Market Direction: BULLISH alert
issued 2/15/2018
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The stock market drops like a rock, the bullish direction is under pressure...
It has been an ugly stretch for U.S.
stocks, which was capped by Wednesday’s more-than-830-point tumble for the Dow
Jones Industrial Average.
To recap: The Dow DJIA, -3.15% and the S&P 500
index SPX, -3.29% booked their worst
one-day slumps since Feb. 8, while the Nasdaq Composite Index COMP, -4.08% put in its worst
single-session skid since Brexit, when the U.K. voted to exit from the European
Union, roiling global markets in 2016.
Wednesday’s action wasn’t as severe
as Brexit, but the downbeat action cast a pall over a rally that has mostly
been driven by domestic economic strength and earnings that have been buoyed by
corporate tax cuts.
So, what’s next? And what has led to
an apparent broad-based unraveling of stock benchmarks that were testing new
heights about a week ago?
Rising
rates are hurting
Rapidly climbing bond yields, which
gain as prices fall, have fueled fears that profit margins of U.S. corporations
may be squeezed by higher labor costs and loftier borrowing expenses. The
10-year Treasury note TMUBMUSD10Y, -0.36% a government bond
that is used to price mortgages, auto loans and other debt, has seen its yields
climb toward a seven-year peak (rates retreated somewhat amid Wednesday’s stock
fall).
“Today’s equity selloff is a
reaction from investors finally realizing we are in a higher interest-rate
environment, and given the elevated level of stocks, market participants were
likely looking for a reason to sell. Higher interest rates typically bring on
tighter financial conditions which could dampen growth going forward and equity
markets are reacting to that,” said Charlie Ripley, senior strategist at
Allianz Investment Management.
FANG
stocks get dumped
Escalating costs of borrowing have
had a more pronounced effect on megacapitalization companies like Amazon.com
Inc. AMZN, -6.15% and Netflix
Inc. NFLX, -8.38% , part of a cadre
of so-called FANG constituents (also including Google-parent Alphabet Inc. GOOGL, -4.63% and Facebook Inc. FB, -4.13% ), which have had an outsize
influence on the broader market by dint of their market values. On Wednesday,
Amazon lost 6.2%, marking its worst day since February 2016 and has nearly
erased all of its gains of the past three months, according to FactSet data.
Shares of Netflix sank 8.4% on Wednesday, representing its worst daily slump
since July 19, 2016.
That said, Amazon’s stock is up 50%
so far this year and those for Netflix are boasting a 70% year-to-date return,
even factoring Wednesday’s unraveling of gains.
Recent action suggests that
investors may be dumping winners and moving money elsewhere, some market
participants say.
October
volatility
In the first eight sessions of the
fourth quarter, the Nasdaq is down nearly 8%, which would represent its worst
start to a quarter since the first three months of 2016 and the worst start to
a fourth quarter since 2008, according to Dow Jones Market Data. The Dow is off
3.3%, which would reflect its worst kickoff to a fourth quarter since it
dropped 22% to start the last three months of 2008.
Seasonally, October has been a bad
period for markets.
Industrial
and material stocks tank
Some of the negative sentiment has
been attributed to a warning from PPG Industries Inc. PPG, +1.06% , which said Monday that the paint and coatings
company was increasing prices on all automotive original equipment
manufacturers products by an average of 10% as it works to combat rising
inflationary pressures.
CNBC’s Jim Cramer said PPG’s
earnings warning could indicate wider weakness in an industrials and materials
sector that has already been whacked by fears about trade clashes between the
U.S. and China.
Technical
breakdown
On top of that, the benchmarks experienced
a number of so-called technical breakdowns or near breakdowns. The S&P 500
snapped a 74-session string without a 1% move, reflecting the longest such
streak since the period ended January. The S&P 500 also tumbled below its
50-day moving average at 2,879.39 and is hovering above its 200-day average at
2,765.51. Technical analysts watch moving averages to help determine bullish
and bearish trends in an asset, with a breach below a trend line typically
signaling that optimism has ended — at least momentarily.
Meanwhile, the Nasdaq knifed below
its 200-day average at 7,4988.59.
The Dow held above its 200-day trend
line but closed below its 50-day at 25,995.09.
Rotation
Some market participants argue that
investors are shifting from growth-fueled strategies to value shares, which
have been out of favor as shares of growthy, techy companies have soared.
Investors tend to turn to overlooked value companies in the later stages of an
economic cycle, before a recession, market participants say.
That shift could be taken hold
presently.
“There is no planet where a
rate-sensitive sector outperforms AS RATES RISE. Tech being taken to the
woodshed daily does makes sense: Value has ticked up vs. growth and in general
people sell their big winners in a panic. You don’t get +60% a year in NFLX
without a few -15% weeks here and there,” wrote Michael Antonelli, equity sales
trader at R.W. Baird & Co., in a Wednesday note.
The Russell 1000 Growth index RLG, -4.02% a proxy for growth
(represented in green in the chart below) and Russell 1000 Value Index RLV, -2.54% have both been
declining, but a sharper drop has played out for so-called growth names.
Moreover, the value index has traded
roughly flat over the past three months, while growth has declined by 1.7% over
the same period.
Fed
policy error
President Donald Trump on Wednesday partly blamed
the Federal Reserve for headwinds in the market. “I think the Fed is making a
mistake. It’s so tight, I think the Fed has gone crazy,” he said, reiterating
criticisms that he has harbored about the central bank’s intent to normalize
interest rates from crisis-era levels and prevent an overheat of the economy.
CNBC’s Cramer and others also are
making the case that a policy mistake by the Fed may be the market’s undoing.
Is
it time to panic yet?
Some market participants say it
isn’t quite time to panic, but advise caution.
“My expectation is that selloff will
be similar to what we saw earlier in the year and ultimately this will turn out
to be a good buying opportunity for those investors that have a longer time
horizon and have a portfolio that suits their risk tolerance,” said Chris
Zaccarelli, chief investment officer at Independent Advisor Alliance.
“How long could this little
correction last? Well, the one in late 2015 lasted about seven months but that
was a full-on earnings recession, I don’t think we’re facing that right now,”
wrote Antonelli in a note, referring to the 2015 downturn in markets partly
sparked by concerns about a slowdown in China’s economy.
“These kind of moves are also good
for one thing: Making a shopping list of all the names you wanted to own lower
and saying ‘here’s my chance, lemme do some homework and see if I still like
it.’ Opportunity always abounds, my friends, you just gotta find it,” he said.
The all-time highs since our initial
recommendation to go LONG
this market. Here is how the markets have performed:
Stock Market
Direction Recommendation (2/15/2018)
|
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Dow
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up 1,751.44 points a 6.95% gain
|
10/3/18
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Nasdaq
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up 876.87 points a 12.08% gain
|
8/30/18
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S&P 500
|
up 209.71 points a 7.68% gain
|
9/21/18
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Related Link: http://www.stockmarket-direction.com/
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