@theMarket: The Dip Buyers Return
Last week, investors suffered through the gloom and doom of a declining market. Many Wall Street equity strategists added to the angst by predicting terrible times ahead. I begged to differ, counting on dip buyers to save the day once again. And that is exactly what happened.
In case you missed it, last Friday, the S&P 500 Index was at an important level, hovering just below its 50 Day Moving Average (DMA). This had happened several times before since March 2020, and each time buyers appeared to "buy the dip."
"I suspect they will again," I wrote, "so, no, I won't get bearish quite yet. I will go the other way and predict that markets will bounce next week. But what if I am wrong? Technically, the downside risk could be another 80 points (1.8 percent) to around the 4,365 level on the S&P 500 Index."
As it turns out, I was right on both counts. Buyers swooped in at the lows an hour before the close on Tuesday, September 21, 2021. The S&P 500 Index ended the day at 4,357, just eight points lower than my worst-case scenario. We proceeded to rally through the remainder of the week, regaining the 50 Day Moving Average and then some.
That doesn't mean we are quite out of the woods just yet. This week the children in Washington, D.C. that we call our "legislators" are once again squabbling over increasing the nation's debt ceiling. The federal debt ceiling has been raised more times than I can count, but it has never been reduced.
In 2019, the debt ceiling was suspended for two years under a bi-partisan agreement. At the time, former President Donald Trump was busily increasing the nation's debt by $7.8 trillion (after promising he would reduce it). Instead, Trump engineered the third largest increase in our debt (relative to the size of the economy) of any U.S. president in history. The federal debt rose from $19.95 trillion in 2018 to $27.75 trillion by the end of his term — up 39 percent, or 130 percent of GDP. Why am I bringing this up?
Because the Republican Party opposes raising the debt ceiling. I won't bore you with the details, other than to remind readers that the debt ceiling today is where it is because of yesterday's bills. Specifically, it is the spending that was authorized and spent by those very same Republicans who now refuse to pay their bills. Wall Street, one would assume, is totally inured to this theatre, but I suspect it still may cause some temporary volatility throughout the next few weeks.
In addition, there may be some drama next week around funding the government. A spending bill — called a "continuing resolution" — that would keep the government running after its current fiscal year ends on Sept. 30 needs to be passed, or the government could shut down.
Government shutdowns have happened before, most recently when the former president held the country hostage demanding billions for his now rusting and dilapidated "Wall." The markets took this in stride. All he really managed to do was make the holidays miserable by denying paychecks to thousands of government workers. In any case, a shutdown could add uncertainty to the markets.
Of course, the market-moving news this week was the upcoming tapering of bond purchases by the Federal Reserve Bank. On Wednesday, Fed Chairman Jerome Powell, after the FOMC meeting, announced that the Fed had met both its inflation and employment targets and the time to taper was coming. It could be as soon as November or December—barring any unforeseen pitfalls. He left the door open to delay if something like an upsurge in the coronavirus threatens the economy.
The meeting notes also revealed that the committee membership was about evenly split on when they might begin to raise interest rates. An interest rate hike could happen as early as next year or be delayed into 2023. The markets took the announcement on board, and while the news was decidedly hawkish, investors were expecting it. Stocks rallied further on Thursday (Sept. 23)and into Friday (Sept. 24) before some profit-taking set in.
This should go down as a September to remember, and it is not over yet. In the days and weeks ahead, we may suffer through another such pullback and test some of those lower levels of last week. If we do, I suspect the dip buyer will again save the day. In the meantime, stay the course and stay invested. Next up, October.
@theMarket: Markets Enter the Danger Zone
It has been a bumpy week for stocks, and it could get worse if you believe the headlines of the financial press. The issue I see is that just about everyone is expecting a nasty period ahead for equities. That makes me somewhat bullish.
Calling short-term market moves in this environment is akin to fortune-telling. It is short on analysis, and long on my gut feelings. Granted, I too, have been warning folks that the September-October 2021 time period has been a seasonally difficult time for equities. My column last week addressed the possibility of a 5-10 percent correction, and what investors should do about it.
The media has now proclaimed that we are entering a "danger zone" for stocks, which stretches from today through the end of the month. Today, Friday, September 17, 2021, is also widely expected to be extremely volatile. It is a "quadruple witching" day when derivatives of stock index futures, stock index options, and single futures expire simultaneously. This event happens once every quarter on the third Friday of March, June, September, and December.
