O, gather me the rose, the rose,
While yet in flower we find it,
For summer smiles, but summer goes,
And winter waits behind it!
For with the dream forgone, forgone,
The deed forborne for ever,
The worm, regret, will canker on,
And time will turn him never.
-- "O, Gather Me The Rose" William Ernest Henley, 1874
So, I Must Ask...
Can you gather the rose? Are you able to isolate, in tough markets where you see opportunity?
I think it is quite easy to understand a singular market input. I also find it far more difficult to interpret output after weighing multiple market inputs such as what we face right now.
Monday was an ugly day for U.S. equities. What is being priced in? Clearly, or maybe not so clearly, the broader market has entered correction. On that note, I want readers and home-gamers to understand, the supposed textbook definitions of having to meet 10% and 20% contractions from recent highs in order to label markets as in "correction" or as in "bear markets," respectively, are less than serious. Simple fodder for journalists. Only those who are not actually part of, or have "no skin" in the game use such definitions. Corrections and bear markets are borne of and sustained by sentiment.
In a real bear market, one that persists, volumes will dry up, and traders will notice a significant lack of participation. Corrections are quite different. Corrections are violent and volatile. That's where we are now.
Do I expect this pricing in of fiscal, monetary, political and geopolitical risk to linger? Let's think. Fiscal risk walks hand in hand with political risk, and now threatens monetary risk. Not exactly one big ball of wax, but all "should'' pressure our existence for anywhere from a couple of more weeks to a couple of months. The geopolitical or external risk is, unfortunately, more permanent. The U.S. economy has become too reliant upon the Asian, and more specifically Chinese manufacturing base, particularly in the area of high technology.
China now faces authoritarian leadership authored by a regressive-style regime in Beijing. The re-centralization of power has been prioritized over economic and certainly corporate performance. Beijing makes sport of coming to the brink of war with Taipei if not daily, then weekly. All while Chinese domestic real estate markets play one gigantic game of Jenga, threatening far more than just one economy.
So, I asked you a question. Can you gather the rose? Is it even time to think about gathering the rose, or any flower, as absolutely none of the myriad of items challenging U.S. and global economies have been resolved.
Is there anything on the traders' side these few early October days, fraught with peril as they are? Sure, and it's more than oil. Algorithmic traders, while ruthless and designed to not just cause but force overshooting in both directions, have absolutely no day-to-day memory. Sentiment, while huge in terms of capital flows and asset class/sector allocation, has absolutely no impact upon high-speed/day-trading/momentum-based/keyword-reading algorithms. Algorithms don't remember yesterday, they don't remember five minutes ago. They are just here to act, to provoke... to force both action and over-reaction.
I "scooped" three such roses on Monday. Later this morning we'll find out how rosy they actually are. I bought some Amazon ( AMZN) and some Zscaler ( ZS) close to the closing bell in New York, and then I waited until just before 8 p.m. ET and bought some Moderna ( MRNA) close to the ARCA close hoping for one last test of the lows that never came.
Blue Monday
Pressure on equity markets was broad on Monday, with a focus on pounding all things tech. The S&P 500 gave up 1.3%, closing 5.4% below its Sept. 2 high. The Nasdaq Composite took the most severe beating across our landscape of indexes, down 2.14%, closing 8% below the high of Sept. 7 for that index. Transports and small-caps, though down, did outperform the broader marketplace.
Losers beat winners at the NYSE by almost 2 to 1, and at the Nasdaq by almost 3 to 1. Declining volume bested advancing volume for NYSE-listed names by a few hundred issues in elevated aggregate trading volume. Declining volume beat advancing volume for Nasdaq names by the same almost three-to-one margin that we witnessed for the split between winners and losers. Aggregate trading volume, though heavy, did not increase from Friday. Equity markets are pretty clearly in a state of professional distribution.
Profits are being taken and exposure is being reduced where there is the most room for cash creation -- in growth. Remember, cash, while unproductive, tamps down volatility. My cash levels, while in deployment mode for more than two weeks now, are nowhere near where they were in late August.
While the Communications Services sector select SPDR ETF ( XLC) gave up 2.16% and the Technology sector select SPDR ETF ( XLK) backed up 2.32% the carnage was even more severe if taken one step further. The Dow Jones U.S. Internet Index was scalped for 3.2%, led lower by Facebook ( FB) , while the Dow Jones U.S. Software Index and Philadelphia Semiconductor Index both surrendered 2.5%. Facebook, Amazon, and Apple ( AAPL) all closed between 11% and 14% below their recent highs.
Charts
We did this last week. Let's go over it again, as the conditions expressed in that column have exacerbated since.
Note that on Monday, the S&P 500 saw both its closing level undercut the closing level from last Thursday, and the low of the session undercut Friday's intraday low. Still, the pattern of much high trading volume on red candle days has continued.
We warned you that last Wednesday's "inside day" was a sign of bearish continuation and it surely was at least that. Currently for the S&P 500, both the Full Stochastics Oscillator and daily Moving Average Convergence Divergence (MACD) are standing together and screaming "Oversold" at the top of their lungs. The Relative Strength Index (RSI), though weakened, is less sure.
