Is the Stock Market Party Ending?

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Fred Imbert and Weizhen Tan of CNBC report the Dow falls nearly 200 points, suffering first negative week in four as Intel slumps:
Stocks fell on Friday as Wall Street wrapped up a volatile week of trading, with tech shares struggling and U.S.-China tensions rising.

The Dow Jones Industrial Average slid 182.44 points, or 0.6%, to 26,469.89. The S&P 500 fell 0.6%, or 20.03 points, to 3,215.63, and the Nasdaq Composite dipped 0.9%, or 98.24 points, to 10,363.18.

Dow-component Intel plunged more than 16% after the chipmaker offered disappointing guidance for the third quarter and delayed the release of its next-generation chips.

The 30-stock benchmark dropped 0.7% for the week, snapping a three-week winning streak. The S&P 500 dipped 0.2% this week, posting its first weekly decline in four. The Nasdaq, meanwhile, lost 1.3% this week for its first back-to-back weekly losses since May.

“We’re living in this constant state of high volatility,” said Johan Grahn, head of ETF strategy at Allianz Investment Management. “We’re surrounded by this uncertainty, not just in markets, but also around every corner of everyday life.”

 “It’s really hard to see this volatility and all the uncertainty that it implies go away anytime soon,” Grahn said.

The Cboe Volatility Index (VIX) — seen by many investors as the best “fear gauge” on Wall Street — traded at 27 on Friday.

Shares of Facebook, Alphabet, Apple and Microsoft all traded lower. Tesla dropped more than 6%. Amazon and Netflix bucked the negative trend, rising at east 0.6% each. 

Big Tech has been the market leader this year as investors grapple with the coronavirus pandemic and its impact on corporate profits. Amazon and Netflix are both up more than 49% year to date. Alphabet and Facebook are up over 13% over that time.

This week, however, this group has struggled. Facebook dropped more than 4% this week and Apple shed 3.8%. Netflix slipped 2.5% during that time period. Microsoft and Alphabet are both down at least 0.5% this week.


“Concerns of another technology bubble are rising,” said Keith Lerner, chief market strategist at Truist/SunTrust Advisory, in a note. “There is also growing concentration risk, with the top five stocks now accounting for 22% of the S&P 500 Index.”

To be sure, Lerner noted that “conditions today are largely not comparable to the mania seen during the technology bubble of the late 90s.”

 “Absolute valuations are elevated but are less than half of the levels reached back then. The rising influence of a small group of stocks is a risk for the overall market, though these same companies are also contributing an increasing amount of cash flow and profits,” he said.

This week’s volatile trading action comes amid rising tensions between China and the U.S. China ordered the closure of a U.S. consulate in Chengdu, retaliating after Washington shut the Chinese consulate in Houston earlier this week. China markets plunged in response, with the Shanghai Composite dropping 3.9% overnight.

Investors also fretted this week about the state of the economy during the coronavirus pandemic.

The Labor Department said Thursday that 1.4 million Americans filed for unemployment benefits for the week ending July 18, topping a Dow Jones estimate of 1.3 million claims.

This is “no doubt sobering and a clear reminder that the pandemic is far from finished exacting its toll on our economy,” said Mike Loewengart, managing director of investment strategy at E-Trade. “While we’re hanging on to hopes of a stimulus bill, Americans are feeling the pain of stalled reopenings and renewed shutdowns across the country.”
Alright, it's Friday, time to write my weekly comment on markets.

This week was a continuation of last week, big tech shares sold off and the rest of the S&P 500 was mostly flat.

I can't say I'm surprised as I've repeatedly warned my readers Wall Street is enjoying its last liquidity orgy no thanks to the Fed expanding its balance sheet by $3 trillion since late March and another tech wreck is headed our way as investors and traders increasingly bid up a handful of mega cap tech shares to nosebleed valuations.

On Monday, I posted this on LinkedIn:



And I commented the S&P 500 now positive in 2020, but 320 members are still in the red. The share of the S&P 500 index held by just five stocks (22%) — a degree of concentration that is higher than during the dot-com era that preceded the early-2000s tech bust: This was before the onslaught of earnings reports from big tech companies late this week.


