There’s no doubt that the Consumer Discretionary Sector was down a ton in a short period of time, -37% from Feb 19 – Mar 18, and it has since rebounded nicely. However, our Technical Team continues to be focused on selling rallies here as we believe that the environment will continue to be difficult for the sector (component stocks) as longer-term momentum indicators are still not yet oversold and technical set-ups / patterns for many of the underlying stocks suggest topping formations.
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You can see the first page here. What with baseball season postponed and the scheduled Opening Day of March 26th having come and gone we figured this would be as good a time as any to get nostalgic for the National Pastime and use some baseball history to create the analogy for the current market environment.
Over 29 weeks from July 24, 2015 – Feb 12, 2016 the S&P gave back -15%. There was a low into late August, a retest into early Oct, and the ultimate low formed in late Jan/early Feb ‘16. The S&P did not get to its upward-sloping 200-week moving average.
After being down for 4 of 5 weeks and without so much as two up days in a row, “everything” bounced yesterday. And if you needed internal evidence to corroborate what the green on your screen reflected consider that Advancing Stocks in the S&P beat Declining Stocks by a ratio of 45:1 and 126 of the 128 S&P’s sub-indexes (98%) gained on the day (the only two that fell were the Interactive Home Entertainment Index and the Food Retail Index). The things that bounced biggest (Energy + 16%, Financials +12.8%, Industrials +12.8%, and Materials +11.6%) were among those sectors hardest hit while the S&P lost -35% from Feb 19 – Mar 23.
Sometimes we think about Milton Friedman, a son of Brooklyn, who earned degrees from Rahway High School, Rutgers University, the Univ. of Chicago (Masters in Econ) and Columbia University (PhD), and who won the 1976 Nobel Prize in Economics. But we think of him mostly for his great talent in explaining economics to the masses. He did this on the talk show, Donohue (late 70’s/early 80’s; YouTube has it).
Wotta week! Concentrating purely on the charts and our take on sentiment today’s Charts Are the Language of Wall Street version is entitled, “Alphabet Aerobics.” You’ll quickly see why via page 1 below.
Legend has it that King Canute, King of Denmark, England and Norway, once attempted to hold back the tides (as is depicted above) to display his celestial and mystic power. Contrary to this unflattering myth, Canute was a wise monarch who was referred to by medieval authority Norman Cantor as the most competent of all Anglo-Saxon kings.
While all risk assets are suffering, none have felt the pain more than small caps. At the epicenter of the credit stress, the Russell 2000 is off nearly 44% from its August ’18 peak, vastly underperforming the 32% decline in the S&P. To put the speed and ferocity of this drawdown into perspective, many of our internal oversold indicators are at or have breached ’08 levels (% of constituents > 200-Day MAVG, 12-Month Lows), while small cap volatility (RVX Index) is rapidly approaches historic highs. Unfortunately, until liquidity concerns abate, we’re hesitant to aggressively embrace these extraordinary oversold signals, and would rather pay up for equities once they signal that the worst is behind us. Support for the Russell resides ~940, the February ’16 lows.
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