Handle With Care

Nov 22, 2021

By Pete Biebel, Senior Vice President

Print This Post Print This Post

As the holiday season begins, with it comes the eager anticipation of many traditional seasonal events. From mundane tasks like hauling out the holiday decorations and napping through NFL games to more anxiety-filled chores like shopping for and shipping off just the right holiday gifts. Mailing cards and presents carries extra stress this year; we’re already being advised to shop early due to supply chain bottlenecks and being warned to mail early in anticipation of the coming holiday surge.

One traditional present that investors expect to figuratively arrive at their doorsteps is a year-end stock market rally. The final three months of the year have historically been very strong ones for stocks, usually topped off with a year-end Santa Claus rally. But now with the averages at or near record highs, one might wonder how much of that package has already been delivered.

Since October 1st, the NASDAQ Composite Index (COMP) has climbed a bit more than 10%, tagging on another 1.24% last week. With its gain on Friday, COMP closed above the 16,000 level for the first time. The S&P 500 Index (SPX) wrapped up the week with a net gain of just 0.32%, which lifted its seven-week increase to 7.82%. SPX has been stalled near the 4700 level for a couple weeks; it delivered a record close on Thursday near 4705 before slipping a bit on Friday. The Dow Jones Industrial Average (DJIA) received a lump of coal last week. Its 1.38% decline for the week reduced its gain since the beginning of last month to a mere 3.72%.

Among the reasons to anticipate that the gains over the final six weeks of the year may be more fragile are a potential post-holiday Covid spike and worsening market breadth. Last week, Austria announced a nationwide lockdown as the pandemic rapidly intensified there. Hotspots in the U.S. have suddenly increased, and now medical professionals are warning that holiday gatherings could result in an upsurge in infections in the coming weeks.

But the unmistakable stamp of narrowing leadership and declining market breadth is the concern that is here and now. In recent weeks, a relatively small number of large-cap stocks have been doing the heavy lifting while the majority of stocks have just been mailing it in. Consider that below the surface of last week’s gain, the NYSE had more than twice as many declining issues as gainers. On the NASDAQ, which had a similar ratio of decliners to advancers, the last three days of the week registered more new 52-week lows than new highs. Of the roughly 4900 NASDAQ issues traded, more than 400 hit new lows on Thursday. On Friday, the day the index reached a new high, 322 issues hit new lows while just 160 touched new highs.

There have been several other recent symptoms of how strength in a relative handful of large-cap stocks has obscured the anemic performance in the majority of stocks. Last week, the benchmark capitalization-weighted SPX managed a small gain while the equal-weighted version of the S&P 500 lost 1.27%.  Over the past five weeks, SPX has gained just over 5% while the equal-weight version has climbed less than half as much. The NASDAQ 100 Index, which is comprised of the 102 largest non-financial companies on the NASDAQ, gained nearly twice as much as COMP last week. All ten of its largest component stocks had gains last week, six of them gained more than 4% for the week. 54 of the other 92 stocks had losses.

Another unsettling aspect of recent activity is that some of the brightest areas, which had instilled hope for the overall market a few weeks ago, have suddenly dimmed. The Russell 2000 Index of small-cap stocks (RUT) launched out of a long consolidation pattern in early-November. It gained more than 6% in the first week of the month. It looked like a very promising sign for the market’s future; after all, good things come in small packages. But RUT has severely underperformed in the past two weeks, losing first about 1% followed by a loss of nearly 3% last week. Two other sectors that had been market leaders in recent months, Energy and Financials, have also seemingly had their lights turned out. Those two were the poorest performing of the U.S. equity sectors last week and are the biggest losers over the past five weeks.

These types of breadth divergences and leading sector flameouts are the holiday equivalent of a loud-mouthed distant relative spoiling the mood during the big meal. Their presence doesn’t mean the feeding frenzy has to end, but it likely isn’t going to be as much fun as was originally imagined. Breadth divergences can persist for months. Given the strong seasonal tendencies, the uptrend could certainly extend into early-2022 before any sort of intermediate-term top has been established.

The market’s run from early-October into early-November left the averages in a very extended technical condition on a short-term basis. Some sort of timeout was due, and that’s pretty much what the past two weeks have been. So far, there has been no technical damage done. COMP and SPX could slip 3% to 4% from current levels without sounding any alarms. Such a pullback could be a heathy prelude to a late-December rally.

Regardless of the scenario, I still believe that additional gains over the next month or two will be limited. So far, I haven’t seen anything that would lead me to increase the SPX 4740 – 4780 upside target zone that I proposed two weeks ago.

In this holiday-shortened week, a bundle of economic reports will be delivered on Wednesday.  In addition to the Jobless Claims data coming a day earlier than normal, we’ll also get important updates on Durable Goods Orders and GDP.

We wish you and yours a very happy and safe Thanksgiving Day holiday.

Date Report Previous Consensus
Monday 11/22/2021 Chicago Fed National Activity Index, October -0.13 0.90
Existing Home Sales, October, SAAR 6.290mm 6.200mm
Tuesday 11/23/2021 PMI Composite Flash, November  58.4 57.8
Richmond Fed Manufacturing Index, November 12 11
Wednesday 11/24/2021 Durable Goods Orders, October, M/M -0.4% +0.3%
Durable Goods ex-Transportation, M/M +0.4% +0.5%
Initial Jobless Claims 268K 264K
GDP, Q3, Q/Q, SAAR +2.0% +2.1%
International Trade, Trade Deficit, October $96.3B $94.6B
Wholesale Inventories, October, M/M +1.1% +0.8%
New Home Sales, October, SAAR 800K 790K
Personal Income, October, M/M -1.0% +0.2%
Personal Consumption Expenditures, Oct., M/M +0.6% +1.0%
Consumer Sentiment, November 66.8 66.9
Thursday 11/25/2021 Thanksgiving Day
Friday 11/26/2021 Stocks close at 1:00 EST, Bonds close at 2:00 EST


Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.