Why is everyone chasing a handful of tech names? Because with uncertainty still high, the herd is focusing on a handful of growth stocks to "hide" in case something goes terribly wrong.

Anyway, what did traders do this week? They mostly sold the earnings news -- good or bad -- on most of these big tech names.

Why? Because they're booking profits after monster run-ups and to be frank, multiple expansion only works so much, after a while, you need earnings to justify valuations.

Now, to be fair, so far I call this a minor pullback in tech shares. Let's first look at the daily chart on the Nasdaq ETF (QQQ):


As you can see, this latest pullback is just a small glitch as tech shares remain above their 50-day moving average.

Let's now change the setting on the chart in StockCharts (you can do this for free) to see the 5-year weekly chart on the QQQs:


Here I added the 10-week moving average to the 50-week and 200-week only to show you what happens during a liquidity orgy where everyone focuses on tech.

It's a pure momentum play and the Fed and its surrogate, the Swiss National Bank, are behind this nonsense.

Why is the Fed so scared if the Nasdaq crashes below its 200-week moving average? Think about it, tech has become the be all and end all of the economy and stock market and policymakers are scared to death about what happens if tech shares crumble. 



Of course, the problem with momentum markets is they work until they don't, meaning at one point asset managers sell to book profits and this can create an avalanche of selling, especially after a monster run-up.

Is that where we are now? I'm not sure, the Fed is still in QE mode as are all central banks, so there is no way of telling yet if this is just a small pullback or the beginning of a more meaningful selloff.

Interestingly, Martin Roberge of Canaccord Genuity shared this in his weekly market wrap-up which he aptly titled "Stealth Rotation":
For the second week in a row, technology and mega-caps stocks are down, while both the S&P 500 and S&P/TSX have stayed flat. Some of the factors causing market anxiety include: 1) US-China tensions arising with both countries ordering the closure of local consulate offices; 2) another jump in US initial claims, confirming the negative impact of rising coronavirus cases and the rolling back in re-opening activity; and 3) concerns that Democrats and Republicans will not be able to strike a well-anticipated coronavirus relief bill before the end of the month. Otherwise, as we highlighted in our mid-week note Wednesday, a key highlight this week is US corporate bond spreads falling below their 200-dma. This is a notable development if we consider that the last two times this dynamic occurred in 2012 and 2016, it coincided with a net rotation out of technology and defensives into economically sensitive stocks. As such, we reiterate our strategy of favoring globally geared groups over domestic-centric sectors, while neutralizing technology exposure at benchmark.

Our focus this week is on the similarity between the market recovery since the March 23 low and that from the March 9 low in 2009 following the GFC. The first panel on our Chart of the Week shows this resemblance. A key question though is whether investors should assume the smooth sailing projected by the 2009 roadmap going forward. After all, the S&P 500 currently trades a 22.2x one-year forward EPS, contrary to 14.4x at this time in July 2009. This is a 54% premium. However, when we adjust for the lower level of interest rates (currently 0.60% vs. 3.7% in July 2009), the fourth panel of our chart shows that the S&P 500 trades at the same equity risk premium (ERP) of about 3.8%. The bad news is that we believe one should not assume a 3% ERP as we did through the last business cycle. As we argued in our summer edition of the QS, with corporate/government debt at record highs, and fewer monetary/fiscal policy bullets left in central banks’ toolbox, one should assume greater business-cycle risk in the next economic cycle. For our part, we assume a 4% ERP, which gives us a S&P 500 fair value of 3,112 on 2021 EPS ($159) and 3,640 on 2022 EPS ($186), assuming bond yields oscillate between 0.50-1.25%. We believe it is too early to trade on 2022 earnings, hence our neutral stance on stocks.

Martin was kind enough to allow me to use this in my weekly market comment and I suggest you contact him directly (mroberge@cgf.com) is you want to be part of his distribution list.

