Nothing is settled yet, and nothing will be for a while – a fragile technical setup, seasonal headwinds for the next few weeks, and a “news rich” environment of policy missteps and regulatory salvos. However, the ongoing reset (valuations, expectations, and top-heavy indexes all settling back) has addressed a few of the key market knocks from a few weeks ago.
Today’s S&P500 high was slightly higher than yesterday’s, breaking a string of lower lows and lower highs. There’s still a lot to prove, with “obvious” selling areas ranging from 4,380 to the low 4,400s. Those are also the levels that must be overcome in order for the overhang of options dealers’ hedging to shift from a headwind to a support for the indexes. The next downside test, if one is required, will be seen around 4,200-4,250 – the July lows – and also near the 200-day average.
Today’s Nasdaq 100 stocks are experiencing a relief rally. We noted at the end of yesterday that it’s difficult to imagine a more concentrated dose of bad news being forced into Facebook shares than we saw yesterday. The stock is now trading at a market multiple, with no premium. Sure, it can get cheaper; it could be in a post-hegemon valuation purgatory akin to Microsoft in the 2000s. But does that seem like a good bet in this situation?
Images of how stretched the NDX was entering today’s session, courtesy of Bay Crest Partners:
Partners at Bay Crest
Cyclical groups are fully participating to the upside (banks, industrials, consumer-sensitive), and the macro message of the market’s sloppy pullback since September 2 has not been particularly concerning – credit spreads are nice and snug, Treasury yields are holding their gains, economic data is solid, and small caps are outperforming.
Small caps, as well as the commodity-related complex, are favorites among tactical market forecasters. It has the feel of a church of what is currently working, with an economic reacceleration call behind it. We’ll see, but energy/commodities are getting pretty hot, perhaps due for a rest/retreat?
Today’s market breadth is fairly strong, with roughly a 2:1 up:down ratio, but there are still a lot of new lows on the Nasdaq.
The VIX has remained rangebound even as the indices have fallen to marginal new lows – is this a “positive divergence” indicating that volatility traders have already hedged up and see the risks priced in? Or will a more concentrated liquidation/fear crescendo be required to establish a better trading low? In recent years, we’ve seen both sides of the coin.
Fragile technical conditions in the benchmark indexes are also a factor, with intraday rallies failing at “predictable” points (the 50- and 100-day moving averages, respectively) and the first 5%+ pullback in 11 months widening the trading range bands. It is unmistakably a short-term downtrend in the S&P500, though this time it is primarily driven by the mega-cap group that pushed the index higher in July/August.
Here’s a comparison of the Nasdaq 100 and the equal-weighted large-cap universe of stocks. The typical stock isn’t levitating, but it had less air under it in September and hasn’t buckled as much from the highs. Even today, the EQAL is down 0.4 percent, while the NDX is down 2.3 percent. Is mega-cap surrender the end result of corrective periods, or will it first result in more indiscriminate liquidation?
Among the previous longest streaks in market history without a 5% pullback, five out of eleven developed into at least a 10% drop, with most falling at least 8%, but none ended at a definitive peak of a bull market.
Narrative dissonance persists: Covid cases are falling fast, and reopening dynamics are resuming, but third-quarter forecasts are still falling. DC policy squabbles keep a big “What if?” question hanging over the debt ceiling, etc.
Are supply-chain concerns reaching a tipping point? It’s difficult to say. There is now a case to be made that the global obsession with these issues, combined with the possibility that we saw a massive pull-forward of goods demand, which will give way to a shift toward services in 2022, means supply chain may have peaked as a market swing factor. Perhaps overly optimistic, but for market purposes, this doesn’t have to be true; it just has to be plausible for a while.
Breadth is mixed rather than nasty. The NYSE has 45 percent/55 percent up/down volume, while the Nasdaq has 30 percent/70 percent. There is a lot of pressure, but there isn’t a lot of selling urgency.
