17 Sep Capital 19 Catch-Up

Weekly Index Movement

S&P500	-0.16%
Nasdaq	-0.39%
Aussie All Ords	+1.7%

The Aussie market closed out a positive week, up by 1.7% on the back of positive moves for Iron Ore and Oil. However, the S&P 500 and Nasdaq both suffered a second straight week of losses, lower by 0.16% and 0.39%, respectively.

Information technology was the worst-performing sector in the S&P 500, down nearly 2%. Adobe shares fell more than 4% a day after the software firm posted better-than-expected quarterly results. Shares of Arm Holdings were lower by 4.2% one day after its successful public debut.

We’ve shown the chart below multiple times this year, but as long as it works, we’ll continue to point it out. The performance of the S&P 500 this year (red line, left axis) has followed the script of the typical annual pattern (gray line, right axis) nearly word for word. That has especially been the case over the last few weeks, and if this continues, we can expect to see additional weakness in the coming weeks. Not optimal in the short-term, but there are always trade-offs in life, and we are more than happy to put up with a few down weeks to get the typical fourth-quarter rally.

Now that the market has corrected/consolidated the big rally March to July, several major indices and sectors are forming sideways patterns as investors try to weigh the pros of stronger economic data against what are lofty valuations and the nagging inversion of the yield curve.

Since the S&P 500’s closing high for the year, every sector besides Energy is down over 1%. Energy, meanwhile, is up over 5%. All those who bought the oil stocks I’ve been banging on about all year should be able to see the benefit they add to your portfolio.

Talking about benefits, you don’t get much more of a benefit than a big up day.

The 20 biggest days

Here is something interesting I came across this week. It is an analysis of the 20 biggest up days for the S&P500 ETF – the SPY.

Big Up days tend to be followed by weakness over the next day and week. But longer term, when you look forward 6 or 12 months, it seems like those big up days set off a positive period in the index

What about big down days?

What we see here is big down days often lead to a bounce-back in the next session.

Notice how 6 or 12 months later the index is positive just like the big up days.

The lesson here?

One day moves are not important. Just hang onto things for 6 or 12 months and things will turn out fine. Most of the time.

Bad Breadth?

There is currently a large divergence underway with respect to the S&P500 trend. While less than half of S&P 500 stocks (48%) are above their 200DMA, the index is still 7% higher than its 200-DMA. That implies that underlying breadth is weak, with higher market cap stocks far above their trend making up for smaller stocks below their trend. That’s one indicator of “bad breadth” that technicians look for; it’s indicative of a narrow market ripe for declines in the technical perspective.

But quantitatively, the current situation is hardly without precedent. Since 1991, the relationship between the percentage of stocks above their 200-DMA and the index position relative to that trend would suggest the S&P 500 should be less than 1% from its 200-DMA given the 48% of stocks above their 200-DMA. Instead, a “200-DMA Divergence” means a gap of 7% between the predicted and actual values.

That’s in the 95th percentile, and sounds like bad news for the market; surely the market will “catch-down” to the weak 200-DMA breadth? Historically, that hasn’t been the case. Indeed, performance over the subsequent 3 months is only weak in the opposite situation, when the index is farther below trend than breadth would predict.

In situations like the current one, the opposite is generally true: the index tends to perform pretty well over the subsequent three months, suggesting that this particular technical framework doesn’t work as advertised.

This happens a lot with technical analysis. Proponents say “look there is bad breath the market is going to fall” or “oh look an outside day shooting star doji with a 200day moving average cross and the red line is pointing down – that means the market is going to fall to the 61.2% Fibonacci retracement”

Obviously I should spend more time paying attention to technicals because personally I can’t predict moves to within 20% let alone to the decimal point.

But what I do know is anyone can say anything and just because someone says it does not mean it is true.

What I like to do is the statistics to back up the claim. Just like the above. Bad breadth like we are seeing has historically been positive for future index moves.

The next time someone tells you something ask them “Where’s the proof?” Most of the time they won’t have any.

Peak Oil?

The International Energy Agency (IEA) just dropped some new predictions, and they are music to my ears.

The organisation has brought forward its projections, saying that the use of our top three fossil fuels – oil, gas, and coal – is going to start falling before 2030, thanks to the speedy rise of renewable energy and EVs. It also pointed out that China’s changing things up, shifting from heavy industry to less energy-hungry sectors like services. And given China’s outsized appetite for oil and gas in the past decade, that’s a big deal.

But let’s be real: the world can’t quit its oily habit cold turkey, so for now, it’s going to be less “hit the brakes” and more “ease off the gas”. After all, if we skimp too much on fossil fuels, then we might face energy hiccups and price spikes.

The ones who are hitting the brakes are Oil explorers on new development. The IEA could well be right and our demand does fall prior to 2030. But supply is falling today. Whenever oil dips below $80 suppliers reduce the amount.

Reports like this from the IEA stop new developments which means no new supply coming on. Demand is going to outstrip supply for decades to come. Unless the world turns anti-green. Seems doubtful now but I wonder what will happen when we get rolling black-outs and Quentin can’t charge his Tesla.

I keep saying get long Oil companies and every week that passes gives me more reason to keep buying more of them.

It’s not just me that thinks this.

Oppenheimer’s chief investment strategist John Stoltzfus:

“We find the S&P 500 energy sector looking increasingly attractive as policy makers in the US and abroad strive to contain inflation and manage economic growth,”

Oppenheimer also sees energy benefitting amid a US push towards infrastructure projects and chip manufacturing.

and this from Lori Calvasina at RBC Capital Markets:

“We are in the very early stages of an earnings revision recovery in the energy space,” she said. “We’re starting to see energy do what tech was doing at the beginning of the year — exiting that downward revision cycle.”

Jamie Dimon, CEO of bank JP Morgan recently said:

“wouldn’t be surprised to see the US 10-year Treasury note yielding 5.5% (over 100 basis points higher than the current 4.3% rate) and crude oil landing between $120 and $150.”

Here is the Energy Sector ETF

Does this look like it wants to head higher to you?

US Inflation

The US released CPI inflation last week.

• Headline monthly/annual inflation came in at 0.6/3.7 percent, basically in line with expectations of 0.6/3.6 pct.
• Core (ex-food and energy) inflation was 0.3/4.3 percent, also essentially the same as expectations of 0.2/4.3 pct.

Markets took it all in their stride and barely twitched. I continue to think the most likely course for inflation is a slow grind lower. But am ever conscious of an oil-driven move higher once more.

The Fed meets This week and after these numbers they will just sit on their hands until the November meeting. That one could get interesting if oil continues its climb. It is now at $89.

Next Week

The Fed meets on Tuesday and will announce their interest rate decision on Wednesday. They won’t move rates so the market will hang on every word Powell says in the press conference.

Apart from that there isn’t much on the calendar but I wouldn’t be surprised to see a little more weakness. But don’t worry, we are almost at the end of September and then things can get all bright and rosy again.

I’ll leave you with this little fact this week:

Investing legend Warren Buffett turned 93 on August 30th. Barron’s showed last year that Berkshire Hathaway A shares could fall 99% and still be outperforming the S&P 500 since 1965 when Buffett’s Berkshire performance begins. From 1965 through 2021, Berkshire shares generated a compound annual return of 20.1% against 10.5% for the S&P 500.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.