It is usually a big volume day in the markets. Individual stocks and indexes sometimes see large price swings during the day and into the last hour of trading. The media has everyone worked up that somehow the "danger zone," combined with "quadruple witching," spells doom for the markets. I beg to differ. While volatile, these events have proven to have little impact on the markets after the one-day expiration. Losses are usually recouped throughout the following days.
The contrarian in me also wonders how useful it is to worry about the next two weeks in the market. When everyone else is on one side of the boat, I tend to lean the other way. Headlines like "investors brace for more September volatility" just adds to the noise, and leaves little left to discount on the downside, at least for now.
What could move the markets higher? Well, we have another FOMC meeting coming up on Wednesday, September 22,2021. I expect the Fed will wait until November before pulling the trigger on tapering. That will cheer up most investors. There was also some good news on the economic front.
As most readers are aware, U.S. consumer spending is a massive part of the Gross Domestic Product of this country (about 70 percent). Thanks to the pandemic, incomes were boosted by fiscal stimulus, while at the same time, spending was depressed amid the lockdowns. Economists believe that as a result, consumers' savings have accumulated to the tune of $2.4 trillion or more. That is a lot of firepower and leaves the typical consumer with a combination of extra cash and lower debt.
That thesis came home to roost this week. Consumers defied expectations and went shopping. Retail sales in August 2021 jumped 0.7 percent, which surprised the markets, since consumer confidence readings had been falling sharply in recent weeks. That led most economists to expect a decline of 0.7 percent. It seems that those rising incomes, employment, and accumulated savings kept the consumer shopping, despite fears about the Delta variant.
The S&P 500 Index is at an important level, hovering just below its 50 Day Moving Average (DMA). This has happened several times before since March 2020, and each time buyers appeared to "buy the dip." I suspect they will again, so, no, I won't get bearish quite yet. I will go the other way and predict that markets will bounce next week. But what if I am wrong? Technically, the downside risk could be another 80 points (1.8 percent) to around the 4,365 level on the S&P 500 Index.
@theMarket: Some Brokers Are Getting Bearish
For four days in a row, the markets closed down. That is in itself unusual. It has only happened four other times since the March 2020 low. Does this portend further downside in September?
On Friday, the markets tried to bounce back. The damage to the averages has been minimal thus far. But given how far we have come, more and more brokerage houses (Goldman Sachs, Deutsche Bank, and Morgan Stanley, among others) are warning that the September-through-October time frame could see a 10 percent correction. How much weight should you give these gloomy predictions?
If you are a short-term day, or swing trader heed their call, since we are probably overdue for such a downdraft. This has been one of the 15th longest stretches in market history where the S&P 500 Index has gone without even a 5 percent correction. Consider that the average time between 5 percent corrections since 1950 has been only 97 days. As of Friday, Sept. 10, we are pushing 316 days without such a decline.
As I have pointed out in the past, there are plenty of issues that investors are facing over the next two months. Any one of which could justify some profit-taking. We have the looming battle over the debt ceiling, and the beginning of the Fed's announced tapering of bond purchases, to name just two.
On Thursday, the European Central Bank (ECB) gave us a taste of what that might look like. Christine Legarde, President of the ECB, announced their own tapering of bond purchases under its pandemic emergency purchase program. The Governing Council kept interest rates the same, but noted that inflation was running at a 3 percent rate in August 2021, the highest in a decade. Markets in Europe took it well, but closed mixed, while U.S. markets fell on the news.
Other investor concerns center on the potential slowing of the U.S. economy during this third quarter, as well as the probability that corporations have already hit peak earnings for this cycle.
Of course, the pandemic is still with us and continues to cause dislocations. Supply chain issues, which were thought to be temporary, seem to be lengthening in durations in areas such as semi-conductors and consumer durable goods and parts. And economists are still arguing over what is transitory inflation and the other stickier kind. The U.S. Producer Price Index rose 0.7 percent in August bringing the year over year increase to 8.3 percent, the largest on record.
Now, none of the above information is new. It has been with us for quite some time, but it's that time of the year when investors for some reason start to focus on what could go wrong (rather than go right). Call it behavioral science, investor psychology, or simply "cup half empty." If this September/October turns out to be down months, then I am pretty sure that November through the end of the year will be up months for stocks. That is the rhythm of the markets.
