You know the drill… BOJ, Fed, Oct Jobs this week. Election next. I suspect BOJ surprises to the downside on less than expected commitment to monetary stimulus, but will be muted. I expect the Fed to be a non-event with Fed Funds futures only pricing a 15% chance of a rate increase. And I expect the Oct Jobs data Friday to be factored into the Fed’s decision not to raise, while strongly hinting to a Dec 14 hike. This is all known. This past Friday’s “Oct surprise” sell-off in the market on the headline that the FBI has emails of interest found during the sexting investigation of Anthony Weiner (you can’t make this up) is unlikely to continue on that particular story as we probably see radio silence from FBI Director Comey until election day. But it pretty much makes the FOMC Nov meeting a 0% chance, as there’s no way they want to get the sort of heat Comey is getting right now.
But we may be getting close to a point where no matter what the outcome in the election we are due for a little “sell the news”, and traders may even try to get ahead of that. As far as after the election itself, with a Clinton victory maybe we see the S&P 500 (SPX) touch unchanged on the year (now up 4%) in the coming weeks, if Trump shocks, we could see a Brexit type reaction and all bets are off after that. I for one would finally take Trump supporter Carl Icahn’s advice to be VERY fearful of owning stocks in that scenario.
Now lets’ consider the progress, or lack there of U.S. stocks during the last 22 months, while U.S. monetary policy and U.S. politics have emerged as two of the largest headwinds to stocks.
On December 31st, 2014 the S&P 500 (SPX) closed at 2058. On Friday, the SPX closed at 2126 on Friday, up 3.3% (less dividends) in 22 months:
That’s not a heck of a lot of progress, despite the index grudgingly making new all time highs this summer. I guess more importantly the only upward momentum in the market came after sharp declines. The risk has clearly been to the downside owning stocks and those sell-offs have been enough to get some off-sides and provide the juice for the move back to highs, but not much more than that.
The index’s nearly 2 year consolidation between 1800 and 2200ish is fairly reminiscent (in some ways) of the 400 point consolidation in 2010 and 2011, expect for the fact that 400 points in the SPX between 1000 and 1400 was a tad more volatile than between 1800 and 2200:
Back in 2010 and 2011 there was a lot of consternation among central bankers and financiers about the continuation of crisis monetary policy, and the political will to continue it in Washington, sound familiar?
On Friday (Russell, Your Looks Have Become A Problem – IWM) we highlighted the relative under-performance of small cap stocks from the recent highs vs their large cap peers. The IWM, the etf that tracks the Russell 2000 on Friday closed below technical support at $120 and more importantly its third consecutive close below the uptrend that has been in place since the February lows:
To my eye, stocks are feeling a bit strained, and the leadership at the very least are showing signs of fatigue. Just last week, Apple (AAPL) couldn’t rally after strong results, Amazon (AMZN) investors hit the pause button after increased spend despite 30% sales growth, Alphabet (GOOGL) couldn’t go up after printing a stellar quarter, which makes Wednesday’s Q3 report from Facebook (FB), and more importantly the stock’s reaction all that much more exciting (on Friday we highlighted a long stock alternative for those who want to stay long and make defined risk bullish bet – ((Facebook (FB) Pokes), this one makes us a bit nervous). Regular readers are well aware that its the concentration of performance among such a small group of growth stocks that causes us to have our antennas up (MorningWord 10/25/16: Breadth Mints – QQQ):
My continued concern as it relates to the health of the rally is the performance concentration of top 5 holdings in the Nasdaq, but particularly the NDX. The top 5 holdings (AAPL, MSFT, GOOGL, FB & AMZN) in the QQQ (105 stocks total), the etf that tracks the NDX make up about 40% of the $5.6 trillion index’s weight. Year to date the index is up nearly 7%, or about $390 billion. When you take the year to date gains in market cap terms of the top 5 holdings they equal nearly $370 billion. That’s fairly astounding from a concentration point, showing what appears to be a lot of poor performance of dozens of stocks in the index, possibly masking some nasty fundamentals.
The risk is that growth rates among a small group moderate (as we saw in AAPL over the last 2 years), which they are most certainly likely to do, but whats more uncertain is how these stocks will act when too many investors head for the door at the same time and if there will be a rotation into other sectors that will be adequate enough to buoy an already weary stock market.