long term.

Semiconductors

After setting a new high On September 16th, the sector has cooled off and a bout of profit-taking has taken place. Despite the sector falling 5+% in the last two weeks, all of the trend lines continue to look positive. It's one of the better-looking technical pictures in the market. Any change in this group would add more uncertainty to the overall technical picture.

The Speculative Slant - ARK Innovation

Speculative High Growth had remained resilient until this week. Another area that could be a "tell" of what comes next in the general market. The ARK Innovation ETF (ARKK) has now broken below support that was held in June, July, and August. A caution light is on and if this speculative area of the market breaks below the trading range it has been trapped in since March, the warning flag is up.

Cryptocurrency

Last week I noted that Bitcoin was not the haven it has been touted to be. This week provided another example of that. When stocks hit the skids on Tuesday Bitcoin followed right along. However, I also noted continued resilience as near-term support levels did hold, and that sparked a late-week rally that has BTC back into the 47k range. I continue to hold a mall position in Grayscale Bitcoin Trust (OTC:GBTC).

Final Thought

There are ALWAYS concerns. Most of the time they are short-term oriented. Investors might want to notice there is a slight difference to that backdrop now. I continue to move forward with an open mind. The short-term fundamental issues brought about by D.C. will eventually be resolved. However, if dysfunction continues, a full-fledged debt crisis ala 2011, will change everything in the short term.

Whether or not the tax and spend bill gets passed "as is" or we see a diluted package or no package remains to be seen. The final resolution to that legislation will go a long way in forming my next strategic move.

Postscript

Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be "right" for each situation.

In different circumstances, I can determine each client's situation/requirements and discuss issues with them when needed. That is impossible with readers of these articles. Therefore I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.

THANKS to all of the readers that contribute to this forum to make these articles a better experience for everyone.

Best of Luck to Everyone!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of EVERY STOCK/ETF IN THE SAVVY PLAYBOOK either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Any claims made in this missive regarding specific Stocks/ ETF’s and performance contained in this report are fully documented in the Savvy Investor Service. My Playbook is positioned to take advantage of the bull market with NO hedges in place. This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me. IT IS NOT A BUY-AND-HOLD STRATEGY. Of course, it is not suited for everyone, as each individual situation is unique. Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel calmer, putting them in control. The opinions rendered here, are just that – opinions – and along with positions can change at any time. As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die. Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time. The goal of this article is to help you with your thought process based on the lessons I have learned over the last 35+ years. Although it would be nice, we can't expect to capture each and every short-term move.