Stocks gave up a rough 1% on Tuesday. In isolation, certainly something most investors can withstand. That it came in addition to the half of one percent or so lost on Monday and the three to four percent surrendered on Friday speaks volumes I think. Markets bottomed in mid-June, and within days... confirmed technically that a tradable bottom had been placed. We were free to trade and invest like the "good old" days for most of the summer. It gnawed at you the whole time though.
Was that more than a tradeable bottom? Several equity market indexes gained more than 20% trough to peak, placing parts of the market in what the nerds call a "textbook" bull market. Then it happened. The first truly meaningful test.
On August 16th, just about two months after the S&P 500 touched bottom, the S&P 500 just barely kissed its 200 day SMA. Take and hold that single line, more than all others, and Wall Street officially joins the party. There are two moving averages that provoke massed changes in allocation of professional capital more than all the others. The already mentioned 200 day SMA, and its shorter-term cousin, the 50 day SMA.
There are many simple and exponential moving averages that matter or can matter for indexes and individuals funds and stocks at given times. These two lines, the 200 and the 50, always matter. Why? Two reasons. One, these are the two lines where risk managers increase attention paid to what portfolio managers are actually doing.
Now, two... while there are many algorithms and different kinds of algorithms that impact price discovery in a number of different ways, and those ways as well as the algorithms themselves only keep getting more complex in their efforts to evade detection and/or reverse engineering, all algorithms designed to trade themselves or simply facilitate order execution, see and react to these two lines, including the simplest algos among them.
There are simply more eyeballs on these two moving averages than there are on all others.
Readers will see that the S&P 500, on Tuesday went right through the 50 day SMA like a hot knife through butter. There was very little, if any intraday support at that spot. Now, for the bulls, all is not lost, though the situation may appear to be rather bleak. The index has never really "lost" a level until it loses contact with that level on the daily chart. Clearly, as the level cracked only yesterday, that has not happened just yet. It will if the S&P 500 posts a fourth consecutive "down" session later today.
One might also see that the S&P 500 bottomed for the day on Tuesday at nearly a precise 50% retracement of the mid-June through mid-August rally. Why is that important? Remember, 50% retracements are not true Fibonacci levels, so we can not go to our favorite twelfth century Italian mathematician for help here. What that level is, quite bluntly, is the half way back point, and that actually is a "thing." It's a thing that could be good or bad. It's a spot typically, where momentum can either turn or accelerate like a slingshot. Kind of like the pivot points that I show you on my model trades for single stocks.
So, you're saying there's a chance? Yes, I am saying there is a chance. That said, however, I am over 50% cash for the time being. That's ridiculously high for me. Understand where we are. "Jobs" week. Labor day weekend ahead. Going into September. The Fed Chair and his minions clearly misinterpreting the macro, and openly stating their intention to damage the US economy. These are not going to be sunny days on the beach with the ones we love. These are going to be rainy nights in the jungle with critters you never heard of, but might just make a meal of you moving about while you try not to sleep.
Now, That You've Mentioned September...
I have been around Wall Street for most of my life. September has seemingly always been volatile. I mean, obviously, October has been pretty rough. One of my grandfathers took a beating in October of 1929. I'll never forget October of 1987. I hear many "youngsters" speak of how many market crashes they have been through. Let me tell you something, if it happens over weeks or months, it still stinks, but it's hard to call it a "crash"... you did not ride your bicycle into a tunnel and get hit by a freight train. If you have been working or participating in financial markets since before October 19th, 1987, you have only been through one crash.
Of course one terrible September that I won't go into at this time, comes immediately to mind. However, even prior to 2001, September over time and on average, I had been taught by my mentors, was the worst market month of the year. For mental illustration, I'll refer to two sources. Ed Yardeni's Yardeni Research shows monthly seasonality data for the S&P 500 (and its predecessors) going back to 1928. That's 93 years. Over that time, the index has posted 51 negative Septembers and 42 positive Septembers. The other 11 months are all positive for a majority of those 93 years. The S&P 500 (and its ancestors) has surrendered an average of 1% over that same time frame. This is easily the worst of any month, with only February and May also posting negative averages, both at -0.1%.
Now, I'll go to the seasonality tool at TrendSpider, which is one of several charting services that I subscribe to, and plug in what I need to in order to end up with a monthly seasonality model covering the past 40 years for the S&P 500. This should cover most (not all) of our careers. Over the past 40 years, the S&P 500 has been positive for September just 46% of the time, the only month of the 12 to be positive less than 55% of the time over those years. Over those 40 years, the S&P 500 has provided a median return of -0.35% and a mean return of -0.71% for September. Both are the worst among the 12. Both are the only negative means or medians among the 12 over 40 years. Yup. Keep your helmet on. Buckle your chinstrap. We don't have any John Waynes out here. At least I don't think we do.
A bloodbath across commodities that smashed energy? How special. Anyone else happen to notice that the rally in WTI Crude prices came to a screeching halt precisely at the 50 day SMA?
Now, take a gander at the yield for the US Ten Year Note. Hmm...
That yield not only took back its 21 day EMA precisely as the S&P 500 ran into a buzzsaw at its 200 day SMA, but had retaken its 50 day SMA as well less than a week later. Just this week, that 21 day EMA crossed over the 50 day line, producing a "mini" or "swing trader's" golden cross. That's bullish (for the yield), which is bearish for the US Ten Year.
