The guest commentary below was written by Joseph Y. Calhoun, III of Alhambra Investments on 3/20/21. This piece does not necessarily reflect the opinions of Hedgeye.
Why did stocks sell off in recent months? Was it the emergence of the Omicron variant?
That was a popular narrative right after Thanksgiving but that lasted less than a month before stocks decided to look past COVID make a new high right after the new year.
Was the correction due to fears of the Fed raising interest rates and stopping QE? Was it the run up to and eventual start of the Ukraine war? Or was it just that stocks got too expensive and no one wanted to buy at nosebleed levels?
The answer would seem important at first blush since if we could identify the cause, we could determine whether it has been resolved and whether the furious rally last week made any sense.
Unfortunately, there is no way to know the “right” answer. We can’t know what every trader/investor was thinking when they pushed the sell button. Some might have sold because they needed the money for a down-payment on a house and felt some urgency because mortgage rates are rising.
Some might have decided to head to the sidelines due to the Ukraine war. Some might have decided that the 1.94% they can now get on a 2-year Treasury note doesn’t sound that bad compared to the 1.3% dividend yield on the S&P 500, which also happens to include a lot more anxiety. Maybe it was none of those things. Or maybe it was all of those things and more.
Whatever caused the correction, there seemed to be a consensus last week that the all-clear had been sounded and it was okay to wade back in, especially to the growth stocks everyone was abandoning just a week or so ago.
The NASDAQ composite rose over 8% last week while the S&P 500 value index managed about half that (which wasn’t bad considering it was down a lot less). Was the drop in oil prices the trigger?
Oil prices fell over $15 on Monday and Tuesday as everyone stopped panicking and figured out that Russia is still selling a lot of oil and that isn’t likely to change, even if their customer base has some turnover. It rebounded Thursday and Friday though to close the week down about $6 and yet stocks continued to rally through Friday.
Maybe the Fed finally actually doing something rather than just talking about it – sell the rumor, buy the fact – was the trigger. They hiked the Fed Funds rate – which is used by just about no one – by 1/4% on Wednesday and stopped buying bonds (we think), surprising exactly no one. Bonds did respond to more talking by Jerome Powell at his press conference but one can’t help but wonder why, given his track record.
I have said for a long time that monetary policy, such as it is, would be better conducted under a gag rule that applies anytime FOMC members are awake. Forward guidance only works if you can forecast and the Fed’s track record on that front makes your local weatherman look like a genius.
European stocks actually performed better than the NASDAQ last week so maybe it was positive developments in the Ukraine war that spurred the rally. We have discovered a lot about Russia during this war but mostly that their conventional forces probably don’t represent much of a threat to the rest of Europe.
The Russian military has been hampered by poor logistics, poor strategy, incredibly poor tactical execution, and low morale. Other than that, things have been going swimmingly. The problem for Ukraine is that Putin is not burdened with a conscience and appears willing to sacrifice his soldiers and Ukrainian civilians to achieve his aims.
Things might look better for the rest of Europe – if one assumes Putin can be restrained from using nukes – but for Ukraine the situation remains pretty dire. So, maybe the rally in Europe made sense in light of what we’ve learned about Russia in the last 3 weeks.
But I don’t think there is any reason to get too excited about US growth stocks. The NASDAQ Composite and the S&P 500 growth indexes are both trading below their 200-day moving averages and their 50-day moving averages have now crossed below the 200 day.
Those are technical markers that confirm the underlying trend for those indexes is now down. That condition could reverse fairly quickly as it did in 2004, 2006, 2011, 2016 and after 2020 but we haven’t seen any extreme sentiment conditions yet so I have my doubts. Bottoms are generally made when pessimism is rampant and everyone is betting stocks will keep falling.
The percentage of stocks above their 200-day MA will fall to the low teens or single digits. Put/call ratios will spike and short selling will be rampant. The only one of those we’ve seen so far is in the NASDAQ where the percentage of stocks above their 200-day MA fell to 14% in late January (not that it can’t go lower).
The lowest reading for the S&P 500 was 36% in early March. That isn’t even close. The put/call ratio for individual stocks peaked at 0.82 in this correction; bottoms are generally not made until the ratio exceeds one (1.28 in 2020).
The index only put/call ratio closed Friday at 1.07; bottoms usually see the ratio exceed 2 to 1. Traders are still too eager to be bullish for this to be a major low.
The leading styles right now, especially over the last 3 months are dividend and value, domestic and international. All these index ETFs are trading above their 200-day MA and the 50-day MA is above the 200-day; they are still in uptrends.
From a valuation standpoint, international continues to trade cheaper than the US. The EAFE value index (EFV, Alhambra owns) has a dividend yield over 4% and its holdings sound like a who’s who of international blue chips: Shell, Novartis, Toyota, BHP, HSBC, Total Energy, Nestle, Sanofi, Siemens, Glaxo Smith Klein, etc.
The wild card for international stocks is, as always, the dollar. If the dollar is rising, non-dollar investments face a headwind that is hard to overcome. The dollar is near the top of it’s range but could still go higher.
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EDITOR'S NOTE
Joe Calhoun is the President of Alhambra Investments, an SEC-registered Investment Advisory firm doing business since 2006. Joe developed Alhambra's unique all-weather, multiple asset class portfolios. This piece does not necessarily reflect the opinions of Hedgeye.