I'm not sure if a stealth rotation is going on into economically sensitive stocks but tech shares are vulnerable and insiders are dumping shares across the stock spectrum:



I would say another big difference between now and 2009 is we are at the tail end of a long cycle, rates are at historic low levels while debt is mushrooming all over the world, so growth will remain weak over the next decade.

Take the time to read Hoisington's latest Quarterly Review and Outlook. I read their quarterly comment religiously to try to understand the big macro picture and agree with their conclusion:
Assuming a large percentage gain in economic activity in the second half of this year, the Fed, the World Bank and many economists project that there will still be a substantial gap between potential and real GDP. In economic theory, this is called a deflationary gap. At the end of the three worst recessions since the 1940s, the output gap was 4.8% in 1974, 7.9% in 1982 and 6.4% in 2009. The gap that existed after the recession of 2008-09 took nine years to close. This was the longest amount of time to eliminate a deflationary gap. Even when the gap was closing over the last decade, the inflation rate continued to trend downward, remaining near or below 2%. This indicates that there were even more unutilized/underutilized resources than was captured by the magnitude of the gap. Considering the depth of the decline in global GDP, the massive debt accumulation by all countries, the collapse in world trade and the synchronous nature of the contracting world economies the task of closing this output gap will be extremely difficult and time consuming. This situation could easily cause aggregate prices to fall, thus putting persistent downward pressure on inflation which will be reflected in declining long-dated U.S. government bond yields.
Deflation is coming, I've been warning my readers to prepare for it since September 2017 and the pandemic will only exacerbate the deflationary trend that was well in place.

What about the Fed and all the central banks expanding their balance sheet? What about the massive fiscal response in the US and Europe? They too are deflationary but you will only see it as we head the way of Japan.

In their attempt to avoid another great depression, policymakers are pushing the envelope on monetary and fiscal policy but all they are doing is exacerbating wealth inequality and that too is deflationary.

In short, all roads still lead to deflation and that means record low rates are here to stay.

And that means you need to prepare for wild volatility in public equities.

Now you get the big picture as to why pensions are moving away from bonds into private debt and away from public equities into private equity, infrastructure and real estate.

Of course, deflation is merciless, it will eviscerate public and private assets.

But don't fret, that's over the long run.

One other thing that bugs me, everyone is bearish on the US dollar but as deflation roils the global economy, you want to be long the greenback over the long run. Also, while Europeans got their act together this week, I don' trust them at all and think they are lying through their teeth about their coronavirus numbers and how bad their economies really are.

Lastly, a couple of stock charts that caught my attention this week:



Shares of Advanced Micro Devices (AMD) gained 17% today, breaking out to an all-time high as Intel misfired. It reports earnings on July 28, with analysts expecting a profit of $0.17 per share on $1.86 billion in second quarter 2020 revenue (don't touch it prior to its earnings report).

The second chart is Whirlpool (WHR) which crushed its earnings earlier this week and has come bounced back strong since March lows (don't touch it either).

The only reason I'm showing you these charts is I look at a lot of charts of companies and remind myself continuously, it's not the stock market, it's always a market of stocks.

Below, Fundstrat's Tom Lee discusses his views on the market. With CNBC's Melissa Lee and the Fast Money traders, Tim Seymour, Bonawyn Eisen, Brian Kelly and Karen Finerman.

Second, Social Capital CEO Chamath Palihapitiya told CNBC on Thursday that Tesla's growth is no longer about its electric cars, but its renewable energy components. That could make Elon Musk's company worth trillions, he added.

Third, Mohamed El-Erian, chief economic adviser at Allianz and a Bloomberg Opinion columnist, says the US economic recovery is "slowing down, leveling off," due to the public engagement concerns of consumers over the ongoing pandemic. He speaks with Bloomberg’s Jonathan Ferro on "Bloomberg The Open." El-Erian's opinions are his own.

Lastly, Dr. Maria Van Kerkhove, the World Health Organization’s lead expert on COVID-19, talked with “GMA” this morning about the growing number of cases in the US and elsewhere. Take the time to listen to her, she's incredible and should be the head of the W.H.O.



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