Dysfunction Junction

Sep 27, 2021

By Pete Biebel, Senior Vice President

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The stock market’s northerly route over the past several months has been occasionally interrupted by brief jogs to the south. Those sudden veers, which were severe enough to induce panicked cries from the back-seat drivers, proved to be fleeting. In no time at all, the bulls had regained control, the market resumed its drive north and the lost ground was recovered in just a day or two. Last Monday, stocks experienced another hair-raising southerly swerve. The major averages all lost about 2% that day with much of the blame falling on the possible bankruptcy of a very large Chinese property developer.

We know now that the Monday lows were the lows of the week. With the China concerns in the rearview mirror, the market recovered all of Monday’s losses, and then some, over the next three sessions. The Dow Jones Industrial Average (DJIA) ended the week with a net gain of 0.62%. The S&P 500 Index (SPX), apparently tailgating DJIA, was just slightly behind with a 0.51% net gain. The NASDAQ Composite Index (COMP) barely moved the needle with just a 0.02% advance. Even the Russell 2000 Index of small-cap stocks (RUT) had a nice ride through the week, ending with a 0.26% net gain.

On a sector level, Energy and Financials left the others in their dust last week. The Energy sector went from worst to first, down nearly 6% at its Monday low and ending the week with a net gain of more than 3%. Helping to drive that sector were crude oil prices, which rallied from a Monday low just below $70 to Friday’s close near $74. In addition to crude oil, several commodity sectors racked up gains of a percent or two. Financials got a boost from higher long-term interest rates and a steeper yield curve. That sector gained about 2% for the week as the yield on the 10-Year Treasury Notes spiked from 1.30% to 1.45% late in the week. The confirmation on Wednesday that the Fed would begin reducing its monthly purchases of Treasury and mortgage securities sooner and faster than had been advertised helped push the 10-Year rate to its highest level in nearly three months.

Where the brief downdrafts and subsequent recoveries in recent months have been mere potholes in the market’s road forward, the events of last week have left the market at a fork in the road. The reason is that, where some of the earlier jogs may have merely dented the market’s resolve, last week’s adventure left the market looking like the Griswold family station wagon an hour into the movie.

The market has provided numerous signs recently that it’s been in a more dysfunctional state. Where all the previous successful U-turns have come at roughly the level of SPX’s 50-day moving average, Monday’s plunge pushed the index well below that level. SPX was able to climb back above its 50-day on Friday, but just barely. Even more damaging, last Monday SPX traded below and closed below its August low. That was its first lower low in nearly a year.

There’s another important distinction this time around. The four previous brief detours to the 50-day all came within four or five days of SPX reaching a new high. This time, the averages had all been skidding lower for a couple weeks prior to last week’s wreck. That path lower had been greased by the deteriorating breadth and momentum that we’ve noted in recent articles.

As we enter this week, the market seems to have already forgotten about the big Chinese company bankruptcy. Unless and until there is some evidence that the firm’s failure creates a contagion that spreads to financial institutions outside China, that story won’t be a negative for our markets. And even though the news from the Fed last week was very much on the hawkish end of expectations, the spike up in the 10-Year yield has been well contained so far. That yield certainly could continue higher this week, but as long as it holds below 1.55% or so, it probably won’t be more than a bump in the road for equities. News on the spread of the Covid Delta-variant has been less bad lately; it would likely need to take a severe turn for the worse before it would become a significant negative for the market.

The one wildcard with which the market hasn’t yet had to cope is the looming debt ceiling legislation or lack thereof. We’ve been through this drama before. At this point, the market will be watching the song and dance on Capitol Hill but is unlikely to be overly concerned unless negotiations stall in the eleventh hour.

Having arrived at this crossroads, the tone and direction of trading this week could well determine the market’s course over the next month or two. If the market can convincingly pull out of the rut left by last week’s smashup, then continued forward progress should be a cinch. If SPX can advance just another 1% or so, into the upper-4400s, then a drive to slightly higher new highs should lie ahead, though it could take a couple weeks to get there. However, if things head south again early this week, we could be in for a much rougher road. Falling quickly back below the 50-day on SPX (roughly 4440) would cast doubt on last week’s rebound. Still, I suspect the index would have to fall another 2%, to below 4350 before it was likely to trigger another rush for the exits.

The Durable Goods numbers today could prompt a market reaction if they come in much weaker than expected. The Unemployment and GDP data on Thursday are the reports that have the greatest potential to rock the boat. While there’s just a trickle of earnings announcements this week, the floodgates are about to open as the deluge of third-quarter reports will begin next week.


Date Report Previous Consensus
Monday 9/27/2021 Durable Goods Orders, August, M/M -0.1% +0.6%
Durable Goods Orders Ex-Transportation, August, M/M +0.7% +0.4%
Dallas Fed Manufacturing Survey, September 9.0 11.0
Tuesday 9/28/2021 International Trade in Goods, Trade Deficit, August $86.4 B $87.0 B
Wholesale Inventories, August, M/M +0.6% +0.4%
Case-Shiller Home Price Index, July, M/M +1.8% +1.6%
FHFA House Price Index, July, M/M +1.6% +1.5%
Consumer Confidence, September 113.8 114.8
Wednesday 9/29/2021 Pending Home Sales Index, August, M/M -1.8% +0.9%
Thursday 9/30/2021 Initial Jobless Claims 351K 335K
GDP, Q2, SAAR +6.6% +6.7%
Chicago PMI, September 66.8 65.3
Friday 10/1/2021 Personal Income, August, M/M +1.1% +0.3%
Personal Consumption Expenditures, August, M/M +0.3% +0.6%
ISM Manufacturing Index, September 59.9 59.8
Construction Spending, August, M/M +0.3% +0.4%
Consumer Sentiment, September 71.0 71.0


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