The Week On Wall Street: Reality

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The Week On Wall Street: Reality

seekingalpha2023-08-19

Equities have rallied from bear market lows, but longer-term returns are still flat to down.Pay attention to companies raising guidance. In a questionable economy, they are telling you their business ...

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In a questionable economy, they are telling you their business is strong.Inflation remains \"sticky,\" interest rates are not yet \"restrictive\" and that keeps the Fed engaged.kasto80/iStock via Getty Images \"More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.\" - Woody Allen For most investors, it's all about the longer-term perspective of equity market performance. When we follow the day-to-day, week-to-week market action it's easy for investors to get unanchored from reality. We have been surrounded by positive market action lately, but just a few short months ago the selling was intense. As shown in the charts below, the annualized returns of the S&P 500 over the last one, five, and ten years are only modestly above their long-term averages while two-year and twenty-year returns are below their historical average. S&P Returns (www.bespokepremium.com) This doesn't look like a stock market that's unanchored from reality. So for all of the fanfare and a wild ride recently, equities haven't done much of anything and are in line with past results. Now there is a different scene on the fixed income markets which are still mired in a BEAR market trend. To say the performance in the US Treasury market has been poor recently would be an understatement. Over the last one, two, five, ten, and twenty-year periods, the performance of long-term US Treasuries as tracked by the BofA/Merrill 10+ Year Treasury Index ranks right near the weakest ever. Fixed Income Returns (www.bespokepremium.com) It sounds hard to imagine, but if you've owned a 10-year US Treasury for the last five years, even after accounting for coupon payments, you've lost money. The key risk for bond investors in a rising-rate environment is inflation, and we've been in that backdrop. Many analysts are suggesting both of these trends are near an end. However, bonds may be signaling the \"higher for longer\" interest rate scene along with inflation that hangs around for a while longer. In essence, we find ourselves in the same backdrop that started the BEAR market in bonds. The economy may finally lose some momentum later this year as student loan debt repayment returns in October and as the recent sharp jump in interest rates should provide at least some further growth moderation later in the fourth quarter and the early part of 2024. Slower growth ahead may be in the cards, but will it be slow enough to keep the inflation rate on a downward trajectory? Energy costs are moving higher and if that trend escalates CORE inflation stays embedded above the Fed's target. Eventually, the Bond market will turn, but similar to equities, getting involved before the turn can lead to a lot of anxiety. The MONTHLY chart of the Long Term Treasury ETF (TLT) shows what I am referring to. Investors that believed Fixed income was a great buy when they rallied back in December '21 have suffered a lot of financial pain. TLT -Long Treasury ETF (www.tc2000.com) Bear markets generally indicate low investor confidence and a sluggish economy. In this case, I don't believe the bond market is unanchored from reality. The MACRO fundamental picture remains very questionable, and that can eventually affect the next topic. The \"Macro\" Technical Scene Keeping with the theme that we've had a lot of action but little to show for it, turn your attention to the analysis below. With a rally of over 28% from its bear market lows in late 2022, equities have come a long way in a short period, but if you widen out your view from the extreme lows of last year and look on a calendar basis, the gains don't look quite as impressive. In the case of the S&P 500, over the last 12 months, it's still up over 11%, but on a two-year basis, performance looks much less attractive at just 4.4%-another example of an equity market that has not become unanchored from reality. S&P 2yr. performance (www.bespokepremium.com) However, it's also a sign that the S&P has done nothing since 2021, and that \"stretches\" the notion that this remains a long-term secular BULL market. (more on that later) The Nasdaq is a similar picture. It has rallied more than 40% from its bear market lows and is up nearly 16% over the last year. However, it is down 2.2% over the last two years. NASDAQ 2 yr. performance (www.bespikepremium.com) Lastly, the Russell 2000. It's been a laggard off the lows and over the last year as well with gains of 21.4% and 6.3%, respectively. The two-year performance looks downright depressing with a decline of 10%. Russell 2000 (www.bespokepremium.com) There is a group of Investors and analysts that are unanchored from reality. When you have big gains in 6 months, yet intermediate/longer-term returns are still flat to down, Savvy Investors are asking \"Where is the \"Growth?