Columbus Day! The “Dead Zone” Ending and an Indicator Run-Down
Overview
Equity markets rallied last week, as debt ceiling concerns were relieved, and economic data was generally better than expected. The S&P 500 rose 0.8% on the week, with energy and financial stocks leading the advance as long term rates rose mildly. Both sectors have broken out to all-time highs. Defensive stocks lagged, along with technology stocks, as they tend to do when longer-term rates rise.
With the general rise in 10-year Treasury yields, value factor sectors of the markets are now rallying relative to growth biased factors, after the latter staged a strong comeback through the summer.
Regaining Footing
Against on-going (and, so far, wrong) calls by some strategists for a 10-20% price correction, the markets regained its footing last week. Despite an extensive list of worries put forth by TV commentators that would seemingly weigh on equity prices, the S&P 500 now sits a little more than 3% below its early-September high, after dipping about 6% from its all time high. Chris and James wrote on September 20th, 2021 in the market update for the week:
we are still in the “deadzone” of the 3rd quarter with higher trending volatility, with a September dip underway. We currently view these dips as having approximate ranges of 3~6%.
Breadth and Momentum
Taking a look at several technical factors, the percentage of stocks above their 50-day moving average has nearly doubled from two weeks ago, and the percentage of stocks above their 200 day moving average has risen to over 66%, both meaningful jumps. Our view is that while technical tests do remain, breadth and momentum have both likely bottomed for October. If there is any further weakness, it is likely to be short-lived, as the market slowly grinds higher.
Headline Risk and Sentiment
There a currently still a number of headline risks facing the market: concerns over a looming Fed taper, concern over China’s real estate market and financial-sector repercussions, inflation and stagflation worries, and oil prices pushing $80 last week. Conversely, this seems bullish to us. Why? One, because this seems suspiciously like a classic “wall of worry” set-up to take the broader index higher, and two, because things that historically lead stock prices have turned up, but those indicators are getting next to no press. Things like lumber and copper prices have historically led the S&P500 price upward by a few months, and both of them have turned up.
In addition, investor sentiment has turned as negative as it has been since April 2020. According to the most recent Investor’s Intelligence Survey, 60% of respondents are now bearish or correction minded, while only 40% are bullish. Consider that for a moment. Does it really make sense for the level of negativity now to be at the same levels as in the depths of the Corona panic? Much more likely is that investor sentiment has swung to an extreme, and when investors are extreme (either negatively or positively), it is time to consider the the other side.
Currency Markets and Bitcoin
Looking into the currency markets, the Euro/Yen currency cross, which holds a relatively high degree of correlation with global stock markets historically, has turned up. This means that the value of the Japanese yen is weakening against the Euro. The Japanese yen (along with the U.S. dollar) is typically viewed as a “safe-haven” currency, and yen-selling can indicate a “risk on” attitude, and more money flowing into stock markets.
Bitcoin is now above $55k and historically its upward moves have lead higher moves in the S&P 500.
Economic Surprise Index and the Federal Reserve
The economic surprise index, while still below zero, has a positive upward slope to it. And of course, and most importantly in the current cycle, QE by the Federal Reserve is still on-going and the Fed’s balance sheet rose at a pace of 20% last week.
Our view remains the same for the rest of the year (check out our 2nd half market outlook or any of our recent podcasts. You may also consider reviewing our Investor Mindset podcast, which is aimed directly at helping investors navigate the markets ), and as always, we encourage our clients and investors to not be distracted by short-term noise, and stay focused on your plan.
Stock Talk Podcast (Weekly Market News and Opinion from Oak Harvest):
https://oakharvestfg.com/stock-talk-podcast/
The Investor Mindset Podcast (Introduction to Critical Concepts for Investors):
https://oakharvestfg.com/investor-mindset/
“I Don’t Want to Invest Now Because…”
https://oakharvestfg.com/i-dont-want-to-invest-now-because/
Interesting News and Reading:
https://www.politico.com/news/2021/10/10/james-carville-terry-mcauliffe-virginia-ads-515737
https://www.foxnews.com/world/missing-man-joined-search-party-for-himself
This content contains general information and express the views of Oak Harvest Investment Services. All data, articles, and information cited are believed to be reliable at the time of creation; however, Oak Harvest does not warrant any information contained herein to be correct, complete, accurate or timely.
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