DOW 31,262 (+9), S&P 500 3,901 (+1), Russell 2000 1,773 (-3), NYSE FANG+ 4,846 (-46), ICE Brent Crude $112.91 /barrel (+0.87 ), Gold $1,845 /oz (+3.90), Bitcoin ~29.1k (-900)
MAC Desk Commentary:
It was another ugly week and sentiment is growing more despondent. Today we had another early rally that was met with selling and any of the major indices that had held last week’s low yesterday, eventually broke that level. Amidst that selloff the S&P 500 officially traded into Bear Market territory <20% after narrowly avoiding this mark last week. However, there are some arguments as to whether this is official based on intraday or closing prices, but this is really just semantics at this point as the pain being felt is real in either case. Today, was options expiration which has been adding to the volatility and that was on full display again into the close. From the low hit around 1:30 the S&P 500 rallied over 2% in the final two hours of trade to end the day unchanged. As has been highlighted everywhere (but I think I was first two weeks ago) this was the seventh consecutive week of declines in the S&P 500 for the first time since Q1 of 2001. That episode extended to eight consecutive weeks with the drawdown over that time-fame ~16%. With the nearly ~3% decline this week the index is down ~14% this time around.
The weakness this week was clearly driven by the deafening calls that a recession is imminent following the disappointing earnings from major retailers. This led to massive drawdowns at some blue-chip retail stocks (WMT/TGT >-20% for the week). The companies highlighted higher than expected costs related to fuel/freight/labor, unexpected inventory level builds (some weather related) and a shift in consumer spending patterns. The commentary continued to support the data that the consumer wallet is shifting away from goods to experiential spending. However, the reports also highlighted that the rising gas/food prices is hitting discretionary spending and consumers were starting to trade down within product categories. Consumer discretionary and staples were the two worst performing sectors this week within the S&P 500 both down over 7%. That being said, not every retail earnings report was negative (HD, LOW, TJX, FL etc.) and overall spending levels remain reasonably healthy as evidenced by the retail sales numbers, but the environment is clearly impacting the lower income levels.
This week there were a few other important earnings reports outside of retail and while most of these stocks also ended the week lower there was a more positive tilt Palo Alto and Cisco highlighted that corporate tech spending remains strong. However, the latter lowered guidance saying that it was unable to meet strong demand due to China issues. A dynamic also highlighted by Deere today.
On that front there were some positive signs that Shanghai was gradually moving forward with its re-opening which should help to alleviate some of these issues. As I’ve said before this is possibly the biggest potential positive catalyst for the market as it will help supply chain issues which will impact both earnings and inflation. As long as zero-tolerance policy remains in place this will remain an overhang. If other wholesale lockdowns can be averted that could be a big tailwind.
Along with the conversation about recession the other big question is related to earnings estimates. At this point the street is calling for S&P 500 earnings in both 2022 and 2023 to be up 10% YoY. Given the backdrop these estimates do seem to be at risk, but it is worth noting that the market has already begun to take some of this into account as multiples have contracted significantly down ~4 turns since the start of the year ~21.5X to 17.5X (see chart below). This is still above the average over the last 20 years (~16.3X) . If we assume earnings are instead flat over the next 2 years that would put the forward multiple at 19X just to get a sense of how “de-risked” this is.
This week we did see yields moving lower despite central bank commentary that suggested officials were unphased by the recent selloff. Chair Powell did provide some context around his thinking on inflation and some of the peak inflation narrative that has been building saying, “This is not a time for tremendously nuanced readings of inflation…We need to see inflation coming down in a convincing way. Until we do, we’ll keep going.” It is notable that some of that some of the market-based inflation expectations have moved lower.
|ICE BofA MOVE
Up until recent high yield has held up reasonably well relative to investment grade (largely due to the impact of energy within the indices). That started to unwind significantly recently and accelerated by weakness in retail this week (see charts below).
Sectors/Other Asset Classes:
|NYSE FANG +
Sorted by Weekly losses
|S&P 500 / Consumer Staples -SEC
|S&P 500 / Consumer Discretionary -SEC
|S&P 500 / Information Technology -SEC
|S&P 500 / Industrials -SEC
|S&P 500 / Communication Services -SEC
|S&P 500 / Financials -SEC
|S&P 500 / Real Estate - SEC
|S&P 500 / Materials -SEC
|S&P 500 / Utilities -SEC
|S&P 500 / Health Care -SEC
|S&P 500 / Energy -SEC
The Technicals Still Matter -
- USD index: +$0.31 to $103.06
- Oil prices - ICE Brent: +0.78% to $112.91, WTI: +0.45% to $110.38
- Gold: +0.21% to $1,845.10, Silver: -0.65% to $21.77, Copper: +0.43% to $4.30
- VIX: +0.08 to 29.43
- Bitcoin: -2.9% to ~29.1k
When we first laid out potential targets for this topping H&S pattern months ago the measured move called for a fall to ~3,800. At the lows today the S&P 500 traded to 3,810. There was a significant reversal today which put in a hammer suggesting that we could be set up for at least a tradeable bounce. We would want to see this confirm on Monday which would need to clear the highs from the past 2 days around 3,940.
From an RSI perspective the index has not hit a really oversold level amidst this recent weakness which is the climactic selloff everyone is looking for. These sharp rallies have not allowed that to happen but once again there is a positive divergence similar to what we saw during the March rally. In addition, the Weekly RSI hit that oversold level for the first time today touching 30. I’ve added the Weekly Chart below which also include Fibonacci retracement levels off of the pandemic lows. The 38.2% retracement is ~3,800, the 50% retracement is closer to 3,500.
Today was options expiration and as I’ve highlighted before we have seen key short-term turning points in the market in following week on multiple occasions over the last few years. With some of these technical factors, the fact that we are down 7 weeks in a row, sentiment is very negative and yields have started to move lower - I would not be surprised by a significant bounce in the near-term. I’m not convinced that this is “the low” as there seems to be quite a bit of negative news that will need to come down the pike. This is where the technicals can sometimes help avoid too much of a bias.
There isn’t any significant resistance until we test the decline 20d moving average which is ~4,080. This week’s high is ~4,100.