The moral of this tale is that if you are a long-term investor the next two months are simply a tiny blip, or bump in the road that should be ignored. If you attempt to sell everything and then buy at the lows, you haven't learned anything from reading my columns. The best advice I can give is to ride it out, and if markets drop, just don't look at your portfolio (if you are the nervous type).
Another possibility is that we have a shallower pullback than the pundits are predicting, or none at all. Who says they have it right? As I wrote last week, history has been a poor guide in predicting the future of markets undergoing extraordinary circumstances.
As regular readers know, my target for the S&P 500 Index in the intermediate term was 4,550. On September 2, 2021, we hit an intraday high of 4,545.85, which is close enough for government work.
Right now, I see some downside, possibly to 4,448 on the S&P 500 Index, and then I will reassess. Make no mistake, I expect the markets to be volatile in both directions over the next few weeks. If we do see that 5-10 percent correction, I believe it will happen over the next two months, rather than a few days.
@theMarket: Investors Are Chasing Stocks Higher
The proverbial Wall of Worry provided plenty of foot holds for investors this week. The major averages continued to make new highs (or hovered just below them), despite bad news and focused instead on anything that could justified higher prices.
The belief that the Delta variant of the coronavirus may be peaking in the worst-hit states was enough to cheer investors. Not that the extremely contagious infection ever had much of an impact on the markets anyway. Still, the hope that Delta has peaked gave added umph to large cap growth stocks.
Helping this summer's move higher was almost $30 billion in fresh money that has come into the market since July. It appears that many retail investors with money on the sidelines caught FOMO fever. This "in at any price" behavior might explain why valuations continue to be stretched upward, despite the belief that we have already seen "peak" earnings in the stock market.
As I cautioned investors, last week's Jackson Hole symposium was a non-event with Fed Chairman Jerome Powell sticking to his story line that tapering would come, just not yet. That relieved some of the markets' anxiety around when the taper would begin, at least until the Sept. 22 FOMC meeting. Weaker employment data for last month, I expect, will postpone any tapering until more data is forth coming. That could mean no action from the Fed until November 2021. Readers should hear a lot of jaw boning by Fed officials leading up to the Sept. 22 meeting. Their frequent speeches, insights, and opinions are meant to give the markets plenty of time to adjust to a taper without (hopefully) causing a tantrum.
In the meantime, equity strategists are split between calling for even higher prices ahead or warning of an imminent correction during September, which historically has not been kind to the markets. But that is not necessarily going to be the case this year. In years where the stock market has had strong upside gains, like they have had this year, two-thirds of the time, stocks have had a pretty good month.
However, history, especially in a time of extraordinary events, such as the present pandemic, along with huge monetary and fiscal stimulus, has not been an accurate predictor of financial markets. Technical analysis is also less effective in determining market movements when stocks continue to make new historical highs week after week. Markets can perform like rubber bands that are stretched and stretched until they snap. The problem is that no one can gauge the strength of the rubber bands.
For instance, for months I have targeted 4,550 on the S&P 500 Index as a likely spot where we may see some consolidation, at least in the major averages. Traders have pushed stocks up close to this level several times this week only to back off by the end of the day.
At this time, the S&P 500 Index overall is extremely overbought, as is the NASDAQ, if less so. Momentum in many stocks is also bleeding off. Yet, the small cap, Russell 2000 Index, which has been in a holding pattern for most of the year, seems ready to catch-up to the main averages in the weeks ahead.
Precious metals also look to have room to run. Gold has broken out of an eight-year range, but there has been no follow through as of yet. The price just chops around in a tight range. The dollar, I suspect, will determine when and if gold moves higher. The greenback has been in a trading range for months. It is presently weakening against a basket of currencies. The weaker it gets, assuming interest rates remain low, the higher the price of gold, or at least that is the theory.
Bitcoin and Ethereum, two of the major crypto currencies, have responded to the weaker dollar. Bitcoin, after spending the last few months digesting its decline from more than $64,000 to $28,000, has been inching its way higher week after week. I said "inch" instead of leap, or spike, because the volatility around Bitcoin has quieted down.
Some analysts believe that the entry of a large number of institutions into the crypto currency market (as opposed to just retail money), has had a calming effect on price movements. Ethereum, on the other hand, has been outperforming Bitcoin, which may mean that crypto is no longer a one-horse Bitcoin show. That could be another sign that the crypto marketplace is maturing.
