A painful week for investors … why John Jagerson and Wade Hansen don’t believe it will turn into something uglier … how much longer the weakness could last
We shouldn’t be worried about traders reaping some profits right now.
That’s how our technical experts, John Jagerson and Wade Hansen, began their Strategic Trader update from Wednesday.
The reassurance is welcomed given the pain many investors felt this week. Some are concerned that the market is in the first stage of a full-blown correction.
While that’s not off the table, John and Wade suggest it’s more likely that the recent weakness is business-as-usual — nothing more than the ebb and flow of a normal market.
Today, let’s get into these details and find out why John’s and Wade’s bottom line is “although fluctuations like this can be frustrating for traders with a bullish bias, it looks very routine.”
***Normal healthy pullback or the beginning of significant collapse?
For newer Digest readers, John and Wade combine options, insightful technical and fundamental analysis, and market history to trade the markets, whether they’re up, down, or sideways.
While they consider long-term, macro market forces, what’s happening now is a primary focus of their analysis. After all, you wouldn’t want to put on a bullish trade if short-term indicators were pointing toward imminent weakness.
Fortunately, John and Wade view this week’s selling pressure as nothing out-of-the-ordinary.
From their Wednesday update:
This week’s uptick in market volatility shows all the signs of profit-taking rather than a fundamentally negative shift in the market …
The first clue that this volatility, which started last Tuesday, is profit-taking rather than a fundamental change in the market is that the hottest sectors and assets are experiencing the losses.
At the same time, other groups remain defensive and bullish or neutral.
To illustrate their point, John and Wade point toward the performance difference between high-flying small caps, bitcoin, and select hot market sectors, versus the S&P.
… small caps that have exceeded most expectations over the last 12 months lost more than twice what the S&P 500 had lost by Tuesday morning.
Extremely speculative assets like bitcoin, solar stocks, development-stage biotech and hot stocks like Tesla (TSLA) performed especially poorly over the last few days, which is completely normal after the run those assets had over the previous 12 months.
***It’s also interesting to see this performance differential if we compare the S&P Equal-Weight Index with Nasdaq 100
To make sure we’re all on the same page, the S&P 500 Index is comprised of a shade more than 500 of the largest companies in the United States. However, all of these companies don’t get equal representation in the index. That’s because the S&P is “weight-averaged.” In other words, the bigger the company, the more “representation” it has in the index.
Given this, when we look at the S&P, we’re not viewing an accurate depiction of how its “average” stock is doing. But by looking at the S&P Equal-Weight Index, which, as its name implies, gives every stock the same representation, we get a far-clearer idea.
Meanwhile, the Nasdaq 100 is a basket of the 100 largest, most actively traded U.S. stocks listed on the Nasdaq. It’s basically a “who’s who” of today’s top tech leaders, including Apple, Microsoft, Tesla, Amazon, Nvidia, and so on.
Below, you can see that while the average Nasdaq-100-stock has fallen 4.1% on the week (as I write Friday early afternoon), the average equal-weight-S&P stock is down just 0.2%.
That’s a major performance differential.
By the way, for you astute readers who are wondering about the performance difference between the S&P 500 and S&P Equal-Weight, the S&P is down 1.5% — almost 8-times its equal-weight cousin.
This reflects the added weight that tech-majors like Apple, Microsoft, and Tesla have in the S&P.
***What additional factors are John and Wade looking at that gives them confidence this weakness will blow over?
The first is easy monetary policy from the Fed.
Back to John and Wade:
… long-term interest rates have been rising recently, but the Fed remains committed to its bond-buying program that should keep borrowing costs low.
Fed Chair Jerome Powell told the Senate banking committee on Tuesday that “it is likely to take some time for substantial further progress to be achieved” for the economy to reach long-term growth and inflation targets.
We feel that Powell’s comments came at the perfect time on Tuesday and were the primary factor that reversed the broad indexes and tech sector losses.
The Fed’s program can’t last forever, but we don’t think a change is likely in the short term. For now, we don’t plan to recommend any changes to our strategy until the 10-year Treasury yield gets to 2%.
Yesterday, the 10-Year yield climbed as high as 1.6%. As I write, it’s trading at 1.508%.
While it might seem that’s a substantial ways from 2%, the explosive rate at which the 10-Year yield has risen since the summer tells a different story.
Back in early August, the yield was at 0.5%.
That means it has exploded 200% in less than seven months.
Plus, the gains that are steepening. Below, you can see how the yield was at 1.01% just one month ago, yet has raced higher to today’s level of 1.508%.
At this rate, the 10-Year yield could easily top 2% by late-March.
This is definitely something to keep an eye on.
***John and Wade also point toward stimulus spending as supportive of more gains
From their update:
We know much of the news about the stimulus has recently been overshadowed by the fight to increase the minimum wage.
In our view, if the fight in Congress is about an aspect of the stimulus bill (minimum wage) rather than the bill itself, then the likelihood for direct payments this quarter is a near certainty.
We aren’t the only investors who feel that stimulus is likely to happen quickly. Selling the news of more direct payments could be one of the triggers for the recent volatility, but we think that is a temporary issue and will reverse shortly.
As we stand today, the House is expected to pass Biden’s $1.9 trillion stimulus package today, after which it will go to the Senate.
Though the package appears to have zero Republican support, Democrats could get it through the Senate through the process of “reconciliation,” which allows them to pass the legislation with a simple majority instead of the 60 votes usually needed to get past a potential filibuster in the Senate.
***Finally, John and Wade point toward earnings growth as a reason why the market will continue climbing, even if it’s volatile
Back to their update:
This earnings season has been very encouraging. So far, profits are up more than 3% among the S&P 500 on a year over year basis.
This comparison is important because it shows that the first quarter of 2021 is doing better than the first quarter of 2020, which was mostly before pandemic hit spending numbers.
To put things in perspective, on a year over year basis, profits declined more than 9% in the fourth quarter of 2020.
However, there is an important caveat for this factor: Earnings are much lower than in 2019, and stock prices are a lot higher.
This doesn’t mean stocks will fall, but it does increase the likelihood that volatility will remain high.
As they near the end of their update, John and Wade include an interesting fact …
Over the last two years, corrections have lasted an average of 27 calendar days (excluding the pandemic crash in March 2020). The vast majority last between 18-24 days.
If you’re keeping track, the S&P topped out just 14 days ago. This suggests there could be room left in this current pullback, even though John and Wade don’t see it snowballing into a major correction.
As we wrap up, I’ll give them the final word, which comes from their market update yesterday:
Our bottom line right now is that the correction still appears to be driven by some temporary profit-taking that is within normal ranges.
Adjustments like this are routine. If there is still some volatility to come, our expectations are that it will play out similarly to the profit-taking last September, which wound up working out very well in our favor.
Have a good evening,