KEEP AN EYE OUT FOR THE MY INAUGURAL QUARTERLY MARKET REVIEW WHICH I WILL BE SENDING TO ALL SUBSCRIBERS IN THE NEXT DAY OR TWO, TAKING A DEEP DIVE AND LOOKING BACK OVER AN EVENTFUL (TO PUT IT MILDLY!) Q3 2022.
Dearly beloved, we are gathered here today to mourn the demise and end of the summer stock market rally which finally expired last week, as the entire set of gains since the June 16th prior lows were completely erased and new lows were made for 2022. The rally may have only had a short life of two and a half months, but it impacted the lives of millions of people during its time here on earth. It turned many investors into believers that the year of pain was finally ending, the bottom had been reached and the skies were clearing. However, it got exposed as just another cruel “bull trap”, just like the one we experienced in late March.
When the autopsy results came in, the cause of the rally’s death was determined to be Jerome Powell’s Jackson Hole speech on August 26th, Michael Myers-style inflation that will not die and the collapse of the giddy self-delusion of many investors who had convinced themselves that what they wanted to happen was what was going to happen.
At the beginning of August, with the rally under way, I posted this on Instagram ..
.. which unfortunately proved very prescient. Also, if you have been a regular reader of the UNDER THE HOOD part of this report you will have learned that there were plenty of technical deficiencies with the rally that made many skeptical of its sustainability.
The S&P 500 lost about 9% for the month of September, and the NASDAQ plunged 10.5%. For the third quarter, the S&P 500 fell 5%, and the NASDAQ declined 4%. (I will shortly be sending a Q3 market review as part of a new quarterly service to subscribers)
The UK’s central bank, the Bank of England (BOE), announced on Wednesday it would take action completely contrary to UK Treasury policy and start massive buying of the country’s government bonds in an attempt to check the frenzy afflicting UK bond and currency markets brought about by what is quickly becoming known as “The Trussterf*ck”, a stimulus plan announced by the UK’s new Prime Minister Liz Truss and her finance minister (“Kami-”) Kwasi Kwarteng that basically stuck a middle finger up to financial markets and mainstream economic orthodoxy. For a few hours at least on Wednesday, it looked like it might have worked. Pressure on interest rates eased not only in the UK but around the world.
In the US, the interest rates for the benchmark 10-Year Treasury note, which had briefly climbed above 4% for the first time in more than a decade, quickly and dramatically slid back down on the back of the BOE announcement. By the end of the day, it was at 3.71%, that’s its steepest one-day drop since Lady Gaga drew our attention to her poker face in 2009. Bond yield moves like we saw in just one day last Wednesday in the US and the UK often take months to play out, but these aren't ordinary times.
Most stocks initially ripped higher as a result, although conspicuously absent from the sector leaderboard was Technology, which was held down partly by Apple (AAPL) after the company announced it is dropping plans to boost iPhone production due to disappointing demand.
The relief was temporary however (probably not helped by an absolute car crash of a media-round by PM Truss trying to justify her policy initiative) and by Thursday lunchtime, stock markets everywhere had given back all of Wednesday’s gains - and more - and interest rates were shooting higher again.
Markets found it easy to find more to get anxious about. The Federal Reserve's preferred inflation gauge came in hotter than expected. The Core Personal Consumption Expenditures price index (PCE), rose 0.6% in August, indicating that inflation is becoming more structural. The PCE doesn't have housing and rents as as a big component as the Consumer Price Index (CPI) does, so the fact that it is still rising is worrying and simply provides more cover for the Fed to continue to aggressively raise interest rates.
The situation in Ukraine deteriorated as Russia annexed eastern regions following sham “referenda”. The temperature was also raised by damage to the Nord Stream gas pipelines that NATO blamed on Russian sabotage and said that the attacks on European energy security could be met with a military response.
All of which raises the question; when does this all this s**t stop? I would say the answer is three-fold ..
* A meaningfully softer CPI number. The next release is on October 13th. If CPI drops enough, that will signal disinflation is quickly taking hold and we could easily see a 5% or more rally in the stock market because it’d call into question the Fed’s damaging “dot plot” and likely result in a decline in the all-important expected Terminal Rate (what the Fed Funds rate will be at the time the Fed stops raising rates).
* Better-than-expected earnings. Q3 earnings season begins in earnest on October 14th. Earnings concerns are pressuring stocks. If companies come out, like some did in Q2, and basically say business is holding up fine, that will go a long way to easing concerns about an imminent collapse in corporate earnings.
* More dovish Fed speak. The Fed does have a history of “blinking” on rate hikes when economic data seems to justify a pause at least. If the rhetoric of Fed presidents and Powell’s press conferences start to focus on acknowledging the slowing economy and the relative success of their “shock and awe” policy of raising interest rates at such an extraordinary pace, then expectations for that Terminal Rate may begin to drift lower and that could result in a big relief rally that could possibly prove to be sustainable.
