When I was young, one of my most enjoyable past-times was keeping up with the vibrant music scene (late 60’s and 70’s).
I would frequent my local record shops and pick up the hottest new albums for only $3.99.
While I may be dating myself, the irony of my story is that as I got older...
Collecting albums (and music) took a back seat to studying charts (which are just images) of stocks and any other asset class, but I apparently was ahead of the trends...
According to Musictech.com headline on Sept. 16, 2021...
"Vinyl sales see a 94% increase this year, with Gen Z buying more than millenials"
Vinyl is back.
In fact, last year marked the first time since 1986 that U.S. vinyl record sales exceeded $1 billion!
And as you know, it's not just vinyl...
2021 was record-breaking for stocks, crypto, NFTs (which are just images), and more!
Inflation, supply shocks, money flow?
We'll cover that next, but without a doubt...
The younger generations of traders (or investors) have a much bigger influence over all of these trends than when I was buying my vinyl for $3.99.
And like the trends of music (regardless of whether you listen to it on vinyl or digitally).
Markets are fickle (yet somewhat predictably so).
If you missed last week's Market Outlook, "What Will Be The 2022 Song", you may want to review it here.
The market's sudden New Year shift came as a surprise to many, but not to us.
Early January is when we should always be prepared for a skip in the song playing in the market's narrative.
The 2022 "skip" sounded like a 4+% decline in the NASDAQ 100 (NASDAQ:QQQ) and the VanEck Semiconductor ETF (NASDAQ:SMH).
The Biotechnology stocks (IBB) sounded like a big scratch in your vinyl, down over 7%. However, this area of the market isn't currently viewed as a market leader, so—no surprise.
The bright spots this past week were Energy (XLE) up over 10%, and Banks (KRE) up over 5%.
Additionally, we're seeing a shift from Growth stocks (Vanguard Growth Index Fund ETF Shares (NYSE:VUG) down 5.2% YTD) to Value stocks (up 1.5%).
Cathy Woods manages the ARK Innovation ETF (NYSE:ARKK), that focuses on grow stocks that she calls innovative technology companies. She's down almost 10% this year already after a horrendous 2021. Yikes!
We have pontificated over the last several months in our weekly Market Outlook commentary that something "didn't smell right", expecting that...
This year's (2022) market weakness would be a reasonable outcome given last year's period of remarkable consecutive new highs.
While we had a down week in the markets, especially the technology area, it is important to remember that the S&P 500 is just 2% off its highs. So, this move down has been rather muted relative to history.
What Drives the Markets?
There are four components that typically drive the markets: inflation, earnings, interest rates and money flows. Let us examine each of these conditions.
Inflation is trending up quickly and hit the highest year over year number in more than 40 years. As we have been reporting throughout the latter part of 2021, this is a big negative for the market and something our own Mish continues to address on National TV.
Earnings are excellent with 2021 growth around 19%. This has certainly been a positive during 2021 especially for large mega cap stocks. Much of this is attributable to the recovery phase coming out of 2020 and the COVID lockdown. Also fueled by easy money and the government subsidizing everything.
Interest rates have been muted and artificially supported by government bond buying. However, now with the Fed tapering, and broadcasting its intention to raise rates, this accelerated move to higher rates is spooking the markets.
It is important to note that rates are still low but the rate of change in just a few days has caught investors off guard. Moreover, analysts covering many of the growthier industries are recalibrating the effect higher interest rates may have on earnings and signaling a multiple contraction is coming. Even inflation adjusted bonds (TIP) got hit hard this week.
Finally, money flow can have a positive effect on the markets even when the other three are negative.
Money flows have been huge this past year with estimates of $1 trillion of new money just going into ETFs. ETFs in turn must put that money to work and large mega cap stocks are the biggest beneficiaries of that. No surprise given that record number of people have been retiring in 2021 and rolling over their retirement money to their own discretion. Money flows may also be a function of company buybacks as well (creating less shares of stock in the market) and that has been approximately $800 billion plus in buybacks during 2021.
The Shift is On!
As referenced above, bond interest rates rose dramatically last week. Estimates for a slowing economy showed up in the lower jobs number on Friday. Contracting multiples began to seep into technology stocks. Energy prices continued to rise along with higher interest rates that fueled bank stocks, materials, commodities, and consumer staples higher.
This is a true value stock narrative. However, one week does not make a trend and we will have to see if it holds up longer.
For now, the song we are hearing has a few minor scratches in the vinyl. Hopefully, the skips are not prolonged so that we eventually hear a better song.
Here are the other takeaways from our Big View indicators:
Risk On/Bullish
- The QQQs are oversold on both price and momentum confirmed by the Real Motion indicator, and are potentially subject to mean reversion on the upside
- Energy (XLE) roared this week with Oil (USO) +4.2% and Oil Services (OIH) 14.6%
- Regional Banks (KRE) led Mish’s Modern Family this week and made new all-time highs because of increasing rates
- Both Emerging (EEM) and Established (EFA) foreign equities outperformed US stocks this week
Risk Off/Bearish
- Even though Gold (GLD) backed off slightly this week, it still outperformed the S&P 500 (SPY) on a relative basis and is indicating Risk-off
- Value (VTV) v. Growth (VUG) exploded this week, favoring Value stocks while Growth stocks are now in a warning phase. This ratio may be oversold and potentially subject to mean reversion
- Bonds got smoked across the board, with SHY, TLT, IEF, BND, and even Inflation-adjusted bonds (TIP) all selling off drastically this week
- Long bonds (TLT) closed below the crucial 200-day moving average
- Market internal according to the Hindenburg Indicator with a lookback of 90-days is still flashing a warning sign and showing 15 omens, 1 less than last week
- Risk Gauges moved from Risk-On back to Neutral across SPY, QQQ, and IWM
- All 4 key indices were down for the week, led by QQQ -5.4% and except for the Dow Jones (DIA), the other key benchmark indices retreated into defensive mode by entering either a warning (QQQ and SPY) or distribution phase (IWM)
- New Highs vs New Lows for both SPY and COMPX appear to be rolling over, a risk-off indication
- While the worst performing sectors were Semiconductors (SMH) -3.9% and Homebuilders (XHB) -7.1%, a clear indication of the impact of interest rate hikes and a more risk-off environment
- Due to their sensitivity to higher interest rates Solar (TAN) -8.1% and Clean Energy (PBW) -6.9% also got hit hard despite the positive performance in Energy (XLE)
Neutral Metrics
- Soft Commodities (DBA) recovered back above its 50-day moving average, reestablishing a bullish phase for now
- Volume pattern are relatively neutral across the board with the exception of QQQ showing 5 distribution days and only 1 accumulation day over the past 2 weeks
- Sentiment is neutral in the SPY according to the McClellan Oscillator