\" The growth profile (Or lack of it) has been the topic of many conversations in these missives. There is plenty of evidence that now shows questioning \"policy\" was the correct \"call\". I've shared the policy backdrop that was in place during some of the best years for stocks and demonstrated that the present backdrop is the complete opposite. It's abundantly clear, the stock market agrees. The \"returns\" in equities recently have been abysmal. That gets me to the point of this exercise; Is This The Continuation Of A Secular BULL Market And The Onset Of Another Leg Higher? I recently discussed that question and the entire MACRO scene with members of my service. That article does a deep dive into what comes next for the markets. In the weeks to come I will introduce a slimmed-down \"BASIC- LOW COST\" version of my service opening up my views to more investors. A no-holds-barred uncensored view of the markets. These weekly updates will then serve to introduce new followers to that service, in what will be the \"first step\" in a worthwhile investing experience for investors. The Week On Wall Street The trading week started with the S&P sitting just above a key short-term support level. Investors wondered if a bounce or a break below would give them a heads-up on where the market was headed. On Monday investors got a fresh start on the week as the S&P 500 was able to bounce off of support with a modest rally of 0.58% to start the week. Turnaround Tuesday arrives and it wasn't long before market participants figured out that Monday's action was a head fake. An across-the-board sell-off took every Index and Sector down on the day. Wednesday started with a quiet opening after Tuesday's selloff, but as the day went on the S&P kept probing to find a bottom. During that process, every rally attempt was sold. That's typical action when the mood turns sour. The S&P finished the day at a new closing low for this mini pullback. It was the same story for the other major indices and an across-the-board selloff in the sectors for the second day in a row. The only difference, Utilities (XLU) posted a gain. There was no mood change as the week ended. Both Thursday and Friday were weak again. For the week the S&P gave back 2.5% of its yearly gain. The index has now pulled back 4% from its closing high on July 27th. The NASDAQ, NASDAQ 100, S&P 500, and Russell 2000 have now logged three consecutive weeks of losses. The Economy Conference Board data on leading indicators data declined for a 16th straight month in the most recent sign that traditional metrics which tend to show up before recessions say we are headed for a broad retreat in economic activity. As shown in the chart below, leading indicators continue to fall at a pace that has only ever been seen during recessions. LEI (www.conference-board.org/topics/us-leading-indicators) The streak of monthly declines that leading indicators are currently working on is the third-longest on record, surpassed only by the mid-1970s recession and the global financial crisis. LEI Declines (www.bespokepremium.com) The further decline in leading indicators is especially notable given the large increase in stock prices and their positive contribution over the last two months. Rules are meant to be broken, and that's what it will require for a recession to be avoided, and why I have a problem with the \"Soft Landing\" views. Manufacturing remains weak - Retail Sales stay resilient The Empire State index plunged to a 3-month low of -19.0 in August from 1.1 leaving the index well below the 1-year high of 10.8 in April. NY Fed (www.newyorkfed.org) . The components declined as well, and the ISM-adjusted Empire State fell to a 3-month low of 45.4 from 50.2, versus a 3-year low of 43.4 in May. It's been a while since we've seen a positive report in this sector, and this week we received two. The Philly Fed index surged to a 16-month high of 12.0 in August from -13.5 leaving the first positive reading in a year. Analysts saw a comparable ISM-adjusted Philly Fed rise to a 1-year high of 50.5 from 45.6, leaving the third reading above fifty for the 1 year. Philly Fed (www.philadelphiafed.org) Today's big Philly Fed gain accompanies a similarly big Empire State decline to leave a mix that is consistent with economist assumptions that the full set of headline and component sentiment measures will oscillate throughout 2023 around slightly contractionary levels. Industrial production surged a hefty 1.0% in July, double expectations. It follows declines of 0.8% in June and 0.4% in May. Manufacturing bounced 0.5% in July, erasing the -0.5% June slide. Consumer Retail sales beat assumptions with big July gains of 0.7% for the headline and 1.0% for the ex-auto measure after upward revisions, leaving a solid \"real\" consumption path into Q3. Retail Sales (www.tradingeconomics.com) Strength partly reflected a 1.9% pop in nonstore sales due to Amazon Prime Day. Housing NAHB housing market index dropped 6 points to 50 in August, missing forecasts, after rising 1 tick to 56 in July. This breaks a string of monthly increases since January and is the lowest since May's 50. The weakness was broad-based. The present single-family sales index slumped to 57 from 62. The future sales index dropped to 55 from 59. NAHB Index (www.nahb.org) The report noted rising mortgage rates and high construction costs due to a lack of workers, a lack of buildable land, and shortages of distribution transformers were putting a \"chill\" on builder sentiment. Housing affordability is an ongoing challenge while demand for new