The VIX is up 2+ points as a result of both the post-weekend wake-up effect and continued index volatility. However, prices are still well below late-September highs. For better or worse, I’m anxious rather than panicked.
New South Wales and Victoria, Australia’s two largest states, have announced plans to relax some restrictions once 70 percent of their populations have been fully vaccinated. Both states are expected to reach that figure this month.
“We anticipate strong reopenings in the hospitality, hotel, gaming, ‘bricks and mortar’ retail, and travel industries as the population seeks to escape the confines of their homes,” Bank of America analysts wrote in a report dated Sept. 22.
The investment bank identified two stocks that are expected to benefit the most from Australia’s reopening: hospitality and gaming operator Endeavour Group and national flag carrier Qantas.
The Endeavour Group
Due to lockdowns in New South Wales and Victoria, more than 40% of Endeavour Group’s hotels were temporarily closed.
“Once the current restrictions are lifted, we expect Endeavour’s sales to rebound quickly,” said Bank of America analysts. They anticipate that the group’s electronic gaming machine sales will at least return to pre-Covid levels, despite the fact that some restrictions will remain in place beyond October.
Endeavour is reportedly Australia’s third-largest gaming operator, but it is the country’s largest owner of poker machines, with over 12,000 machines in 293 hotels.
Bank of America has set a price target of 7.70 Australian dollars ($5.57) per share, representing an 8.14 percent increase from the close on Tuesday.
According to Bank of America, Qantas’ domestic travel business will recover at a similar rate as it did prior to the most recent lockdown in New South Wales, when interstate borders were open.
The bank identified upside risk — the extent to which the stock’s value may rise above expected levels — as a result of increased willingness to travel among people who have been fully vaccinated and increased savings from households during the lockdown.
“We reiterate our Buy on (Qantas) given their leverage to domestic travel recovery and liquidity to weather current uncertainties,” the analysts wrote. As a result of the restructure, the airline is “expected to achieve approximately 70% domestic market share.”
Qantas will resume international flights to Covid-safe countries in December. CEO Alan Joyce said in August that he expects flights from Australia to the United States, the United Kingdom, and parts of Asia to resume by Christmas.
Bank of America’s price target for Qantas is 6.15 Australian dollars ($4.45) a share — projecting 7.1 percent upside.
These stocks are also on the rise.
Bank of America is optimistic about the margins of supermarket operators Coles and Woolworths in the future, despite the fact that sales are expected to moderate due to pent-up demand for dining out. The lockdown increased sales significantly, putting pressure on supermarkets’ costs and efficiency.
Viva Energy and Ampol, two fuel distributors, are also favorites of the investment bank. Both companies saw a significant decrease in fuel consumption as a result of the lockdowns and the lack of air travel.
“With the reopening of economies and borders, it is clear that the fuel providers are highly leveraged, especially given the likely pent-up demand for travel,” the analysts said.
Bank of America is bullish on Ramsay Health Care’s backlog of surgery volumes in the health care sector. Due to Covid-19, many non-urgent surgeries at RHC’s New South Wales hospitals were postponed.
“The resumption of elective surgery will benefit diagnostic imaging providers such as Sonic Healthcare, Healius, and Integral Diagnostics… as well as ultrasound disinfection company Nanosonics,” the analysts concluded.
The bank also anticipates an increase in Covid cases once restrictions are lifted. Testing vigilance to control the caseload is expected to continue in the near term, potentially prolonging tailwinds for lab company Australian Clinical Labs.
Buy on the dip
“I think people will be fine if they stick with really good stocks,” Cramer said on “Squawk Box.” “I enjoy the technology here.”
“Extreme growth works. And when you have these dips, you buy,” he added, as the tech-heavy Nasdaq fell again, while the 10-year Treasury yield remained elevated due to inflation fears. The Dow Jones Industrial Average and the S&P500 both fell. Since Friday, all three have alternated between strong gains and sharp losses.
