What's Going On With The Market
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Seeking Alpha Analyst Since 2008
Trader, analyst & portfolio manager, from 1975 - 2001. Former head of equity trading at Northern Trust Co. in Chicago. Now a private investor, founder of a nonprofit investor advocacy firm, and private investing coach.
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Summary
- I offer snippets from articles in Barron's, WSJ, Marketwatch and others.
- I include opinions from some of the best strategists on Wall St.
- This article is mostly about the risks investors face.
- The Dip-Buyers may again save the day, but caution is advised.
"Signs of trouble in the equity market are beginning to show. Even with a recovery from their lows on Friday, the major averages had their worst week since June.
"The technology-dominated Nasdaq had its worst week since March. Tech Stocks Got Crushed. The Stock Market Is on Shaky Ground.
"The Cboe Volatility Index, or VIX, is rising, even though it should go down as the market goes up.
"It was hard to know what caused the selling. Companies might be pulling back on their tech spending; Anthony Fauci expressing doubts about a vaccine approval by the election; the lack of progress on another relief bill; manic option activity; election fears; and an ugly chart pattern known as the hanging man.
"After the long run in tech stocks, investors have shifted to buying call options, where their loss exposure is limited to the premium they pay for the contract, explains Mark Haefele, chief investment officer for global wealth management for UBS.
"Options dealers, who have sold calls to these traders, are forced to hedge their exposure. That would mean buying underlying shares as their prices rise and selling as the shares fall. All of which can exacerbate price swings, as happened on Thursday, Haefele writes in a client note.
"The S&P Technology index is trading at 27.5 times forward earnings; the Nasdaq 100 is trading more than 30% above its 200-day moving average; and way too popular. Citigroup’s Panic/Euphoria model is nearly three times the level that signifies euphoria, and the percentage of bulls in the Investors Intelligence Survey is more the 40% higher than bears.
“Nasdaq is in a blowoff phase,” says BTIG strategist Julian Emanuel.
"Sundial Capital Research’s Jason Goepfert notes that the Nasdaq has been more inclined to hit a top and then go down in a reverse-V—as it did in 2007, 1989, and 1972—than to make another dash for a new high, as it did in 2000.
“We believe this is the final and more-speculative stage of our summertime melt-up scenario,” says Chris Harvey, U.S. equity strategist at Wells Fargo Securities.
"Peter Tchir, the derivatives maven at Academy Securities, said “in a world where volumes are distorted by the frantic trading of [algorithmic-based accounts], any real order flow has a surprisingly large impact on prices.”
Buying the dips is still the fallback position for many investors. Will they do it again?
"Corporate insiders apparently are not waiting to cash out, however. The Financial Times reports that U.S. executives took advantage of the market’s rally to sell $6.7 billion of their own companies’ shares in August, the biggest dollar amount since November 2015. As my illustrious predecessor in this space, Alan Abelson, was wont to observe, there are many reasons to sell a stock; expecting it to rise isn’t one of them.
"Temporary Layoffs Are Starting to Look Permanent. That’s Bad for the Recovery.
Cities and States Are Facing a $1 Trillion Budget Mess. More Trouble lies Ahead.
Signs of the looming crisis are everywhere.
“There’s an enormous loss of revenue going on, and we don’t know how long it will last.”
-Richard Ravitch
$3.9 trillion market for municipal bonds. Nothing seems to stop this rally.
Yields are now at their lowest levels since the 1950s.
a growing number of pros are turning cautious on the market.
the yields (returns) may not be enough to compensate investors for the risks
“States are expecting Covid-19 to impact their outlooks for several years to come,” says Kathryn Vesey White, director of budget process studies at the National Association of State Budget Officers.
“Spreads are stupidly narrow in my opinion,” says J.R. Rieger, owner of the Rieger Report muni newsletter.
***
Markets Rise on Covid Hopes
"The stock market’s late-summer levitation continued, bolstered by hopes that treatments or vaccines for Covid-19 lie just over the horizon.
"Those bullish expectations also hinge on public acceptance, despite various polls showing that about a third of Americans wouldn’t accept a Covid-19 vaccination, even if it were free.
On the basis of history, the stock market may be perched rather uneasily at these heights.
"Even before considering the ultimate hell of a contested presidential election, there’s lots more political drama to play out in the months ahead. Both candidates would probably favor more fiscal stimulus—a plus for markets, JPMorgan strategists say—but a more decisive win by either with his party also controlling Congress along with the White House would increase the likelihood of a new spending package." -Barron's
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The Stock Market Is a Runaway Train Nothing Can Stop
"But boy, did it get weird. It was Salesforce.com (CRM). after Salesforce beat quarterly earnings estimates, the stock soared 26% on Wednesday, its largest move on record.
“That’s old school,” says Nicholas Colas, co-founder of DataTrek Research. “That’s 1998-1999.”
"So can anything stop the runaway train that is the tech sector? Probably not. The one possibility is the new monetary-policy framework offered by Federal Reserve Chairman Jerome Powell this past week. He basically said that the Fed would no longer consider strong employment a sign of incipient inflation and tighten rates because of it.
"There’s only one problem: It’s not clear the Fed can actually get growth to pick up enough to get inflation to rise.
“We still need a growth catalyst to ignite the move, and the Fed’s announcement is not it.”
-Tom Essaye of The Sevens Report newsletter.
“Even now, with stocks trading at such lofty valuations, the S&P 500 could offer a 4% annual price gain plus a 2% dividend.”
-BofA Securities strategist Savita Subramanian
***
The Fed’s New Policy Means Rates Will Stay Lower Longer. The Price: Financial Turbulence.
"Jay Powell be careful what you wish for. The unanticipated consequences of the Federal Reserve’s new policy goal of lifting inflation to maximize employment could be unwanted turbulence in the bond and stock markets.
"No longer will the Fed tighten just because the jobless rate falls below what it thinks is full employment. That adds up to low interest rates for years to come.
“Policy has flipped back to the days of wide lapels and double-knit suits, but the inflation response will not be like the 1970s,” writes Steven Blitz, chief U.S. economist at TS Lombard.
"But most inflation will probably get expressed in rents, a tax on spending power, with technology and globalization remaining disinflationary counterweights.
"The University of Michigan’s sentiment surveys show that consumers’ inflation expectations have consistently run ahead of reported numbers and the 2% target.
"Longer-term Treasury yields moved markedly higher on Thursday in reaction to Powell’s presentation.
"However, what the Fed has succeeded in creating is asset inflation. While the CPI has been running above 2%, Carson argues that “the bigger problem is the new policy will trigger more speculation and risks in finance at a time when asset values are already at nosebleed levels.” Excessive exuberance in finance or the economy creates imbalances that naturally correct, but with a crash, he says.
-Joseph Carson, former chief economist at AllianceBernstein.
***
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It’s hard to beat the market without the FANMAG stocks. But it’s not impossible. These funds take different approaches to growth, but all have beaten the market year-to-date as well as over the past 1-, 3-, and 5-year periods. -Barron's
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Analyst's Disclosure: I am/we are long vti sh.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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