No Soup for You

Dec 13, 2021

By Pete Biebel, Senior Vice President

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Following a couple of very lean weeks, the market woke up and chowed down last week. On Monday and Tuesday, the averages gobbled up points voraciously. The lessening of the Omicron variant as a threat spurred the market’s appetite; Monday was the best day for the Dow Jones Industrial Average (DJIA) in nine months. By midmorning Tuesday, DJIA had recovered all of its post-Thanksgiving Day loss. Having gorged so gluttonously and apparently sated, the market merely nibbled at gains over the remainder of the week. DJIA added a morsel more than 4% for the week. The S&P 500 Index (SPX, +3.82%) and the NASDAQ Composite Index (COMP, +3.61%) also ate up the news.

It was the best week for SPX since February. That index took another big bite in the final hour on Friday to end the week at a record closing high (4712), though it stopped short of its record intraday high reached Monday morning of Thanksgiving week (4744). The largest component stocks in SPX were again among the most significant contributors to its gain. The No. 1 stock in the index by size gained nearly 11% for the week; the second-place stock was up more than 6%. The 12 largest stocks had an average gain of nearly 4.5% for the week.

That’s a theme that has been evident all year: The big boys have consumed more than their fair share of the points gained in the index, leaving, if anything, mere scraps for the majority of stocks. Just five of SPX’s largest component stocks account for more than a third of its year-to-date gain. Those same five are responsible for 51% of the index return over the past seven months. The narrowing of market breadth is also apparent in the advance/decline statistics and the number of stocks reaching new highs and new lows. In the face of last week’s record gains, stocks on the NYSE registered 186 new highs and 244 new lows. There were nearly 900 new lows on the NASDAQ and less than a quarter of that number of new highs.

I have cited the narrowing market breadth in recent articles. The presence of that condition is the reason I titled my pre-Thanksgiving article “Handle with Care.” I pointed out then that these breadth divergences can last for months, and their presence alone doesn’t mean that the market is likely to immediately roll over. The fact that the market rolled over that week was a fluke; the market’s sudden weakness was due to the emergence of the Omicron variant. However, where last week’s rebound was an opportunity for the previous laggards to take over leadership, it was the big boys again who wolfed down the gains while many smaller stocks went hungry. Rather than relieving some of the divergence, the action over the past couple weeks has exacerbated it.

A smorgasbord of small stocks did dine in style last week. Shares of companies that should benefit from a reopening economy, airlines, cruise lines and casinos, had a great week. Technology was the strongest of the U.S. equity sectors, up nearly 6% for the week. Big gains in some of its largest stocks masked the weakness in some of the former “shelter-at-home” winners. Several virtual payment companies, streaming services and software-as-a-service companies continued their recent steep slides. The Energy sector was second-best last week with a gain of nearly 4%. An increase of about 6% in the price of crude oil helped to grease the path for energy stocks.

Through much of last week, it appeared that the market’s inflation fears were beginning to trump its Covid fears. In addition to the relative performance of the re-opening stocks over the shelter-at-home stocks mentioned above, the benchmark 10-Year Treasury yield climbed from about 1.35% to about 1.53% through the first half of the week. Because of that, I expected a much bigger reaction from the bond market when the CPI data on Friday morning showed a higher-than-expected increase, +0.8% against expectations of a 0.7% increase. The year-over-year increase was also a tick higher than expected at 6.8%. That’s the highest reading in 39-½ years, but that was pretty much going to be the case if the month-over-month number came in anywhere near consensus.

And the bond market shrugged. The Two-Year Treasury yield actually fell by a basis point. The 10-Year yield was just a tick or two higher on the day. Part of the explanation is that the data was more or less in line with expectations. We needed a larger surprise to spook the bond market. Another excuse is that the reported data is what happened in the past. We all knew it was going to be a big number. The bond market is making a call on future inflation. So far, the expectation is that the pace of price increases will begin to decline soon.

To me, the biggest concern for the stock market is the continuing breadth divergences. Periods in which market breadth narrows persistently are typically followed by weaker than average returns and large drawdowns. With the small-cap stocks underperforming, I don’t expect the major averages will make significantly higher highs, despite the potential for a Santa Claus rally later this month. I still hold to my earlier target range of 4740 – 4780 for SPX.

With last week’s gains, the averages have plenty of elbow room before declines would set off any alarms. The first downside area to watch on SPX is just below 4600, near the 50-day moving average. As long as the index can hold above that level, higher highs are still within reach. Falling below the 50-day would introduce the 4500 area as a critical level. Falling below 4500 would push the index below the early-December low and break its long-term uptrend.

The PPI data on Tuesday will be the first big report this week. Last Friday morning, the market barely shrugged when the CPI print came in 0.1% above expectations. Still, a big miss, one way or the other, could trigger a market reaction. In addition to the Retail Sales data, Wednesday brings the much-anticipated FOMC policy statement and subsequent press conference. The market seems to expect the Fed to announce an acceleration in its rate of tapering of its monthly liquidity injections. The absence of such an announcement could spark a big reaction in both the stock and bond market. The Initial Claims data on Thursday seems almost mild by comparison.

Date Report Previous Consensus
Tuesday 12/14/2021 NFIB Small Business Optimism Index, November 98.2 98.3
Producer Price Index, November, M/M +0.6% +0.5%
PPI, ex-Food & Energy, November, M/M +0.4% +0.4%
Wednesday 12/15/2021 Retail Sales, November, M/M +1.7% +0.8%
Retail Sales, less Vehicles & Gas, November, M/M +1.4% +0.8%
Empire State Manufacturing Index, December 30.9 25.5
Import Prices, November, M/M +1.2% +0.7%
Export Prices, November, M/M +1.5% +0.7%
FOMC Policy Statement and Press Conference
Thursday 12/16/2021 Housing Starts, November, SAAR 1.520mm 1.563mm
Initial Jobless Claims 184K 200K
Philadelphia Fed Manufacturing Index, December 39.0 28.8
Industrial Production, November, M/M +1.6% +0.7%
PMI Manufacturing Composite Flash, December  58.3  58.5
PMI Services Composite Flash, December 58.0 58.2
Friday 12/17/2021 Quadruple Expiration, Stocks & Indices, Futures & Options


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