construction remains supported by a lack of existing home supply as homeowners are staying put as they are locked in by low mortgage rates. The Housing Starts report revealed a modest upside surprise for starts, but small downside surprises for permits, completions, and starts under construction that trimmed prospects overall. Analysts saw downside surprises for most components in June, but widespread upside surprises in May. Housing Starts (www.census.gov) Housing starts bounced 3.9% to a 1.45 million pace after -12k in revisions, while building permits rose 0.1% to a 1.44 million pace. The Global Scene CHINA Retail sales grew 2.5% year-on-year in July, down from 3.1% in June, falling short of analyst expectations. The NBS said industrial production grew 3.7% in July from a year ago, down from 4.4% in June. The recent data suggests that China may struggle to achieve a five percent growth target set for the year. With their economy sputtering, The People's Bank of China lowered the rate on its one-year loans - or medium-term lending facility - by 15 basis points to 2.5% on Tuesday, the second reduction since June. The FOMC Minutes \"Most participants\" continued to see \"significant upside risks to inflation, which could require further tightening.\" That aligns with my view that the rate hiking cycle is not over. While that's on the hawkish side, there were some offsetting caveats.  \"Some\" still saw continued downside risks to the economy and upside risks to the unemployment rate. Additionally, a \"number of participants\" thought that with policy now in \"restrictive territory,\" risks to achieving the 2% goal had become more \"two-sided\" and it was \"important\" that the Committee's decisions balance the risk of an inadvertent overtightening against the cost of an insufficient tightening.\" \"A couple\" of participants favored keeping rates unchanged or could have supported such a proposal. There was still a high degree of uncertainty regarding the cumulative effects of past tightening. And with that uncertainty over the outlook it was reiterated that \"policy decisions at future meetings should depend on the totality of the incoming information.\"  While many were calling for rate cuts in the latter half of this year, I remained steadfast with a forecast that there would be no rate cuts this year. Now we hear the \"noise\" exclaiming we will see rate cuts in mid-2024. For the record, based on the data I'm looking at, the probability for more increases remains HIGH, and rates will stay elevated for quite a while. I am not in the camp that is looking for rate cuts anytime soon and that includes the first half of next year. At the moment, I don't see any Fed PIVOT lowering rates in 2024. Only a severe drop in the economy between now and mid-2024 would prompt the Fed to lower rates. Given the latest robust GDP forecast from Atlanta GDP Now, that is a LOW probability. Over two months ago I introduced the notion that Fed Funds were not yet restrictive. This new data is confirming that. It will be time to reassess the rate outlook for next year as we get closer to the end of '23. In the interim, nothing has changed in my higher-for-longer view. Earnings During Earnings season, I do a deep dive into the reports each week concentrating on the companies that are beating estimates and raising guidance. (Triple Play reports). They are sending a message to investors that their business is good and is getting better. Food For Thought The MACRO scene continues to be challenged. It's no secret that the major auto companies are losing money producing EVs, and now we learn that other \"green initiatives\" are money pits. Wind energy is the next debacle for companies and economies that have forged ahead using flawed \"mandates\" to implement a strategy. Siemens recently announced that its wind turbine business will lose $5 Billion. The Wall Street Journal:  The wind business, viewed by governments as key to meeting climate targets and boosting electricity supplies, is facing a dangerous market squall. After months of warnings about soaring costs and logistical hiccups, developers and would-be buyers of wind power are scrapping contracts, putting off projects, and postponing investment decisions. The setbacks are piling up for both onshore and offshore projects, but the latter's problems are more acute. In recent weeks, at least 10 offshore projects totaling around $33 billion in planned spending have been delayed or otherwise hit the doldrums across the U.S. and Europe.\"  While debt burdens mount the US is planning a $3 trillion spending spree on these green energy initiatives that are now going through the growing pains for an industry that has little to show for the costs associated with it. Perhaps the pushback will continue. A backlash that will stall and delay these flawed projects for years to save the country from a self-inflicted wound that will severely dampen economic growth. It will become obvious that no company can afford to keep workers in a unit or division that is losing money. Governments across the world will be hard-pressed to live up to the promise of all of the jobs that were claimed to be part of this initiative. The threats to the economy are real as the missteps in the flawed transition to \"electric\" continue. Millions turn into billions and at the end of the day, Trillions will be earmarked