A rebound in Old Economy cyclicals is lifting most NYSE stocks on the day, while the big growth stocks remain on the back foot, driving another test of the Nasdaq 100’s key uptrend.
The Dow Jones found some tentative traction above the expected 50-day average bounce zone, as well as the 4,370 area, which served as a decent floor in July/August.
And the QQQ Nasdaq 100 ETF is sagging to meet a shorter-term beacon line – one that has been broken a few times this year to create a deeper slingshot “V” on the chart, but from which it has bounced more frequently than it has been broken.
As we noted last week, many professional investors believe that a larger pullback in September-October is likely, which raises the question of whether a correction has become too much of a consensus to occur on cue.
Energy, banks, and small-cap stocks are bouncing back despite a small drop in Treasury yields, which are still holding firm.
The monthly pattern of downside bias in stocks leading up to options expiration was noted on Friday (which is this coming Friday). This has been followed by sharp recoveries around the 19th of the month in recent months. Today, a Bespoke report chronicles the pattern, and many traders are keeping an eye on it.
Is it really that easy now that everyone has noticed it? Yes, there are mechanical/flow-based explanations for the phenomenon, but the market tends to resist sticking to predictable patterns for long periods of time.
It is unclear to me whether the Democrats’ tax proposals are or will become a key market driver. Corporate interest rates have risen relatively slowly, while capital-gains rates have remained well below income rates.
The CPI figure is expected to be the most important release of the week tomorrow. There’s no denying it, even if it doesn’t quite settle the “transitory or sticky inflation?” debate. According to the WSJ, a Federal Reserve taper beginning in November appears to be a foregone conclusion. If that’s the case, the market has made a tentative peace with it now that Fed Chair Jerome Powell appears to have succeeded in distancing tapering from eventual tightening. But we’ll have to wait and see. The market reaction to the CPI number will reveal more.The market breadth is holding up quite well. The average stock is outperforming, but there isn’t a lot of buyer confidence reflected in the indexes.
The VIX is ebbing slightly but remains at 20. People are aware that it is September, that it is expiration week, and that the market’s footing has been a little shaky over the last week and a half.
The oil issue
Oil prices would reach triple digits six months ahead of the firm’s base case, which has crude at $100 by the middle of 2022.
The firm’s prediction comes as oil’s rally has stalled after a surge in the first half of the year. While strategists led by Francisco Blanch expect oil prices to rise in 2022, the firm expects prices to remain rangebound for the rest of 2021.
Blanch expects Brent to average $70 per barrel in the second half of 2021. On Monday, the international benchmark rose 56 cents to $73.48 per barrel, representing a 0.8 percent gain. The U.S. oil benchmark, West Texas Intermediate crude futures, rose 1.1 percent to $70.48 per barrel.
Blanch wrote, “Weather is quickly becoming the most important driver of energy markets.” He predicted that global oil demand would increase by one million to two million barrels per day this winter, causing the market to run a larger deficit and driving up prices.
“We now see upside risks for oil looming on winter weather risks in 2021/22 as other energy prices such as natural gas and coal continue to rise,” he added.
While prices have recently been range bound, WTI and Brent are up 46 percent and 42 percent year to date, respectively, as demand has rebounded and producers have kept supply in check.
Prices are also being supported by output constraints in the Gulf of Mexico, as producers work to restore normal operations. According to the most recent Bureau of Safety and Environmental Enforcement data, roughly half of the Gulf’s production — or around 884,000 barrels of oil per day — is still shut down.
“We believe it will take weeks to return to normal production levels,” Bank of America said. While the Covid-19 delta variant remains an overhang in developing economies, consumption in Europe and emerging markets has rebounded “with a vengeance,” according to the firm.
Meanwhile, Goldman Sachs predicted on Monday that the oil market will “rally significantly” in the fall, particularly if the Iran nuclear deal falls apart.
Brent is expected to average $80 per barrel in the fourth quarter, while WTI is expected to average $77. Unlike Bank of America, Goldman believes that the fourth quarter will be the peak for oil, with prices falling in the first three quarters of 2022.
Dow Jones backslides
The Dow Jones dipped below last week’s low, leaving the early-September marginal new record highs stranded on the charts.
In a broader sense, this is routine regress. We’ve returned to the 50-day average a half-dozen times this year, finding traction in the process. A similar drop now would represent a 3% drop from last week’s peak, making the 4,400 area tactically important. A trip down there that does not elicit a strong buyer response would be the first indication that the market’s character has changed due to seasonal/slowdown concerns.
Yesterday, I mentioned that the mega-cap Nasdaq names appeared stretched and ready for a breather, which was a tricky setup for the market. At the same time, it was unclear whether the cyclical/value groups had the headline/data cover to fill the void. It wasn’t an issue yesterday, but we’re seeing it today, with the Nasdaq 100 falling 1% and semis falling back into their multi-month range.
This is all technical nonsense on the outskirts of a market that is still up nearly 20% year to date, completely within the realm of normal ebb and flow.
The fundamental issues are a slower-than-expected slowdown, peaking upside earnings revisions, some trepidation ahead of Northeast school reopening/fall weather, and a broader sense that investors have a heavy exposure to equities and that the direction of rebalancing is away from stocks.
Brokerage strategists are coming to the conclusion that it is time to expect a tougher period for equities, with Bank of America and Credit Suisse joining Morgan Stanley, Citi, and others today. It’s never clear whether the time to go defensive is when the Street suddenly does, after weeks of the market signaling the slowdown that these firms are now emphasizing.
Small-caps are being tossed around again; the term “beta” is no longer in vogue. ARKK fought back hard after briefly falling flat on the year yesterday. Defensive rotation in the traditional sense is evident, with utilities and staples and the like. It appears to be more reflexive than high conviction, balancing the bets.
Given that there is no need to stoke labor demand, job openings reaching a new high of nearly 11 million in July may have slightly increased the “Fed green light to taper” idea. It all comes down to supply and Covid’s path.
Even if overall CPI readings have peaked, the inflationary wage/cost pressure theme isn’t going away. If natural gas prices continue to rise due to supply issues, it will be difficult for energy-intensive industries (chemicals, paints, and metals) to compete. European inflation-breakeven rates have reached an eight-year high. What is Covid accomplishing that years of quantitative easing and negative interest rates have not?
A few factors argue against being overly pessimistic here: years in which the Dow Jones is up 15% or more through August are unlikely to have reached their peak by that point in the year. And credit markets have been largely unaffected by the recent slowdown noise and shaky equity tape.
Market breadth is clearly weak, particularly the volume split (25/75 up/down), but there is no imminent washout.The VIX was above 19 for a short period of time, indicating that the market was on high alert. It appears that 15-16 was used as the floor once more. There is no panic or Buy signal for stocks yet, just a slight clenching up.