Ever gone to the beach on a nice day? Gone swimming. No problem. Sun. Fun. Suddenly the water changes. You are being pulled out a little bit further than you are comfortable with. Then a lot further. Swimming against the tide will only exhaust the muscles of your arms and shoulders. You are going to have to wait. Wait until the water sets you free. That's when the real work begins. Hopefully, this was a relatively minor current and you still have your bearings. If you can not swim toward the beach, swim sideways. That's what our marketplace was trying to do.
Over the final 17 or 18 minutes of the Tuesday regular session, you may have experienced something like this, even if you live in a landlocked state, or nation. That sucking sound was the flow of capital fleeing risk assets as the closing bell approached. All of our most focused upon equity indices not only closed lower for the day, but closed at or close to the low of the day, ultimately sending equity index futures lower overnight as well. Silver lining? We'll use the Nasdaq Composite for example as this has been arguably (along with the Nasdaq 100) our most vulnerable large cap index.
The Nasdaq Composite had posted two "Inside Days" over the three sessions coming into Tuesday. This suggests both continuance as well as reduced volatility. Indeed, that closing bell rang just in time on Tuesday afternoon, preserving a fourth consecutively higher low of the day for this index. As for measure of fear, the VIX did climb off of the floor as equities sold off late, but this late plunge was not reflected in any of our CBOE Put/Call ratios. As for reduced volatility, that ship may have sailed.
What would cause such a mild-mannered session to grow much uglier, so quickly? There really were several visible directions toward which investors could point, or "cast blame", and a lot of it had to do with either the threat of inflation be it due to either an overheating economy, rising input costs or questionable policy.
First up, and this happened early in the day, so not alone a catalyst, but certainly part of the mosaic that got us where we went... were the data for April Housing Starts and Building Permits released by the Census Bureau. Actual Starts contracted 9.5%, while Permits increased, suggesting that construction is being slowed not by any lack of demand (backlogs increased 5%), but by higher material costs and slowdowns in supply chains. Then there was our esteemed Secretary of the Treasury. Secretary Janet Yellen spoke at a U.S. Chamber of Commerce event on Tuesday, and encouraged business leaders to "embrace" higher corporate taxes. True story.
Do you know any business leaders? I do. I have been a fly on their walls for decades. None of them are going to like the idea of higher corporate taxes. None of them. Yellen said: "We are confident that the investments and tax proposals in the jobs plan, taken as a package, will enhance the net profitability of our corporations and improve their global competitiveness." She was not done. Yellen added: "We believe the corporate sector can contribute to this effort by bearing its fair share. At the same time, we want to eliminate incentives that reward corporations for moving their operations overseas and shifting profits to low-tax countries."
Right or wrong is not the argument here. The point is that regardless of what might be said publicly, there is not a leader anywhere in corporate America that is going to hear those words and get fired up about his or her business future. No, no... don't go. There's still more.
There's Still More?
That's right. Janet Yellen may have been doing her best to sell this administration's policy objectives, that is her job. She is the economic spearhead of the executive branch of government. Shots were fired at the market from other, perhaps less expected directions as well.
Abby Joseph Cohen, senior investment strategist at Goldman Sachs (GS) , appeared on Bloomberg Television. Now Cohen has gotten a few things right over the years, so Wall Street pipes down and listens when she speaks (or writes). Cohen had this to say... "The fact that inflation and interest rates are on the way up, I think we have to recognize that returns overall in the U.S. equity market from this point will be very modest and perhaps volatile compared to what we have enjoyed over the last 12 to 15 months." Cohen added: "There is less emphasis on momentum and there's more emphasis on relative valuation and which of the companies that have the strongest cash flow growth and are investing that cash flow growth."
Was it Cohen's expectation for muted gains across U.S. equity markets? Was it her acknowledgement that these markets have rotated toward fundamentally sound stocks that actually turn a profit? Or was it her blunt statement on inflation and interest rates, as if forward looking directions were already fact, whether or not those sitting at the table of the FOMC choose to see? Is Cohen ever wrong? Sure she is. So am I. I still would rather bet against you than her.
So, the market sold off late on Tuesday because of April Housing Starts, and what was said publicly by Secretary Yellen, and Abby Joseph Cohen? Yes, but that's not all.
That's Not All?
Ever hear of a fellow named Larry Summers? You know of him. Former Treasury Secretary of the United States, former Chief Economist at the World Bank, former (very controversial) President of Harvard University. Likes to be seen and heard. Well, as circumstances would have it, Summers served in the Department of the Treasury and as its leader during the last ever fiscally responsible administration and that is where his viewpoints seem to come from.