for this transition. However, the continued failures represent more money that is being flushed down the drain. Sadly, this is just the beginning. NO economy can withstand the severe negative impact that comes with the unconscionable decision to invest with no return. The Daily Chart Of The S&P 500 (SPY)  The pullback continued. Since I posted the possibility that July 27th was an intermediate top, the S&P 500 has declined in 11 out of the last 15 trading sessions. S&P 500 (www.tc2000.com) There are different levels of support just ahead, BUT the DAILY chart of the S&P sure gives an appearance that it could be heading back to the 4200 breakout level. Friday's reversal might be the first sign the equity market has found its footing. If more weakness occurs, it starts to question the viability of this perceived new BULL market. If that is the case, it's going to be a very tricky couple of months for investors as they will have to tiptoe through the landmines. Investment Backdrop After surging for most of the spring and early summer, global stock markets have taken a breather so far this month. The action has been typical from a seasonal perspective since August has historically been a time of year when the tape is weak, and the action is heavy. Technically, it's now the largest dip in the S&P 500 since early May, yet that has only produced around a 5% decline. At this point, it looks more like the quick retracement we got in mid-June rather than the beginning of something severe. That can change, of course, but we are not yet seeing the heavy distribution days that typically mark the wide-scale selling of stocks. Instead, it looks as if investors are once again searching for the spot where they can buy the dip rather than thinking about selling. That fits with my idea that the rally this year has been strong and that strength will carry over and keep pullbacks in check. The market can do anything, which is why it's important to monitor how these micro moves shake out. You don't have to understand all of that technical jargon. All you need to know is where the resistance and support lines are, and they are highlighted and noted in the charts that I review and present every day. We find ourselves once again back in a bifurcated market. Last year it was Energy, a little Healthcare, and not much else. Up until July this year, technology has been the place to be. Now we have switched back to Energy, Industrials, with a sprinkling of Financials. However, that changed last week to just Energy (XLE), as the selling took every other sector down last week. While that was happening the \"leaders\" which I warned about entering the quarter are rolling over and taking their lumps. Small Caps (IWM) I've highlighted the numerous failures to break the downtrend the Russell 2000 has racked up since the all-time high in November '21. It's been three weeks since the last failure, and there is nothing BULLISH in the chart of the small caps. The index took the elevator down and finds itself right back at support levels. The BULLS now 'hope' support comes in to avoid a move to the March lows or another 7% from current levels. I admit that it is somewhat surprising that this \"laggard\" didn't step up and start to stabilize and move higher in Q3. The fact that it hasn't done so is sending what may be an ominous signal for the economy and the outlook for stocks in general. Sectors Energy Energy (XLE) remains the place to be as the \"'value\" trade picks up momentum. The rally off the June 1st lows is now ~16%, and other than quick dips, the sector looks to have enough momentum to challenge the November '22 highs. What has been established after the big move in '22, is a large trading range. We've seen the sector defend the lower end of that range and stay in a BULL trend. If Energy is going to take another leg higher, then it will have to break out above the old highs. The forecasts are for WTI to remain resilient with a lean to the upside, and if that holds then the probabilities for new highs in the group increase dramatically. DIPS in the group are buying opportunities. Natural Gas Easy come, easy go. What looked like a potential breakout turned out to be just another false alarm. The Nat Gas ETF (UNG) finds itself right back at support. I expect the roller coaster ride to continue for now and plan to HOLD my position. One positive, instead of the ETF trading range below $7, the ETF is now trading in the $7-$7.50 range with a slight lean higher. Financials The \"Financials\" (XLF) got hit with their credit rating concerns when Moody's announced it was downgrading 10 small-to-midsize banks and warned it could next target the larger institutions. The announcement tossed plenty of cold water on a trade that was looking to gain momentum to the upside It seemed the damage was fairly well contained with the XLF trading sideways just below initial support before more selling showed up this week. The ETF is teetering at a critical support level, leaving investors to wonder if this group will toss in the towel and add some doubt to the BULL market case. Commodities Gold (GLD), Silver (SLV), and Uranium (URA) The GOLD ETF was in a nice trading range, but the selloff caught up to this group as well. GLD also finds itself at critical support. SILVER has been the weakest of the precious metals group lately and is attempting to