"They stab it with their steely knives, but they just can't kill the beast."
-Henley, Frey, Felder (Eagles), 1976
Two-Faced
It would be hard to imagine an equity market more divided in performance than what investors and traders traversed last week. In reality, what passed was only the first five trading days of the new year. The reallocation of funds as portfolio managers and the trading volume they brought with them was as decisive and as impactful as anything seen in such a short time in quite a while.
The big picture from above showed a Nasdaq Composite and Nasdaq 100 that being primarily tech focused large-cap indexes, gave up 4.53% and 4.46%, respectively, over just five sessions. Both as these indexes easily surrendered their 50 day SMAs (simple moving averages), which allowed the move lower to exacerbate...
...as risk managers pushed portfolio managers to reduce exposure. This pressure puts the 200 day SMA, which carries even more weight than the 50 day line, in the crosshairs. Friday's action allowed both the Nasdaq Composite and Nasdaq 100 (which includes no financial stocks) to pressure the lower bound of nearly year long trading channels without actually becoming technically oversold.
Just how meaningful was this price action? For the five day period, aggregate trading volume attributable to the S&P 500 (which held its 50 day SMA) landed 1% above the 50 week simple moving average for that index. For the Nasdaq Composite, this trading volume closed the week precisely in line with its 50 week moving average. However, for the Nasdaq 100, aggregate trading volume for the five days totaled the most for any week since September and finished at a 22% premium to the 50 week volume simple moving average for that index.
Baskets
Of course, tech was not the only group to move significantly for the week. From a sector performance perspective, illustrated through the S&P SPDR ETF weekly tables, the flow of capital forced haircuts of between 4.5% and 4.9% on the REITs (XLRE) , Health Care (XLV) and Tech (XLK) , while managers piled into Energy (XLE) , and Financials (XLF) . Those two ETFs gained an incredible 10.5% and 5.4% (in that order) over the five days.
In my opinion, equity markets are being/have been driven in two directions by both the changing Treasury yield curve as well as future expectations for the still evolving trajectory for forward looking monetary policy. This requires investors to split the more "growthy" sectors into more than one slice in order to really see what's going on.
Within Technology, we see that while much air has been let out of the tires, the outflow has not been even. The Dow Jones US Software Index took an incredible beating last week, down 7.9% as former market darlings Datadog (DDOG) , MongoDB (MDB) , and Zscaler (ZS) all gave up between 18% and 20%. Just an aside, Zscaler has been a personal fave as has cybersecurity as an industry subset. I reinitiated Zscaler as a long position late last week. The position is still small at a rough 3/16 of what would be in my opinion a full allocation. I have not yet decided if this will be a trade or an investment. Guess I'll let the market decide that. As I type, that position is up small from my net basis. The Dow Jones US Internet Index, which is part of the Communications Services (XLC) sector, gave up 5.1%, despite the sector's overall performance of -1.6%.
Back to tech... the Philadelphia Semiconductor Index surrendered 3.8% for the week, while the Sarge faves within that group all underperformed the index. Advanced Micro Devices (AMD) , Nvidia (NVDA) , Lam Research (LRCX) , and Marvell Technology (MRVL) all backed up anywhere from between -4.9% to -8.3%. I did trade around these positions as I am not defenseless, but there is no way to sugarcoat what this group did to my focus group overall, which outside of the semis had what would have been a very good week. Readers will recall that my four focus groups for the new year had been semiconductors, big banks, defense contractors and entertainment. Those three groups, plus Ford Motor (F) ,which is not part of this 2022 focus, but a large long position nonetheless are off to rather strong starts.
Blame It on the Fed?