Summers spoke at a conference on Tuesday hosted by the Federal Reserve Bank of Atlanta. Now, to be clear... Summers is a Democrat, but has dished out criticism often and fairly equally over the years. He has already been quite openly critical of the Biden administration's intent to further extend already "beyond comprehensible levels of" (my words) deficit spending. Now, it was the Fed's turn.
Summers said: "Policy projections suggesting that rates may not be raised for... close to three years are creating a dangerous complacency." He then added... "When, as I think is quite likely, there is a strong need to adjust policy, those adjustments will come as a surprise. That jolt would do real damage to financial stability, and may do real damage to the economy."
After explaining that the primary risks of this current economic condition are asset price inflation, excessive leverage and general economic overheating, Summers added some thoughts on policy placement. "It is not a reasonable place for policy to be in a world where the budget has been expanded by 15% by stimulative policy... I would rather see us go back to a Fed that is concerned about pre-empting inflation, rather than a Fed (that) is concerned about pre-empting fears that it will be concerned about inflation."
Did heck just freeze over? Did pigs just learn to fly? Or did your old buddy Sarge and former SecTreas Larry Summers just agree on something?
Probably due to the fact that the selling pressure really heated up with just about 18 minutes to go, but breadth on Tuesday was not really that awful. Despite the fact that our equity index landscape turned into a sea of red, and despite the fact that the four defensive sectors placed in positions one through four on the daily performance tables with sectors considered to be cyclicals claiming places eight through 11.
Losers edged winners at the NYSE by a rough 8 to 7, while winners beat losers at the Nasdaq by an even narrower margin. Declining volume bested advancing volume by more than 4 to 3 at the NYSE while advancing volume actually claimed an almost 2 to 1 victory up at Times Square. Aggregate Trading volume increased significantly at both exchanges making the day's moves more meaningful than anything seen since late last week.
Look Out Below
First it was Tesla (TSLA) CEO Elon Musk. Now, it's a joint statement released by three Chinese banking/financial agencies. Beijing's National Internet Finance Association, The China Banking Association, and The Payment and Clearing Association of China, jointly stated "Recently, cryptocurrency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people's property and disrupting the normal economic and financial order."
Reuters is reporting that in addition to that statement, the above mentioned agencies have agreed to ban financial institutions from facilitating cryptocurrency transactions. In addition, the People's Bank of China (China's central bank) has reiterated that digital tokens cannot be used as a form of payment. I have probably written a thousand times that governments and government agencies would start cracking down on cryptocurrencies even as these cryptos rallied to dizzying heights. I thought that leadership would come from the U.S. and Europe on this, so I was not completely right. Now that Beijing has made a forceful statement, and Bitcoin trades with a $39K handle, that crypto in particular on Wednesday morning is pressuring its own 200 day SMA at $39,807. Even close to 40% below it's recent highs, should that 200 day line fail to hold, there is no fundamental reason to buy the dip.
Our favorite 12th century mathematician says that if the 200 day SMA breaks that there could be support at either $36K or $30K, but he asked me to make sure that you understand that his model was designed as a means to predict seafood prices. He told me flat out that he has never heard of Bitcoin.
Yes, I saw the 4.8% run that CVS Health (CVS) made on Tuesday based on Shawn Guertin, former Aetna CFO "returning" to the firm in that same position. Yes, I am still a CVS bull, but hold on a second.
Remember this chart? Okay, the "ascending triangle" breakout as April turned into May has worked out like a charm. That said, the shares are overbought and Tuesday's action left a gap to fill. Yes, I also saw five star analyst Justin Lake increase his price target from $82 to $93 on the news. Well, lah-di-dah. Our price target, you will recall, had already been $92 and that is where we'll stand.
That said, today's expected dip is trade-able, but for me, not a time to add to my core investment. On that, I will wait. Wait for $92, and then I will start to unwind the position. Why? Because that has been the plan all along, and when it comes to money, our money... we are stone cold mercenaries in our behavior. That's why.
Economics (All Times Eastern)
10:30 - Oil Inventories (Weekly): Last -427K.
10:30 - Gasoline Stocks (Weekly): Last +378K.
13:00 - Twenty Year Bond Auction: $27B.
The Fed (All Times Eastern)
10:00 - Speaker: St. Louis Fed Pres. James Bullard.
11:35 - Speaker: Atlanta Fed Pres. Raphael Bostic.
14:00 - FOMC Minutes.
Today's Earnings Highlights (Consensus EPS Expectations)