Assessing the Market's Risk-Reward?
report the Dow rises slightly, but loses more than 2% on week:
Stocks finished Friday with slight gains but the major indexes capped the week with significant losses between a slew of somber economic reports and increasing tensions between China and the U.S.
The Dow Jones Industrial Average advanced on Friday by 60.08 points, or 0.25%, to 23,685.42, but ended the week lower by 2.65%. Earlier in the day, the 30-stock average dropped more than 270 points.
The S&P 500 finished Friday’s session up 0.39% at 2,863.70 while the Nasdaq Composite added 0.79% to close at 9,014.56.
The major averages clawed back their losses throughout the afternoon as retail stocks turned around despite a record decline in monthly retail sales. The SPDR S&P Retail ETF (XRT) rose 2% after sliding more than 1.4% earlier in the session. Best Buy, Kohl’s and Nordstrom rose. Walmart and Home Depot each advanced 2%.
Friday’s turnaround also followed better-than-expected data on U.S. consumer sentiment. The University of Michigan’s consumer sentiment index unexpectedly rose in early May as U.S. fiscal stimulus measures “improved consumers’ finances and widespread price discounting boosted their buying attitudes.”
For the week, however, the Nasdaq Composite and S&P 500 were down 1.1% and 2.2%, respectively, with the latter notching its worst week since March.
“Given the amount of uncertainty about this crisis that still looms, we should not be surprised by the setbacks we’ve seen in markets this week,” said Scott Knapp, chief market strategist at CUNA Mutual Group.
U.S. monthly retail sales fell by 16.4% in April, a record. Economists polled by Dow Jones expected a decline of 12.3%. So-called core retail sales —which exclude auto, gas, food and building materials sales — dropped 15.3%.
There's a reason why Trump is ratcheting up the rhetoric on China, the coronavirus has united Americans in one way, their dislike of China:“I guess you could say we knew it was weak,” said John Briggs, head of strategy at NatWest Markets. “The problem is you can’t dismiss all this bad news for April. If you have a deeper hole, you’re starting point is lower.”
Stocks initially tumbled on the retail data. Market sentiment also took a hit amid rising trade tensions between China and the U.S.
The Trump administration moved to block semiconductor shipments to Chinese company Huawei. The Commerce Department said it would “strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.”
Meanwhile, Hu Xijin, editor-in-chief of Chinese state-run publication Global Times, tweeted on Friday that China would “restrict or investigate” U.S. companies including Qualcomm, Cisco Systems and Apple if the U.S. takes further action to block Huawei’s supply chain. Hu’s Twitter account was closely followed last year by traders looking for insight on the U.S.-China trade war.
Based on what I know, if the US further blocks key technology supply to Huawei, China will activate the "unreliable entity list", restrict or investigate US companies such as Qualcomm, Cisco and Apple, and suspend the purchase of Boeing airplanes.— Hu Xijin 胡锡进 (@HuXijin_GT) May 15, 2020
Shares of semiconductor makers Applied Materials and Skyworks Solutions both declined. Apple shares slid 0.5% while Qualcomm fell 5.1%.
“This is not an ideal time to be ratcheting up the trade war with China,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab. “I don’t really quite understand what the rationale is there.”
“Clearly, the administration wants to see the market do better, but the things they’re doing with China right now are making it worse,” he said.
But while Trump is barking at China, so far, there's no bite and the reason is simple, going into an election, he can ill-afford to go after the Chinese Communist Party even if there are legitimate concerns on how it handled the coronavirus crisis.
In short, I foresee strained US-China relations no matter who wins in November but now is definitely not the time to start another trade war as the US enters a coronavirus depression.
Or maybe it is, you never know with Trump and his advisors.
Anyway, I don't want to discuss Trump, Xi or China, I want to focus on markets.
It seems like the bears infected with monetary coronavirus were back this week but the Fed is still cranking up its balance sheet, so there's a fight between worsening fundamentals and ample liquidity.
Not surprisingly, the Fed's tsunami of liquidity is driving up tech shares but it's the most speculative part of the market which is being bid up the most.
Earlier this week, I noted on LinkedIn that both the S&P Biotech ETF (XBI) and the Nasdaq Biotech Index (IBB) made new record highs:
And if you look at the top-performing stocks over the last month, you'll see a laundry list of small biotech stocks you've most likely never heard of:
And this is just a partial list. You can view the full list here.
Many of these stocks are up over 100%, 200% or 300% over the past month on nothing more than hope and hype.
This is especially true of stocks of biotech companies investors are betting on will find a vaccine for COVID-19, like Moderna (MRNA) or Novavax (NVAX):
Now, I've been trading biotech long enough to know a few things:
- These stocks swing like crazy, even the biotech ETFs swing like crazy
- If you play individual names, you can get stinking rich but most people get their head handed to them
- The sector does well when the Fed is on the sidelines and cranking up its balance sheet, like now
What’s the most shorted sector? The answer might surprise you https://t.co/NhyMniUjrD— MarketWatch (@MarketWatch) May 15, 2020
So, either the shorts will get scorched shorting biotech or biotech will get creamed as fundamentals take over the hype or momentum traders book their profits.