Does anything express concern over the coming economic slowdown/contraction, it's depth and it's duration more than rising yields coupled with falling commodity prices. Higher yields could be a set-up for improved economic growth if the slope of the yield curve were to be steepened. Not with collapsing commodity prices though. Besides, we have not seen the yield curve steepen of late. The 2 yr/10 yr yield spread is more inverted now than it was a week ago, and the most important spread, the 3 mo/10 yr yield spread, has been moving sideways (in positive territory) for a month now.
For the day, the S&P 500, Nasdaq Composite, Nasdaq 100, Russell 2000, S&P 40, S&P 600, Dow Transports and Philadelphia Semiconductor Index all gave up at least 1.1%, but not more than 1.59%. All 11 S&P sector-select SPDR ETFs shaded red for the session, with all surrendering at least one half of one percent. Energy (XLE) led to the downside (-3.39%), with the REITs (XLRE) , Industrials (XLI) , Utilities (XLU) , and Materials (XLB) all losing at least a full percentage point.
As far as breadth is concerned, losers beat winners at the NYSE by about 4 to 1, and at the Nasdaq by roughly 5 to 2. Advancing volume took an 18.7% share of composite NYSE-listed trade, and a 28.4% share of Nasdaq-listed action. Aggregate trading volume increased significantly from Monday for NYSE and Nasdaq listed securities, across the S&P 500 and across the Nasdaq Composite. In short, professional money was on the move on Tuesday. It moved out stocks, it moved out of commodities, and it moved out of debt securities. A lot of your favorite pros are far more cashy right now than they were 24 hours ago, and way more than they were going into Jerome Powell's speech last Friday.
The Fed lands another punch. Speaking at a virtual event hosted by the Wall Street Journal on Tuesday, NY Fed Pres. John Williams, not exactly known in economic circles as a lightning bolt, said... "We're going to need to have restrictive policy for some time; This is not something that we're going to do for a very short period of time and then change course. We'll continue through next year. It's going to take some time before I would expect to see adjustments of rates downward."
Continue through next year? How can one say that now? Hey, here's a game, John. Tell me in a few sentences that you are incapable of thinking on your feet, incapable of anticipating change, and incapable of adapting to your environment.
Defense Related News
- On Tuesday, RBC Capital, led by analyst Kenneth Herbert (who is rated at five stars by TipRanks) initiated coverage of L3Harris (LHX) as its top pick for defense stocks. RBC rates LHX at "outperform" with a target price of $285. Herbert also initiated coverage of General Dynamics (GD) at "outperform" with a target price of $275. Northrop Grumman (NOC) also drew an "outperform" rating (target of $550), while Lockheed Martin (LMT) and Leidos Holdings (LDOS) both landed ratings of "sector perform."
- Boeing (BA) made the news twice on Tuesday. First, the firm was awarded an indefinite-delivery/indefinite-quantity contract by The Missile Defense Agency with a maximum dollar amount of $5.02B. Under the contract, Boeing would be responsible for overall Ground-Based Midcourse Defense Element engineering, as well as both physical and logical integration of the GMD Element with the Missile Defense System. A task order in the amount of $506.67M has been issued. The ordering period covers Sept 1 (tomorrow) though August 31, 2027.
- Elsewhere, the US Army had to ground its entire fleet of Boeing made CH-47 Chinook helicopters. The Vietnam era helicopter, designed in the 1950's is still the fastest among US military helicopters and still in use for that reason. Apparently, there have been some engine fires due to fuel leaks that resulted in no casualties. The Army claims that the root cause of the problem has already been identified. Because I know that a few of you were going to ask, the US Navy and US Marine Corps have both long ago retired the very similar CH-46 Sea Knight in favor of the V-22 Osprey (also Boeing). That's why you have not heard anything about our old friend, the Sea Knight.
- This one's a doozy. CACI NSS LLC, subordinate to CACI International (CACI) was awarded a $5.712B blanket purchase agreement for Enterprise Information Technology as a Service (EITaaS) Wave 1. The agreement provides "IT services" with/ for a great number of locations, but work will primarily be done in Chantilly, Virginia. Funds of $16M are obligated at the time of the award, and CACI apparently beat out three other contractors for this award. The Air Force Life Cycle Management Center at Hanscom Air Force Base in Massachusetts is the contracting entity. CACI was up on the news overnight. I have not seen the stock trading this morning.
Economics (All Times Eastern)
07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 5.65%.
07:00 - MBA Mortgage Applications (Weekly): Last -1.2% w/w.
08:15 - ADP Employment Report (June): Expecting 240K, Last 128K.
08:15 - ADP Employment Report (July): TBD
08:15 - ADP Employment Report (Aug): TBD
09:45 - Chicago PMI (March): Expecting 52.2, Last 52.1.
10:30 - Oil Inventories (Weekly): Last -3.282M.
10:30 - Gasoline Stocks (Weekly): Last -27K.
The Fed (All Times Eastern)
08:00 - Speaker: Cleveland Fed Pres. Loretta Mester.
18:30 - Speaker: Atlanta Fed Pres. Raphael Bostic.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: COO (3.26), MDB (-.28), OKTA (-.30), VEEV (1.01)