It has been a rocky two weeks as the S&P has dropped over 5% as Fed Chairman Powell admitted before Congress that inflation was not transitory and that policy would need to get more aggressive to combat higher prices. Weighing on the market is also the the omicron coronavirus variant that is triggering a fresh patchwork of national travel restrictions around the world. For example, Japan and Israel are now barring almost all foreign visitors while Europe and Asia have instituted new rules for international entry. However, I think political leaders know that the recovery must continue under these conditions as just about every central bank and government has unloaded their clip of stimulus payments and quantitative easing. Unless governments restrict movement and trade, the recovery will continue but at a bumpier pace.
This means that the stock market will have to contend with the Fed reversing its stimulative efforts which has caused the market to pullback. The next Fed meeting is on December 15th so we will get the new playbook for 2022 just before the holiday season.
The technicals may have shown signs of nearing a bottom on Friday as there was a failure to breakdown past 4500 (50% FIB). There was an unusually high amount of option activity to end last week as the put/call ratio was the highest in over a year. If you are not familiar with this metric, a high reading means everyone is betting on a crash. In reality, traders use this as a signal of a bottom forming (think of it as a short-term panic) as you begin to run out of sellers as investors have hedged their downside risk.
We saw some evidence of a reversal higher into the close and now we wait for the next few sessions to see if the buying will carry this index above 4605 (55EMA) and confirm a bottom. Seasonality for the stock market this time of year is very good so it wouldn’t surprise me to see a rally into the Fed meeting later this month.
One very notable part of the market is the small caps held within the Russell 2000 (IWM ETF below) that has declined over 13% in November at the 4th fastest pace since 1980. It is very rare to see a failed breakout in a major index but the Russell 2000 may have needed to re-test the lower boundary of its consolidation range which is where it closed on Friday. If there is also a reversal higher in this index, then all of the major indices will be in unison for the first time since February. This index is also the most oversold since March of 2020 so the odds have tilted to a move higher according to the RSI (Relative Strength Index) at the bottom of the chart.
Chart of the Week!
According to the latest World Tourism Barometer, global travel activity rebounded sharply in the third quarter of 2021, while remaining far below pre-pandemic levels.
Economic & Central Banking Snippets
- The U.S. economy added a seasonally adjusted 210,000 jobs in November which was a marked slowdown from an upwardly revised increase of 546,000 in October. Almost 600,000 people joined the workforce, and the unemployment rate fell to 4.2% from 4.6%.The payrolls number, which comes from a Labor Department survey of businesses, offered an unusually large divergence from data from a separate survey of households also released Friday that showed strong progress in employment. That survey showed that 1.1 million more people were employed in November than in October. The labor-force participation rate rose to 61.8%, the highest level since March 2020 at the start of the pandemic. (WSJ)
- The ISM November services index rose to 69.1 from 66.7. All industries saw growth and ISM said “Demand continues to outpace supply that has been impacted by capacity constraints, shortages of labor and materials, and logistical challenges. This has also caused demand pull inflation that is affecting overall business conditions.”
- The November ISM manufacturing index was up slightly at 61.1 vs 60.8 in October where 13 industries of 18 saw growth due to supply side challenges. Only 10 industries saw growth in new orders but all 18 saw higher prices. The ISM said “All segments of the manufacturing economy are impacted by record long raw materials and capital equipment lead times, continued shortages of critical lowest tier materials, high commodity prices and difficulties in transporting products. Coronavirus pandemic-related global issues — worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems — continue to limit manufacturing growth potential.”
- Pending home sales in October rose 7.5% m/o/m as rising rents and interest rates are spurring purchases.
- The September S&P CoreLogic home price index rose 19.5% y/o/y after a 19.8% increase in August. Leading the gains was the 33% price increase in Phoenix, followed by 28% in Tampa and 25% in both Miami and Dallas. At the bottom was the 12% price gain in Chicago, almost 13% in Minneapolis and around 14% for both DC and Cleveland. (Boockvar)
- In response to last week’s news that the Commerce Department is doubling the average tariff on Canadian softwood lumber to 17.9%, lumber prices this week spiked by 21%.
- Industries most affected by Covid-19 are still well below pre-pandemic employment levels. Restaurants, bars, nursing homes, and hotels and similar accommodation are hundreds of thousands of jobs short of where they were in February 2020. (WSJ)
- Tesla CEO Elon Musk sold more than $1 billion of shares in Tesla, according to regulatory filings. The sale marks $10 billion in sales of Tesla shares from Musk that started back in early November.
- Chinese ride-hailing giant Didi Global announced it would delist its stock from the New York Stock Exchange, and plans to list on the Hong Kong Stock Exchange, amid heightened scrutiny of the company by Chinese regulators.
- Square is changing its name to Block to better reflect its interest in Bitcoin and blockchain. The name change comes just days after CEO Jack Dorsey left Twitter to focus on Square.
- Apple is warning suppliers about diminishing iPhone 13 demand, because of long wait times during the global chip shortage. Apple reportedly told suppliers that it doesn’t expect iPhone 13 sales to pick up for the holiday season. Currently, Apple is being limited by how many phones it can assemble with available parts, rather than demand for the phones. However, Apple doesn’t expect customers experiencing long wait times to maintain interest when supply picks up. The company told suppliers it expects the weakness in demand to stretch into 2022. (WSJ)
That is all for now and thank you for being a subscriber!
President – Kisco Capital