I don't know but either way, it's a very risky trade and it's emblematic a very sick market which reminds me a lot of 1999 when tech stocks were going parabolic for no real reason except ample liquidity.
And it's not just biotechs, check out shares of NVIDIA Corporation (NVDA), up another 6% today and making a new record high:
Hedge funds love this stock, it's their go-to powerhouse momentum tech stock and they simply can't get enough of it, buying every dip. Hell, I know brokers who love this stock and arrogantly peddle it to me like it's a no-lose proposition.
The point I'm making is the Fed is fueling another bubble in certain speculative stocks and it won't end well.
Yes, Wall Street loves it. BlackRock loves it. Elite hedge funds love it. But it's another bubble forming and it won't end well.
Anyone who tells you "just buy momentum stocks and close your eyes" in these markets is a fool:
Fed issued a stark warning that stock and other asset prices could suffer significant declines should the coronavirus pandemic deepen, w/commercial real estate market being among the hardest-hit industries. https://t.co/YwECfV7wwU pic.twitter.com/bfs3Z92CzP— Holger Zschaepitz (@Schuldensuehner) May 15, 2020
"Why Dow may be safer bet than the Nasdaq right now, according to recent market history" https://t.co/NrYq2omdSH— Leo Kolivakis (@PensionPulse) May 15, 2020
Justice Department, State Attorneys General Likely to Bring Antitrust Lawsuits Against Google— Stare Decisis (@MsResJudicata) May 15, 2020
Officials at Justice Department are focused on Google’s ad business, how it has used its search dominance
https://t.co/u7rsUQySAv via @WSJ
The problem is the Fed is messing with markets so much that even smart strategists don't know where it's heading:
With Nobody Having Any Idea What's Going On, One Bank Says SPX Fair Value Is From 1,900 To 3,000 | Zero Hedge https://t.co/chwx8Aikmf— Leo Kolivakis (@PensionPulse) May 15, 2020
But I would listen closely to top investors who are not blinded by what is going on:
Risk-reward for stocks is 'maybe as bad as I've seen it,' Stanley Druckenmiller says https://t.co/qqtW50vEpz— CNBC (@CNBC) May 12, 2020
"The market is by anybody’s standard pretty full." David Tepper said yesterday this is the second-most overvalued stock market he's ever seen, behind only '99. https://t.co/nen0cuC04H— CNBC (@CNBC) May 14, 2020
The recovery will be slow, painful, halting & up and down.”— Real Vision (@RealVision) May 15, 2020
Even with a cure, how long will it take to vaccinate 7.7 billion people? @HowardMarksBook & @raoulGMI pic.twitter.com/4Mi94bnAxk
Of course, all eyes will be on this man come Sunday evening:
What does the chairman of the Federal Reserve think is next for the American economy? Jerome Powell speaks to Scott Pelley, Sunday on 60 Minutes. https://t.co/fefktV4aPr pic.twitter.com/bM9n9Zy2br— 60 Minutes (@60Minutes) May 15, 2020
Jerome Powell is being praised for his "decisive and swift actions" but truth be told, he's petrified about what will happen if the market starts shorting the Fed and other central banks, something we haven't seen before.
Right now, the Fed is doing exactly what the market wants, inflating its balance sheet up to wazoo to support the BlackRocks, Vanguards and Fidelitys of this world as well as elite hedge funds which frontrun the Fed, but what happens if investors start losing confidence in the Fed itself?
I'm not saying it's going to happen but beware of market risks, they're actually a lot higher now than in March and investors who are blindly buying the "Fed put" playing momentum stocks as if they're invincible are in for a very nasty surprise.
🇺🇸 While money supply has increased, money velocity has COLLAPSED.— Morten Lund (@meremortenlund) May 14, 2020
Deflation risks are much more imminent than hyperinflation risks --> https://t.co/7YGiKbSsDQ pic.twitter.com/EZPfcK5Opa
Economic Policy Uncertainty Index for United States— Sven Henrich (@NorthmanTrader) May 14, 2020
New record high.
Last time it spike to similar levels was in September 2008.
Markets bottomed in March 2009. pic.twitter.com/c59kJWv3hu
Citigroup's "US equity strategists’ panic/euphoria model is approaching euphoria, which, historically, has led to negative returns over the next 12 months." pic.twitter.com/y4AaS3dEJE— Lisa Abramowicz (@lisaabramowicz1) May 14, 2020
On that note, it's a long weekend in Canada, so I'll be back on Tuesday.
I want to thank all of you who value the work that goes into this blog and who support it with your donations/ subscriptions via PayPal on the top left-hand side. Have a great weekend!
Below, one of the greatest investors of our time, Stanley Druckenmiller, Chairman & CEO, Duquesne Family Office LLC, discusses today's market strategies with the moderator Scott Bessent. Bloomberg’s Dani Burger also reports on “Bloomberg Daybreak: Europe.”
And CNBC’s “Halftime Report” team is joined by David Tepper of Appaloosa Management to discuss his investment strategies amid the coronavirus pandemic. Listen to what he says about the "frenzy" going on in individual names and even if he's not short, he says the risk-reward isn't good.