The Nasdaq was 6% off its September 7 record close at the end of Tuesday’s trading session. The S&P500 had fallen 4.2 percent since its record close on September 2nd. The Dow was nearly 4% off its August 16 record close.
“It is not a market-wide decline. “It’s the fact that you go out and buy the stocks that really make it so that they aren’t impacted by inflation and scarcity,” Cramer explained.
A rapid rise in market rates and inflation reduces the value of high-growth companies’ future cash flows, such as tech stocks. As a result, they may appear overpriced. Higher bond yields, which can raise borrowing costs, also limit tech firms’ ability to fund growth and buy back stock.
According to Cramer, inflation caused by long-term economic problems is not a problem in the United States. “Not inflation,” he says, but supply chain shortages. “Scarcity is everywhere,” and this is driving up prices.
“People try to distance themselves from high growth very quickly, and it has never worked,” he added.
“The companies in the FAANG unit are primarily concerned with containing inflation.” And they don’t have the raw [material] costs,” said Cramer, who coined the FANG acronym (Facebook, Amazon, Netflix, and Alphabet’s Google). Apple was later added.
On Tuesday’s “Mad Money,” he stated that he believes the recent weakness in Microsoft shares — which are now more than 5% lower than their all-time highs on August 20 — has created a favorable situation for investors.
Dip in Facebook (FB)
Anmuth believes that some people are overly concerned about how Apple’s new rules on user tracking and ad targeting will affect Facebook.
“FB’s ad platform, which has over 10 million advertisers, is extremely resilient, and while some marketers may want to shift spend away or reduce bid levels at certain times, we believe there are plenty of others eager to capture that inventory,” the note said.
A series of stories and a congressional hearing about Facebook’s impact on teenagers have also weighed on the company’s stock. However, according to JPMorgan, there does not appear to be much downside left in that news cycle.
The stock was trading near $380 per share at the end of August, but has since dropped into the $330 range.
“FB has survived multiple periods of negativity in the past, and shares are down 13% from their recent highs” (vs. -3 percent for the SPX). Furthermore, Facebook “continues to call for a set of more standard internet rules from Congress, though we do not expect this in the near term,” according to the note.
Is the market too valued?
“I think the market is fairly valued at 4,500” on the S&P500 and a 2% yield on the 10-year Treasury, Wien said on “Squawk on the Street” on Thursday, sticking to the numbers he predicted in January. The 10-year yield was less than 1% at the time, and the S&P500 was trading around 3,750. He believes the 10-year yield will not fall below 3%, but that if it does, it will be “very negative” for stocks.
The S&P500 gained more than 1% on Thursday after a short-term agreement to raise the debt ceiling was reached, marking the benchmark’s third consecutive day of gains. The index is trading above 4,400 points and has a nearly 18 percent gain for 2021. The recent rotation out of bonds into stocks pushed the 10-year Treasury yield to 1.56 percent.
Wien believes the S&P500 could rise by 5% to 10% next year if corporate earnings meet expectations. However, the vice chairman of Blackstone Private Wealth Solutions Group warned that, while stocks are still in a bull market, “the 20% years are behind us” in terms of annual returns.
Wien, best known for his annual predictions list of market surprises, which he began while working as a strategist at Morgan Stanley in the mid-1980s, ran through a list of what he believes the market is thinking in the near term about the back-and-forth in Washington on Thursday.
Wien believes the debt ceiling will be raised beyond the emergency period, which ends on December 3, and that the bipartisan infrastructure bill will be passed. He stated that the market believes President Joe Biden’s $3.5 trillion, Biden has admitted that the bill, which Democrats hope to pass with no Republican votes, will have to be smaller.
Wien said that the market recently got ahead of the fundamentals, which is why stocks have been declining recently, and that stocks could see a “modest drift up” in the future. September was the worst month for stocks this year, and October has lived up to its reputation as a volatile month. Many strategists agree that the fourth quarter is typically a good stretch for the market.