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When I was young, one of my most enjoyable hobbies was following the vibrant music scene (late 60s and 70s).
I frequented my local record stores and bought the hottest new albums for just $ 3.99.
Even though I might be dating myself, the irony of my story is that as I get older …
Collecting albums (and music) took a back seat to studying charts (which are just pictures) of stocks and any other asset class, but I was apparently ahead of them. trends …
According to the title of Musictech.com on September 16, 2021 …
“Vinyl sales have increased 94% this year, with Gen Z buying more millennials”
Vinyl is back.
In fact, last year marked the first time since 1986 that US vinyl record sales exceeded $ 1 billion!
And as you know, it’s not just vinyl …
2021 was a record for stocks, crypto, NFTs (which are just pictures) and more!
Inflation, supply shocks, monetary flows?
We will talk about it next, but without a doubt …
The younger generations of traders (or investors) have a much greater influence on all of these trends than when I bought my vinyl for $ 3.99.
And like music trends (whether you’re listening to it on vinyl or digitally).
Markets are volatile (but somewhat predictable).
If you missed last week’s Market Outlook, “What will be the song of 2022“, you may want .
The sudden change in the New Year’s market came as a surprise to many, but not to us.
At the beginning of January, we always have to prepare for a jump in the song playing in the market story.
The 2022 “jump†looked like a 4+% drop in (NASDAQ 🙂 and the VanEck Semiconductor (NASDAQ 🙂 ETF.
Biotech stocks () sounded like a big scratch in your vinyl, down over 7%. However, this sector of the market is currently not considered a market leader, so no surprise.
The bright spots in the last week were Energy () up over 10% and Banks () up over 5%.
In addition, we are seeing a shift from growth stocks (Vanguard Growth Index Fund ETF (NYSE 🙂 stocks down 5.2% year-to-date) to value stocks (up 1.5% ).
Cathy Woods manages the ARK Innovation ETF (NYSE :), which focuses on growth stocks she calls innovative technology companies. It is already down almost 10% this year after a dreadful 2021. Ouch!
Over the past few months, we’ve pontified in our weekly Market Outlook commentary that something ‘was wrong’, hoping that …
Market weakness this year (2022) would be a reasonable outcome given last year’s period of further remarkable back-to-back highs.
While we’ve had a week of decline in the markets, especially in the tech area, it’s important to remember that the S&P 500 is only 2% off its highs. So this downward movement has been rather muted compared to history.
What drives the markets?
Four things typically determine markets: inflation, earnings, interest rates, and cash flow. Let’s take a look at each of these conditions.
is trending rapidly and reaching the highest year-over-year number in over 40 years. As we reported throughout the latter part of 2021, this is a big negative for the market and something our own Mish continues to address on national television.
The results are excellent with growth in 2021 of around 19%. This has certainly been positive in 2021, especially for large cap stocks. Much of this is attributed to the upcoming recovery phase of 2020 and the lockdown of COVID. Also fueled by easy money and the government subsidizing everything.
Interest rates have been moderate and artificially supported by the purchase of government bonds. However, now that the Fed is shrinking and announcing its intention to raise rates, this accelerated move towards higher rates is scaring the markets.
Importantly, rates are still low but the rate of change in just a few days has caught investors off guard. Additionally, analysts spanning many growing industries are recalibrating the effect that higher interest rates can have on earnings and signaling that a multiple contraction is coming. Even inflation-adjusted bonds (TIPs) were hit hard this week.
Finally, cash flows can have a positive effect on markets even when the other three are negative.
Money flows have been huge last year with estimates of $ 1 trillion in new money just invested in ETFs. ETFs in turn need to put that money to work and large cap stocks are the biggest beneficiaries. No surprise given that a record number of people retired in 2021 and renewed their retirement money at their own discretion. Money flows can also be a function of company buyouts (creating fewer shares in the market) and this amounted to around $ 800 billion in buybacks in 2021.
The change is underway!
As mentioned above, bond interest rates have risen dramatically over the past week. Estimates of an economic slowdown appeared lower on Friday. Contract multiples have started to infiltrate tech stocks. Energy prices continued to rise with higher interest rates pushing up bank stocks, materials, commodities and consumer staples.
This is a true story of value stocks. However, a week does not make a trend and we will have to see if it holds up longer.
So far the song we’re hearing has a few minor scratches on the vinyl. Hopefully the jumps don’t last so that we finally hear a better song.
Here are other takeaways from our Big View metrics:
Risk activated / bullish
- QQQs are oversold on both price and momentum confirmed by the Real Motion indicator, and are potentially subject to an average reversion upward
- Energy (XLE) roared this week with () + 4.2% and Petroleum Services () 14.6%
- Regional Banks (KRE) led the modern Mish family this week and hit new all-time highs due to the rate hike
- Emerging () and established () foreign stocks outperformed US stocks this week
Risk disabled / Bearish
- Even though () fell slightly this week, it still outperformed the S&P 500 () on a relative basis and indicates no risk
- Value () vs. Growth (VUG) has exploded this week, favoring value stocks while growth stocks are now in a warning phase. This ratio may be oversold and potentially subject to mean reversion
- Bonds were smoked across the board, with,,,, and even Inflation Linked Bonds (TIPs) all of which sold drastically this week.
- Long Bonds (TLT) closed below the crucial 200-day moving average
- The internal market according to the Hindenburg indicator with a 90-day retrospective still flashes a warning sign and shows 15 omens, 1 less than last week
- The risk indicators went from Risk-On to Neutral on SPY, QQQ and
- All 4 key indices were down for the week, led by QQQ -5.4% and with the exception of (), the other key benchmarks fell back in defensive mode entering either a warning phase ( QQQ and SPY) or in a distribution phase (IWM).
- New highs against new lows for SPY and COMPX appear to be reversing, an indication of risk
- While the worst performing sectors were Semiconductors (SMH) -3.9% and Home Builders () -7.1%, a clear indication of the impact of interest rate hikes and a more risky environment
- Due to their sensitivity to rising interest rates, Solar () -8.1% and Clean Energy () -6.9% were also hard hit despite the positive performance of Energy (XLE)
Neutral metrics
- Soft Commodities () is back above its 50-day moving average, re-establishing a bullish phase for now
- The volume model is relatively neutral overall with the exception of QQQ showing 5 days of distribution and only 1 day of accumulation in the last 2 weeks
- Sentiment is neutral in SPY according to McClellan oscillator
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