Now, let's get really gnarly...
Check this puppy out. The Nasdaq Composite looks about as ugly as ugly gets.
I see ever-succeeding lower lows. I see a Full Stochastics Oscillator and a daily MACD that look like the remains of a mosquito on a windshield... and an RSI that if not oversold, is just standing there, knocking on the door. But, and this is a big "but," aggregate trading volume (as mentioned above) was lower on a red candle day than it was on the preceding black candle session.
Now, I want you to see three items here. One, there is still a gap left unfilled between Sept. 27 and Sept. 28 (14,800 to 15,000). Two, there could be some gravitational pull back toward that gap, but this is very possibly offset by also a gravitational pull toward the 200-day simple moving average (SMA) for this index.
Now this...
Lastly, look at that FSO (Full Stochastics Oscillator). What do you see at the extreme lower right? You see the black line (using a 14-day look back period and a three-day SMA) cross over the red line? Now what do you see the index doing the last three or four times this has happened at or close to an oversold reading? Voila. The algos will pick this up. Algorithmic trading shops don't care about balance sheets, but they do hire technical analysts.
I can't tell you precisely what will happen on Tuesday, but I am reasonably confident that lacking the impact of market-altering news, and from a technical perspective, the algos in charge at the point of sale will try to force an "up" opening for at least the Nasdaq Composite. Hence, none of my "roses" are listed at my beloved Big Board.
Do not forget, this is trading, not investing. The market is in correction and we are not betting the farm.
Fossil Fuels
Tell me again how I got to such a reduced exposure to big energy? ESG? Public sentiment? Regardless, both Europe and Asia are stricken with tight supplies of both natural gas and coal that have pushed those commodities to their highest prices on record, while oil prices merely trade at seven year highs.
The While House had asked OPEC and friends to help tackle the ever-growing twin problems of inflation produced through scarcity as the planet attempts to recover from this pandemic. You could hear their guarded laughter from here, as that group of allied oil producers declined the request to accelerate crude production.
The meeting lasted less than half of one hour. Oil production will be increased by only the 400K barrels per day already scheduled. At some point, do any of these cash-poor nations at the fringe of OPEC break ranks and do what's best for them? Where is that point?
You know we used to produce a lot more oil and natural gas here in this country than we used to. Want to get into the pipeline discussion? Not right now. Gotcha. Just saying, we do have solutions. Domestic solutions.
Interesting
Citadel founder Kenneth Griffin addressed the Economic Club of Chicago on Monday. Yes, I know he spoke about cryptocurrencies and potential cryptocurrency regulation. But something else he mentioned caught my eye. Griffin said: "Payment for order flow is a cost to me, so if you're going to tell me that by regulatory fiat one of my major items of expense disappears, I'm OK with that."
On this matter, we certainly agree. I have always been staunchly opposed to any artificial inputs that negatively impact free market pricing for anything. If that means paying a commission, so be it. You are paying a price anyway.
For that matter, while discussing ways to improve market pricing, would it not make sense to price equities in minimal increments of nickels of dimes? We used to trade in eighths. That's a 12.5 cent increment and you know what, there was a book for every stock with depth at varying levels. There was far more transparency. I think I just said this above -- we do have solutions. They just won't serve those who have benefited from the practice of bringing darkness to the point of sale.
By the way, I never, never, never enter an order without designating a specific market, be it the NYSE, the Nasdaq Market Site, ARCA or other. I just figure, and I may be completely wrong, that it makes my order potentially that much less attractive or useful to those who pay for such things.
Did You Notice?
That J.P. Morgan analyst Stephen Tusa increased his target price for General Electric ( GE) to $55 from $40, while maintaining a "neutral" rating. mentioning the stock's "limited intrinsic value."
GE closed at $104.90 on Monday, down 0.87%.
Down for the Year!!
As mentioned up above, Amazon is well off of the stock's July and even September highs. Monday's 2.85% beating took Amazon, at the close, to being -2.1% year to date. No joke. Amazon has closed lower for six consecutive sessions and is now down for the year.
Blame yields? Sure. Yields did not really move much on Monday. Oh yeah. Inflation? Yes. You can at least in part, blame inflation, and perhaps a less than spectacular holiday season or less margin room for AWS clients to spend on the cloud or digitization. Maybe just blame valuation, or the new guy (CEO Andy Jassy).
Oversold much? Check out the RSI, the FSO (holy moly), the daily MACD? If AMZN does not at least rebound into the opening, I'll eat my hat. Not my Montreal Expos hat though, that one is too cool to put at risk. One of my Mets hats. I've got like six of them.
What do you think happens if not now, but should Congress get its act together? There are unfilled gaps. Pop goes the weasel cuz the weasel goes pop.
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last 16.5% y/y.
09:45 - Markit Services PMI (Sep): Flashed 54.4.
10:00 - ISM Non-Manufacturing Index (Sep): Expecting 59.9, Last 61.7.
16:30 - API Oil Inventories (Weekly): Last +4.127M.
The Fed (All Times Eastern)
13:15 - Speaker: Federal Reserve Vice Chair Richard Clarida.
Today's Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings scheduled for release.