One little-noticed silver lining to what has been happening is the interest you can actually earn these days. Most portfolios have at least some bond exposure, which has been a problem on a price basis in 2022 as interest rates have rocketed. It is however worth reflecting on the fact that, one year ago, these were the approximate prevailing interest rates in various parts of the US fixed income market:
* Short term government bonds: 0.3%
* Corporate bonds: 2.3%
* High Yield Savings Accounts: 0.30%
* High yield bonds: 4.4%
Here are those approximate yields today:
* Short term government bonds: 4.4%
* Corporate bonds: 5.6%
* High Yield Savings Accounts: 2.30%
* High yield bonds: 8.0%
Keep your chin up and make absolutely sure you read the ARTICLE OF THE WEEK below for more about why this is actually a much better environment for regular ongoing investors than the one we were in this time last year when it seemed that we were seeing new market highs almost every other day.
OTHER NEWS (REAL ESTATE EDITION):
Buyers and sellers alike seem to be souring on the real estate environment .. Government data on new-home sales in August released last week came in surprisingly high at 685k, crushing the 495k expectation. However, it’s still way down from the peak rates of more than a million new home sales in summer 2020 and 800k in summer 2021.
On the affordability side, prices are still soaring but at a rapidly diminishing rate. Data released last week showed July’s average prices nationally up 15.8% from a year earlier. But that was well down from June’s 18.1% annual gain. Indeed, that month-on-month fall in the rate was the largest deceleration in the history of the index.
Anecdotal evidence abounds of listing agents sitting around twiddling their thumbs at what is normally a very busy time when traditionally lots of sellers throw properties on the market ahead of the winter slowdown. People are just sitting on their already-refinanced 2.8% mortgages and have little interest in replacing them with 6.8% ones by selling and re-buying.
Buyers are pulling the brake too. Even leaving aside for a moment the sky-high prices still being asked by sellers who are still mentally anchored to 2021 and the doubling of mortgage rates in a matter of months that is crippling first-time buyers, many potential buyers who can afford to purchase are worried about being that dope that pays the market high and then watches prices fall 20% right after the closing. It’s easier to just hang out for a while and see what happens. Mortgage application volume dropped 3.7% last month alone.
This idea of the real estate market basically seizing up is supported by data released last week showing downgraded expectations of a total of 5.19 million existing home sales in 2022, that’s over 15% down from 2021’s number. And 2023 sales are expected to slump further to 4.82 million, which would be the lowest annual count since 2012.
UNDER THE HOOD:
During bear markets, investors should not look to the stocks displaying relative strength for leadership. Those stocks are the leaders of bull markets. On the contrary, for leadership in a bear market, investors should look at what is going on with the very weakest stocks. After all, many of these stocks were the first to peak back in the day, foreshadowing the coming overall market decline. The seeds of the 2022 decline were planted way back in February 2021 when smaller stocks began to roll over but few noticed as the headline indexes just kept moving constantly higher for months.
These weak stocks can currently be found among the Percent of Stocks 30% or More Below Their One Year Highs. Ahead of a real, lasting market turnaround situation this number should be declining sharply towards single digits as these stocks start their journey upwards. Unfortunately for the bulls, this number soared to over 57% last week, its highest level since May 2020! This portion of the market theoretically has the very best valuations, but buyers are just not interested.
Another discouraging fact for the bulls is that the total trading volume was above average, and often significantly above average, on the big down-days, showing much greater conviction on the part of the sellers than the buyers.
Evidence of true exhaustion or capitulation on the part of the sellers remains elusive. More than that, signs of the return of Demand robust enough to sustain a new bull market are likewise absent.
“Oversold” (see EXPLAINER: FINANCIAL TERM OF THE WEEK)? So what? Without Demand explosion, it’s just an adjective with no meaning or consequence.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
It's the calm before the storm of the Q3 earnings season, which ramps up in mid-October. By far the main event on the economic calendar next week is the September jobs report on Friday. Economists expect to see a gain of 250k jobs, down from the 315k gain in August. The unemployment rate is forecast to hold steady at 3.7%.
Other economic data out next week includes Manufacturing Purchasing Managers' index followed by the Services equivalent the next day. The August Job Openings and Labor Turnover Survey (JOLTS) comes out this week, cue another tedious avalanche of simplistic articles pointing out how there’s like 1.8 jobs per unemployed worker or whatever it is. Zzzzzz.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
* ↑Bullish: 20% (up from 18% the previous week)
* →Neutral: 19% (down from 21% the previous week)
* ↓Bearish: 61% (unchanged from 61% the previous week)
* Net Bull/Bear spread .. ↓Bearish by 41 (Bearish by 43 the previous week)
Source: American Association of Individual Investors (AAII).
Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
(For context: The highest ever percentage of AAII bearish sentiment was 70% and occurred on March 5, 2009 near the end of the financial crisis bear market. The lowest percentage of AAII bears was 6% on August 21, 1987 shortly before the stock market crash of October 1987).
Weekly sentiment survey participants are usually polled on Tuesdays or Wednesdays
LAST WEEK BY THE NUMBERS:
Last week’s market color from finviz.com
- Last week’s best performing US sector: Energy (two biggest holdings: Exxon Mobil and Chevron) - up 2.2%
- Last week’s worst performing US sector: Utilities (two biggest holdings: NextEra Energy and Southern Company) - down 8.7%
- The S&P 500 and the NASDAQ-100 declined in equal measure
- Emerging Markets and US Markets fell further than International Developed markets
- Large Cap stocks fell much further than both Mid and Small Cap
- Very little to separate last week’s performance of Value and Growth
- The proprietary Lowry's measure for US Market Buying Power is currently at 138 and fell by 1 point last week and that of US Market Selling Pressure is now at 178 and rose by 4 points over the course of the week.
- SPY, the S&P 500 ETF, remains below its 50-day and 90-day moving averages and well below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 28**. SPY ended the week 25.1% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, remains below its 50-day and 90-day moving averages and well below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 29**. QQQ ended the week 33.8% below its all-time high (11/19/2021).
** RSI readings range from 0-100. Readings below 30 tend to indicate an over-sold condition, possibly primed for a technical rebound and above 70 are often considered over-bought, possibly primed for a technical decline.
- VIX, the commonly-accepted measure of anticipated upcoming stock market risk and volatility implied by S&P 500 index option trading (often referred to as the“fear index”) ended the week higher yet again at 31.6. It remains above its 50-day and 90-day moving averages and well above its long term trend line.
ARTICLE OF THE WEEK:This week .. “All of the value creation for investors comes from the actions they take in falling markets, not rising ones”.Required reading for anyone under 55 and who has money in the stock market from Josh Brown.
EXPLAINER: FINANCIAL TERM OF THE WEEK:A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity) .
The completely subjective term oversold refers to a condition where an asset has traded lower in price and has the potential for a price bounce. An oversold condition can last for a long time, and therefore being oversold doesn't mean a price rally will come soon, or at all. Many technical indicators identify oversold and overbought levels. These indicators base their assessment on where the price is currently trading relative to prior prices. Fundamentals can also be used to assess whether an asset is potentially oversold and has deviated from its typical value metrics.
Oversold to a fundamental trader means an asset it trading well below its typical value metrics. Technical analysts are typically referring to an indicator reading when they mention oversold. Both are valid approaches, although the two groups are using different tools to determine whether an asset is oversold.
Fundamentally oversold stocks (or any asset) are those that investors feel are trading below their true value. This could be the result of bad news regarding the company in question, a poor outlook for the company going forward, an out of favor industry, or a sagging overall market.
Traditionally, a common indicator of a stock’s value has been the P/E ratio. Analysts and traders use publicly reported financial results or earnings estimates to identify the appropriate price for a particular stock. If a stock’s P/E dips to the bottom of its historic range, or falls below the average P/E of the sector, investors may see the stock as undervalued. This may present a buying opportunity for long-term investing.
Traders can also use technical indicators to establish oversold levels. A technical indicator only looks at the current price relative to prior prices. It does not take into account fundamental data.
George Lane’s stochastic oscillator, which he developed in the 1950s, examines recent price movements to identify changes in a stock’s momentum and price direction. The RSI measures the power behind price movements over a recent period, typically 14 days.
A low RSI, generally below 30, signals traders that a stock may be oversold. Essentially the indicator is saying that the price is trading in the lower third of its recent price range.
This isn't to say the price will bounce immediately. Many traders wait for the indicator to start heading higher before buying since oversold conditions can last a long time. For example, a trader may wait for the oversold RSI to move back above 30 before buying. This shows that the price was oversold but is now starting to rise.
If oversold is when an asset is trading in the lower portion of its recent price range or is trading near lows based on fundamental data, then overbought is the opposite. An overbought technical indicator reading appears when the price of an asset is trading in the upper portion of its recent price range. Similarly, an overbought fundamental reading appears when the asset is trading at the high end of its fundamental ratios. This doesn't mean the asset should be sold. It is just an alert to look into what is going on.
Oversold is mistakenly viewed by some traders as a buy signal. Instead, it is more of an alert. It lets traders know that an asset is trading in the lower portion of its recent price range, or is trading at a lower fundamental ratio than it typically does. This doesn't mean the asset should be bought. Many stocks that continue to fall look cheap all the way down. This can happen because most oversold readings are based on past performance. If investors see a grim future for a stock or other asset, it may continue to be sold off even though it looks cheap based on historical standards.
SIMON@ANGLIAADVISORS.COM | WWW.ANGLIAADVISORS.COM | FOLLOW ANGLIA ADVISORS ON INSTAGRAM
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