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Wednesday 24 August 2022
Today’s newsletter is from Jared Blikre, a reporter who focuses on the markets at Yahoo Finance. Follow him on Twitter @SPYJared.
The S&P 500 (^GSPC) has a breadth problem.
The summer The stock rally ended last week after a sizeable 17.4% gain for the S&P 500 from mid-June lows to mid-August highs.
But, echoing a common grievance from the so-called FAANG era that prevailed in the years leading up to the pandemic, 30% of the heavy lifting was once again done by just a few stocks — Apple (AAPL), Microsoft (MSFT), Amazon (AMZN ) and Tesla (TSLA).
And as these trades lose momentum and culprits like the strengthening dollar make their presence felt again, so has it recently The rally seems more troubled than a few weak sessions might otherwise suggest.
Apple, arguably the world’s most important stock, suffered its worst two-day plunge in two months on Friday and Monday after hitting key trendline resistance. This decline caused the stock to break a separate — and steep — trendline to the downside; The stock is now at its 20-day moving average.
Over the summer, Apple climbed as much as 4% of its all-time high — an impressive rebound for a stock that fell about 30% from late March through mid-June. However, this quick reversal leaves Apple stock on shaky ground.
Apple (AAPL) failed at the long-term trendline resistance, broke the potential support of the steep trendline and is now sitting at its 20-day moving average.
Over a similar period, Microsoft rallied 21%, taking the stock as high as 16% from its all-time high. But five days later, the stock confirms an island reversal pattern on its daily candlesticks. Amazon is in a similar boat but is still “on the island” — consolidating 45% gains at its recent peak.
Meanwhile, Elon Musk’s Tesla is looking a little stronger after a 50% rally that wasn’t quite as steep and unsustainable as Apple’s. Still, the stock has struggled to break the midpoint of its decline from record highs, suggesting that shorts still have the edge over the longer term. It wasn’t until above $1,000 per share that we would expect Tesla bears to start throwing in the towel.
The story goes on
Of course, none of this would be a cause for concern if the broader market had been more involved in advance.
True, some market internals have been flashing bullish signals lately. For example, the percentage of S&P 500 components trading above their 50-day moving averages surpassed 90% last week for the first time in over a year.
But key leaders and industry groups – like the high yield bond market and the semiconductor industry – underperformed during the summer rally and quickly reversed. Short-covering junk off-the-bottom rallies have so far only been able to conquer a market.
Meanwhile, bullish investors are on needles and needles, counting down the minutes until Federal Reserve Chairman Jay Powell’s keynote address in Jackson Hole Friday morning.
But most strategists believe investors can forget about a Powell pivot so soon in the Fed’s rate-hiking cycle. At the end of July, the head of the Fed explicitly stated several times that the Fed’s next steps would only be about the incoming data – i.e. inflation statistics – and not much more.
Of even greater concern for the market, US stocks accounted for 86% of global stock gains during the recent rally, according to Michael Hartnett’s team at BofA Securities. Leaving aside the US stock market, it is no coincidence that the recent risk rally thrived as the dollar cooled from its soaring run.
And that respite appears to be temporary, indeed, as a 7-day rally in the US Dollar Index (DX-Y.NYB) erased a 20-day decline of the same magnitude, sending the dollar straight back to near two- Decade highs.
Now the euro is back below par with the dollar – a boon for tourists but a bane for Europe now facing recession shall we say, getting the global economy to follow suit some experts.
Don’t expect much help from the Fed unless Powell says something that knocks the dollar off its high pedestal.
Investors looking for the next bullish catalyst might rejoice over Powell’s hints at an end to the Fed’s balance sheet tightening program — or so-called quantitative tightening — which is putting pressure on currencies, bonds and money markets.
But as Bank of America Global Research’s equity derivatives team said in a note on Tuesday, “We believe risk assets have reason to be concerned about Jackson Hole.”
As always, investors are better off just not fighting the Fed.
What to see today
economic calendar
MBA Mortgage Applications
Durable Goods OrdersJuly (+0.8% expected, +2% before)
Orders of durable goods without transportJuly (+0.2% expected; previously +0.4%)
Pending Home SalesJuly (-2% expected, -8.6% so far)
merits
Yahoo Financial Highlights
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