If Bitcoin can break through the $51,000 level (no easy task), says the chartists, then the chances of a move higher rise substantially. Some crypto bulls expect to see $100,000/coin by year end. On the downside, Bitcoin below $46,000, and Ethereum under $3,500 would indicate to me that this up move has failed.
As for the economy, supply chain disruptions, the end of stimulus payments, and higher unemployment checks are expected to have slowed growth in the economy this quarter, which could also be a headwind for the stock market. Unemployment claims continue to decline, but the number of unemployed workers is still quite high, despite the enormous number of unfilled jobs nationwide. Non-farm payrolls for August 2021 were a disappointment with the economy only gaining back 235,000 jobs — half the consensus forecast.
Let's stay the course on the investment front, even though we may experience a little turbulence this month. And have a great Labor Day weekend, everyone.
@theMarket: Taper Talk Tanks Stocks
The July minutes of the last FOMC meeting were released Wednesday. In the announcement, Fed officials expressed their willingness to start reducing asset purchases before the end of the year. In response, traders dumped stocks. Was that the right move?
Stock jockeys seem to believe that by reducing monetary stimulus by even a smidgeon, all will be lost in the stock market. I find that hard to believe. The Fed is purchasing $120 billion a month in bonds. If they reduce that amount by $10-$20 billion, that still leaves a lot of central bank firepower.
A much better explanation for the losses this week could be that it is a slow week, and a seasonally treacherous time of the year in the equity markets. Traders can move stocks up and down easily on little volume, racking up big losses (and gains) from unsuspecting investors.
Add into that mix, a host of unknowns ranging from the latest surge in the Delta variant of the coronavirus, events in Afghanistan and China, plus the upcoming battle over the debt ceiling, and you have a genuine witches' brew of misinformation, fear, and worry. Oh, and did I happen to mention that all this is occurring at the very top of the markets?
Let's begin with the Fed's statements. Nothing, absolutely nothing, in the minutes was new information. I have been writing about this upcoming taper for weeks. Everyone knows it is coming by now. It is only a question of how much the Fed plans to taper and when.
The fall of Afghanistan and the rise of the Taliban may hurt American pride, and possibly damage our credibility among allies and our enemies, but that's about it. Talk of increased terrorist activity as a result is a bit much, and no reason to sell stocks, unless you own an Afghanistan country fund (of which there are none). But again, it was a slow week in the markets.
The ongoing decline in American-held Chinese stocks is a horse of a different color, however. A month ago, I warned readers that Chinese stocks traded in the U.S. and abroad would face a massive re-rating as a result of the actions of the Chinese government. Many Chinese stocks have declined by 50 percent or more since my column.
I have watched as investors bought every dip (just like they have done in the U.S.), thinking they were buying quality stocks at a bargain, only to see prices fall even further. Investors need to understand that the Chinese government is a communist and not a capitalist system. They could care less how much you lose on their way to achieving their political and socialistic goals over the next five years and beyond. Chinese equities may have a dead cat bounce soon, but the risk is still real, and will continue to pressure these stocks.
Another threat I have been taking seriously is the ongoing COVID Delta variant. My concern, aside from the health risk to everyone, is the Delta variant's potential impact on the global economy. We are starting to see additional supply line bottlenecks forming throughout the world, causing a scarcity of parts and products. Consumer sentiment is also retreating. Retail sales, however, still seem to be okay but have cooled somewhat in the last week, according to Bank of America's debt and credit card spending data.
This week, medical experts revealed that the efficacy of the vaccinations we have already received may be becoming less effective in preventing coronavirus infection as time goes by. U.S. health officials on Wednesday announced plans to dispense Covid-19 booster shots to some Americans starting in September 2021 (for those with certain underlying health conditions). Bottom line: we are still at the mercy of this pandemic, and until a large percentage of these anti-science citizens in mostly southern states get with the vaccination program, we will never get out from under.
The Afghanistan mess does muddy the waters somewhat, at least as far as the timing of the debt ceiling debate. Congress still needs to debate and pass the $3.5 trillion budget proposal through the reconciliation process as well.
I have been surprised by how well the markets have been handling all of these challenges. Markets snapped back on Friday somewhat, however, we will need to wait until next week's outcome of the Fed's Jackson Hole Symposium before signaling an all-clear in the short-term.
The small-cap, Russell 2000 Index and the Dow Transportation Index have already declined a good 9 percent over the last few weeks. I suspect that somewhere down the road, the main averages will follow them down but thus far, unlike the Chinese stock market, it has paid to buy every dip. Stay invested.