make this $20.75- $21 level support. Coincidentally that is where the 50- WEEK moving average resides. I spotted what I believe is a 'reversal' and added the trading position back into my portfolio. A bounce from these levels will give me more confidence that this can turn out to be another successful trade in SLV this year. Coming into this week, Uranium had the best DAILY chart in the metals I'm currently involved with. A slow grind higher has pushed the URA past the closing highs of February '23 and this past June. However, momentum has waned and instead of a move to $24, there is an equal chance the ETF can drop to the $21 level. I continue to HOLD both my trading and long-term positions. Healthcare Healthcare (XLV) was one of the favored sectors that I believed would gain some traction in Q3. The 3% rally since July 1 has at the very least kept the sector stable, but I frankly was expecting a lot more. Most, if not all of this mini rally can be attributed to a couple of big pharma stocks that are on fire due to their Obesity drugs. Perhaps the group will gain more traction as \"value\" remain in favor now. The chart is basically \"neutral\" Biotech Interest rates moving higher are a drag on a capital-intensive sector like Biotech. While the general market continued lower, the Biotech ETF (XBI) seemed to hit a support level, but when interest rates spike even higher during the week, the sector completely broke down. Technology (QQQ) No surprise that the NASDAQ which led on the way up, is now the leader on the way down. At the start of Q3 - the message was to refrain from chasing the mega-cap names. Now when I review the charts of AAPL, META, MSFT, NFLX, TSLA, etc. it's easy to see they have all rolled over. The short-term trends have been broken. Support can come in at any time, BUT there is plenty of room for these names to fall before solid support shows up. Remember, when the short-term trend is disturbed, it takes time to repair, and that infers 'sideways\" action will more than likely come first. Semiconductors Sub-Sector In the last couple of weeks, the discussion on the Semiconductor ETF (SOXX) ) has centered around whether this last breakout at $505 was genuine. Now we are getting signs that it may have been a false move. Instead of holding onto the breakout level, the ETF is now looking like it's going to make a round-trip move back to the start of the AI mania scene in May. International Markets I recently took a look at what might be opportunities in the global arena taking a deep dive into China, India, and Brazil. Global Investing takes on additional risks. Primarily because it is very difficult to stay up to date with the fundamentals of these governments and markets. However, there is a case to be made for some dollars to be allocated to International investments. Portfolios that wish to be diversified across the global spectrum should take a look at such alternatives. That detailed report is available to all members of my service. Final Thoughts Since the early part of 2022, unless an investor has the greatest timing model to work with, it has been one difficult market to analyze and forecast. A great example of why it's best to stay diversified. At times we can overweight a favored sector but that also requires \"timing\" and it's not easy to time the stock market. The reason why I prefer to follow and stay with primary trends. What I'm referring to are the BULL/BEAR trends that can be identified with individual stocks, sectors, and indices. If a stock/sector is in a BULL trend we can take profits along the way BUT we should STAY involved in that trend. This was the reason I didn't want to leave the Energy sector this year when many market pundits gave up on the group. The Energy sector NEVER left the BULL trend. In today's investment landscape, it's very easy to jump from group to group to try and catch what is HOT at the moment. Sounds easy but it is difficult to pull off. An investor will wind up churning their portfolios and at the end of the day might wind up worse off than the investors that sat through a dip in an established long-term BULL trend. When the technology sector along with the BIG 7 mega-cap stocks all turned around this year and entered new BULL market uptrends, it seemed foolish to not join that crowd. However, I suggested patience and avoided the chase, leaving the door open to a group that they would eventually offer an opportunity to be bought when weakness hits and support levels hold. That strategy didn't look so good until the calendar switched to August. So now instead of wondering what to do with all of those technology stocks that are in decline, an investor can sit back and pick off their favorites after they stabilize at good support levels. PATIENCE pays off. The Q3 game plan called for the leader to become laggards and the laggards to find renewed interest. Except for the small caps that has played out fairly well. At the moment the BIG 7, along with the semiconductor group still looks vulnerable. I continue to exercise patience, keep an OPEN mind, employ discipline, and suppress emotions. If you have a plan you are FAR ahead of the average investor out there. 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!","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"hasMoreComments":false,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}