The market was well set up for the tapering. No problem there. Financial markets had come to understand that initial lift-off for the central bank's target for the Fed Funds Rate was moving toward March. What completely surprised financial markets in last Wednesday's publication of the minutes of the last policy meeting was the discussion around the possible race toward "quantitative tightening." Markets were not set up to consider the actual removal of liquidity from the economy, or reduction to the monetary base as soon as perhaps May as there does seem to be some urgency. There is no April meeting, and I really doubt that the FOMC would wrap up "quantitative easing", lift short-term rate targets, and kick-off "quantitative tightening" all in the same month.
Make no mistake... you push up short-term rates, and start drawing on money supply all in the first half of the year, you may arrest inflation. In fact you will arrest inflation if simultaneously, negative pandemic induced kinks in supply chains ease, but understand this: We are in uncharted waters. The Fed has never tried to unwind a nearly $9T balance sheet before. No one in authority now was more than a youngling the last time the Fed had to try to slow consumer level inflation, and both monetary and fiscal lessons learned then, may not apply now. Lastly, the pandemic remains unpredictable. Expect success in controlling inflation to be met with a real struggle to sustain economic growth.
The Folly of Tracking Job Creation
From a macroeconomic perspective, last week was dominated by December's employment related data. Sure, there were signs of what is perceived as a tight labor market as participation and wage growth improved as did the unemployment rate. How many jobs were created in December? Nobody really knows. Certainly not anyone at the Bureau of Labor Statistics.
If one follows the ADP Employment Report, the U.S. economy added 807K private sector jobs in December. If one follows the BLS household survey, in December 651K new folks found jobs. If one follows the BLS establishment survey, there were 199K new hires for the month, which would be really weak, and that weakness was found in private sector hires. This puts the ADP Report and BLS establishment survey published data for December in direct conflict with one another.
Fact is, if the Bureau of Labor Statistics is this poor at collecting and releasing employment related information, then how on earth can we trust anything that the agency publishes? Oh, and don't forget... every number is also salted and peppered to taste. We know people did find work. The disparity between the establishment and household surveys, which has been large for two months now, suggests that the "off the books" labor market is probably quite active.
The inability to tax these earnings for the U.S. Treasury is one large catalyst toward leaning into cooperating with the Federal Reserve Bank on the creation of a true crypto-U.S. dollar that could replace cash. Today or tomorrow? No. In our lifetimes? How old are you? Definite maybe. By the way, Bitcoin gave up almost 11% last week.
The Week Ahead
Once again, Friday will be the key to the week at hand. On the way, we'll run through December data for consumer and producer prices, which certainly will move markets. No one wants to see a seven handle for year over year headline level CPI, which is likely this Wednesday. Friday brings about not just data for December retail sales and industrial production, but the start of fourth quarter earnings season as the big banks start to report.
I am strongly considering taking some profits across that space ahead of the digits as these banks have made a habit of rising into earnings and then struggling for at least two weeks or so. No denying that banks are heavily reliant upon traditional banking as a revenue driver have benefited of late. Wells Fargo (WFC) and Bank of America (BAC) have been leaders.
Expectations, according to FactSet are for S&P 500 year over year earnings growth of 21.7% on revenue growth of 12.9%. This will be a deceleration from Q3 earnings growth of 39.8% on revenue growth of 17.8%. This will also likely slow full year earnings growth to something like 45.2% on full year revenue growth of 15.9%. Projections for calendar year 2022 are for earning growth of 9.4% on revenue growth of 7.6%, and a lot of this work was done ahead of a full understanding of the Fed's preference for moving on the balance sheet possibly in the first half of the year, ahead of the midterm elections. We'll see.
The S&P 500 closed on Friday trading at 21.25 times 12 months worth of forward looking earnings while yielding 1.29%. The Nasdaq 100, even amid the carnage, still trades at just less than 28 times forward looking earnings while yielding 0.64%.
Economics (All Times Eastern)
10:00 - Wholesale Inventories (Nov): Expecting 1.2% m/m, Last 2.5% m/m.
The Fed (All Times Eastern)
12:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (CMC) (1.19), (TLRY) (-.07)
(AMD, NVDA, MRVL, and F are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)
