Behind The Street - Issue #2
October 3, 2021
October 3, 2021
Behind The Street Newsletter
The Nasdaq, S&P 500, and Dow Jones Industrial average all faced harsh sell offs early in the week but managed a strong rally into Fridays close, yet again. The Nasdaq and S&P 500 found support on their 100-day moving average with the Dow lagging and failing to rally back above its 100-day. The general market is still in a correction being that the S&P 500, Nasdaq, and Dow Jones are all still below their 50-day moving average. Final print on the S&P 500 was 4357.05, Nasdaq 14,566.70 and Dow Jones 34326.47.
It is important to note that major indexes are only 3-5% off their all-time highs. However, under the hood of this market we see major damage in individual names. Often the indexes will hide the true damage to the stock market due to mega cap tech stocks having such a high weighting in the index. For example, S&P 500 includes the 500 largest U.S. publicly traded companies, weighted by market capitalization. Large tech companies such as $AAPL and $MSFT each have over a 5% weighting in the index, thus cushioning the blow when smaller market cap names sell off.
Looking at past growth stock leaders, many are off 30-40% from all time highs. This is severe damage and buying should be avoided unless these stocks start to see signs of institutional buying. (Large percentage gains on higher-than-normal volume.) Remember, stocks in a down trend tend to stay in trend, its best to avoid buying unless we notice a major trend change such as breaking above a key price level or reclaiming a major moving average. $TWLO is down -26% from ATH, $OKTA -18%, $SPLK -35%, $ZM – 54%, $TDOC – 58% etc.
In conclusion, even though indexes don’t appear to be under pressure, “under the hood” we see major damage. This is a sign of a “thin” market and weak breadth. However, as we make our way into earning season things can change very quickly and we need to be ready to change with the trend at any time. Above all, EARNINGS MATTER. Should we see massive beat and raise quarters from former leaders and current leaders, expect a nice set up for a rally into year end.
As of June 29, the following are the five largest S&P 500 index constituents by weight:
1) $AAPL - 5.89%
2) $MSFT - 5.63%
3) $AMZN - 4.07%
4) $FB - 2.32%
5) $GOOGL - 2.03%
Distribution Days: (Days where index sells off in heavier volume than previous day. Signaling institutional selling. 5 - 6 distribution days in the span of 4 weeks signals market weakness) Investor’s Business Daily
Current Distribution Count: Market in correction
Leaders up in volume: $CF, $NTR
Leaders down in volume: $MRVI, $PDCE
What’s The Fed Doing?
This week will be critical for the Fed. Friday morning we will see the September employment report. These reports are always important, but the September numbers will dictate whether Fed Chairman Jerome Powell will proceed with tapering of its $120 billion in monthly securities purchases. On September 22nd Jerome Powell said that it would take a “reasonably good” employment report in order to give the authorization to start to taper. Read more about it here: The Outlook for Earnings, Jobs Adds to the Chill in the Air | Barron’s (barrons.com)
View the U.S. 10 Year Treasury here: US10Y: 1.454% -0.007 (0.00%) (cnbc.com)
The debt market is the most important factor in relation to the stock market. This week we saw the yield on the 10-year U.S. Treasury note surge above 1.5%. The 10-year yield is now at a three-month high, breaking out of its months long range. This is important because lower yields make investors willing to pay more for shares of tech companies that they expect to produce large profits in the future. When yields move higher company’s earnings years from now are worth less today. Remember, many highflyer tech stocks have high valuations bases on future earnings. We will talk more about this on the stream!
The VIX: CBOE Market Volatility Index
September 28, 2021 saw yet another massive spike in the VIX to a high of 24.81. Historically when we have extreme moves to the upside in the VIX it is often wise to go short vol. VIX is a fear indicator in the market and sure enough, we saw the VIX collapse back down to 21.20 to close the week. The VIX is still elevated so look for more follow through to the downside.
Follow the VIX here: VIX Index (cboe.com)
Looking Ahead:
We are in a correction, however, look for what is considered a follow through day on the indexes. This is a day where the market closes higher on greater than normal volume. This is a signal that institutional investors are buying back stock. We need to be fluid with the markets. Overall, the market is still in an uptrend on a weekly and monthly time frame, but it is important to keep an eye on the trend as we head into earnings season.
Now that the market is in a correction it is important to look for the individual stocks that are holding up well, these stocks tend to be the new leaders in the next rally. These stocks have high relative strength. RS (relative strength) tracks a stocks performance vs. the S&P 500 and is a great way to find winners once the market trend continues upward. Stocks in a downtrend tend to stay in a downtrend and vice versa. $DDOG, $ZI, $GOOGL, $TEAM, and $PANW are some examples of stocks with high RS ratings. Remember, above all else earnings trumps all.
One major positive to keep an eye on. The ISM Manufacturing index rose 1.2 points in September to 61.1, better than expected and signaling faster expansion in the overall economy.
View the Manufacturing PMI report here: https://www.ismworld.org/supply-manag…A
PMI above 50 indicates an expansion of the manufacturing segment of the economy compared to the previous month. A reading of 50 means no change. A reading below 50 suggests a contraction.
Lastly, Bitcoin saw massive strength on Thursday and Friday with large buy volume showing face. I continue to be bullish on Bitcoin and Ethereum going forward. In addition, on chain metrics show large holders are not selling their coins. Instead they are buying more. Have a happy and productive week ahead and I will see you right back here next week for the third edition of the Behind The Street Newsletter!
Your Pal,
Tom
Email: walkswallstreet@gmail.com
Much of the data in this Newsletter can be found here:
Investor’s Business Daily | Stock News and Stock Market Analysis - IBD (investors.com)
Barron’s | Financial and Investment News (barrons.com)
***The Behind The Street Newsletter is for educational purposes only. This is not an endorsement to buy or sell any securities. Please consult with your personal financial adviser. This is a collaborative space where we talk about the financial markets for educational purposes only.***