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Wednesday, August 24, 2022
The S&P 500 (^GSPC) has a breadth problem.
The summer rally in stocks petered out last week after a sizable 17.4% gain for the S&P 500 from mid-June lows to mid-August highs.
But echoing a complaint common to the so-called FAANG era that prevailed in the years before the pandemic, 30% of the heavy lifting was once again performed by only a few stocks — Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), and Tesla (TSLA).
And as these trades lose steam and culprits like the strengthening dollar again make their presence known, this recent rally appears more troubled than a few weak sessions might otherwise indicate.
Apple, arguably the most important bellwether stock on Earth, suffered its worst two-day plunge in two months on Friday and Monday, after hitting key trend line resistance. This drop saw the stock break a separate — and steep — trend line to the downside; the stock now sits on its 20-day moving average.
Through the summer, Apple climbed within 4% of its record high — an impressive rebound for a stock that fell about 30% from late March through mid-June. This quick reversal, however, has Apple shares on shaky footing.
Over a similar period, Microsoft mustered a 21% rally that took the stock to within 16% of its all-time high. But five days later, the stock is confirming an island reversal pattern on its daily candlesticks. Amazon is in a similar boat, but is still “on the island” — consolidating what had been a 45% gain at its recent peak.
Meanwhile, Elon Musk’s Tesla looks a bit stronger after a 50% rally that wasn’t quite as steep and unsustainable as Apple’s. Still, the stock has struggled to punch through the halfway mark of its decline from record highs, indicating shorts still have the edge on a longer-term time frame. Only above $1,000 per share would we expect Tesla bears to start throwing in the towel.
None of this, of course, would be too concerning if the broader market had participated more in the run-up.
True, some measures of market internals have flashed bullish signals recently. The percent of S&P 500 components trading above their 50-day moving averages, for instance, topped 90% last week for the first time in over a year.
But key leaders and industry groups — such as the high yield bond market and semiconductor industry — underperformed through the summer’s rally and have been quick to reverse. Short covering junk-off-the-bottom rallies can only take a market so far.
Meanwhile, bullish investors are on pins and needles, counting down the minutes to Federal Reserve Chair Jay Powell’s keynote Jackson Hole speech Friday morning.
But most strategists think investors can forget about a Powell pivot this soon into the Fed’s rate hiking cycle. The Fed chief explicitly stated several times at his presser in late July that the Fed’s next moves are all about the incoming data — read: inflation stats — and not much else.
More troubling for the market is that U.S. stocks accounted for 86% of global equity gains during the recent rally, according to Michael Hartnett’s team at BofA Securities. Looking away from the U.S. stock market, it’s no coincidence we find the recent risk rally flourished as the dollar cooled from its blistering surge higher.
And this respite is indeed looking transitory, however, as a 7-session rally in the U.S. dollar index (DX-Y.NYB) erased a 20-session decline of equal magnitude, putting the dollar right back near two-decade highs.
Unless Powell says something that knocks the dollar from its lofty pedestal, don’t expect much help from the Fed.
Investors looking for the next bullish catalyst may cheer any hints from Powell towards an end to the Fed’s balance sheet reduction program — or so-called quantitative tightening — which is putting pressure on currencies, bonds, and money markets.
But as the equity derivatives team at Bank of America Global Research said in a note on Tuesday: “We believe risk assets have reason to worry about Jackson Hole.”
Leaving investors better served, as ever, by simply not fighting the Fed.
What to Watch Today
MBA mortgage applications
Durable goods orders, July (+0.8% expected, +2% previously)
Durable goods orders excluding transportation, July (+0.2% expected; +0.4% previously)
Pending home sales, July (-2% expected, -8.6% previously)