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What Caused This Sudden Market Swoon?


Nowhere to run to, baby, nowhere to hide

Got nowhere to run to, baby, nowhere to hide.

It’s not love I’m a running from,

It’s the heartaches that I know will come…

-Martha Reeves & The Vandellas

Yesterday, there was simply no place to hide except in cash; all the major indices closed lower, along with gold, the dollar, and bonds. The big story continues to be selling in mega-cap names. It’s like the old saying, Live By the Sword, Die By the Sword – although that’s a little hyperbolic. 

  • Russell 2000: -3.69%
  • NASDAQ Composite: -3.52%
  • FDM MicroCap: -2.68%
  • S&P 500: -2.45%
  • Dow Jones Industrials: -1.75%

Market Breadth

Last week, we saw cracks in the internals, which have been overwhelmingly bullish. Now, they are overwhelmingly bearish with a sharp increase in new 52-week lows on the New York Stock Exchange and the NASDAQ Composite – and substantially more down volume.  It was as if someone cried fire in a crowded theater. 

  • NYSE down volume 5.57 billion, almost six to one above up volume.
  • NASDAQ down volume 5.28 billion, more than five to one above up volume.

Market Breadth

NYSE

NASDAQ

Advancing

424

482

Declining

2,859

3,596

52 Week High

291

272

52 Week Low

61

87

Up Volume

997.27M

1.03B

Down Volume

5.57B

5.28B

When Hot Stocks Boil Over

The NASDAQ Composite is down sharply from its recent all-time high with selling on the biggest winners.  The average gain in the top 20 NASDAQ winners have – it has come down significantly.

  • On Feb 9th,  818 NASDAQ winners were up an average of 21.3%, while the top twenty had an average of 145.0%.
  • On Feb 25th, 674 NASDAQ winners were up an average of 19.8%, while the top twenty had an average of 105.4%.

NASDAQ Composite

Trapdoor?

Coming into the week, all eyes focused on how close the 10-year yield was getting to matching (and potentially surpassing) the 1.50% yield for the S&P 500. It happened.

To see the chart, click here.

Hide and Go Seek?

When there is a big market swoon, there is nowhere to hide. It is why I do not like to spend a lot of dry powder on elaborate strategies supposedly designed to mitigate risk. It’s fine to buy ‘puts,’ and at a certain point, sell calls against big winners in your portfolio. But I have never been a fan of stuff like the so-called barbell strategy, having half your portfolio in growth names and the other half in value names. 

With that in mind, all eleven S&P 500 sectors were lower, with traditional safe havens suffering the smallest declines. I was surprised at how much Materials came down. While Energy succumbed to profit-taking, West Texas Intermediate (WTI) was higher.  Keep that in mind when you are considering adding to your Energy weighting.

Also, keep an eye on Financials – even the very boring and dull insurance companies (best value).

S&P 500 Index

-2.45%

Consumer Discretionary XLY

-3.72%

Consumer Staples XLP

-1.09%

Energy XLE

-1.93%

Financials XLF

-1.82%

Health Care XLV

-1.00%

Industrials XLI

-1.84%

Materials XLB

-2.31%

Real Estate XLRE

-1.63%

Technology XLK

-3.50%

Utilities XLU

-0.90%

Additional Thoughts

  1. This period is long overdue and really needed. 
  2. I do not think this is the start of a major correction.
  3. Key support points, including the 50-day moving average, must hold.
  4. There is a sense of delicious irony that the market is down on good news after it rallied on bad news.
  5. I like it when the market pulls back sharply rather than slowly decline over long periods.
  6. Bond yields were due to move higher and are still lower than where they should be.
  7. I’m salivating at the chance to buy great names I missed on the way up – but I won’t force the issue.
  8. Still, we are going to make moves on the way down rather than chase after major turns.

Portfolio Approach

Yesterday, we took profits in Consumer Discretionary in the Hotline Model Portfolio.

Today’s Session                                      

The market has for the most part been under pressure all morning, but declines have been limited.  I’m watching commentary from Europe, where bond yields are also soaring.  We have already seen comments from top officials at the European Central Bank (ECB) and Bank of England (BOE), which makes me believe they will act very soon to slow or curb the rise in yields. 

Conversely, members of the Federal Reserve have been too cool for school and it is not working.  In fact, some are pointing to the cavalier comments from New York Fed President John Williams as a reason for accelerated pressure in the second half of yesterday’s session.

Speaking to an online forum, he said he was encouraged by rising inflation expectations, and not troubled but rising long term yields.  They reflect investor optimism in the recovery and GDP growth, which he noted will be the strongest in decades.

That’s all fine, but at times people need to see panic.  The stock market is trying to push the Fed into doing more than simply talking a good game.  If Powell & Co want to be able to jawbone markets, they better do more than whisper sweet nothings.

It really is time for the Fed to talk about making adjustments.  They might not have to make adjustments, but the market wants to know they are prepared to take additional actions to keep their promise, and at the same time, slow the rate of inflation or inflation assumptions.

Dry Powder

One of my big investment themes going back to last year has been all the dry powder that eventually makes it way into the economy and on to the bottom lines of publicly traded companies.  That investment proposition just got stronger this morning as the BEA reported January 2021 personal income and savings.

  • Income +10.0% from +0.6%
  • Spending +2.4 from -0.4%

The discrepancy between the growth in both resulted in the savings rate erupting to 10.0% or $3.93 trillion dollars.

This is good news to me, not bad news.  If the market sells off names that will benefit most, I consider that A GIFT.

To see the chart, click here.



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