It was another rough day in the marketplace yesterday…and seems to be pointing to lower stock prices as we move into October (no matter what happens today). Probably the worst development from yesterday was that the Yankees won and the Red Sox lost, but there were certainly other issues weighing on the minds of the bulls. The internals from yesterday were not good at all…as the breadth on the S&P 500 Index more than 11 to 1 negative. This compared to a reading of less than 5 to 1 negative at 1:15, so you can see that the late-day decline was a very broad one.
Speaking of that late day declines, it’s something that we’ve seen every day so far this week. This is much different than we’ve seen for most of this year. Sure, we’ve seen a few days when the market has sold-off in the last hour of trading, but not a bunch of days in a row. If anything, any kind of final hour “bunches” have been nice upside rallies, so this change in trend is another item to add to the negative side of the bull/bear ledger. (It’s nowhere near as concerning as the Red Sox skid, but this change in trend is still a problem.)
The decline in the S&P 500 has taken the index below its closing lows from last Monday’s big decline. However, it did not fall below those intraday lows. In fact, it closed right on those lows (just 1.7 points above those intraday lows from last week to be exact). It did close below its 100-DMA, but only slightly so. Therefore, it’s going to take a break below last week’s lows to signal that a push towards official correction territory is dead ahead.
That said, the S&P 500 has now (finally) seen a pullback of 5%. Of course, that’s only a blip on the radar screen of any long-term (or even intermediate-term) chart, so it’s hard to think that the worst is behind us……The questions we’re getting right now deal more with the stocks we think would be good to buy after this decline. That’s actually not good. It’s when people stop asking those questions…and start asking us how low the market will go…that tells us that we’re finally seeing some light at the end of the tunnel.
In other words, even though a lot of stocks have fallen a lot more than 5%, there doesn’t seem to be a lot of “fear” in the marketplace. Yes, there IS (definitely) some bearishness out there. One could even say that there is a lot of bearishness out there. So, we’re not saying that sentiment is still overly bullish. We’re merely saying that there is a difference between “bearishness” and “fear”….and there does not seem to be much “fear” out there yet. We believe there is likely to be a decent amount of fear in the marketplace before this decline in the stock market finds a bottom.
The main reasons we think that the market will fall further (besides the Red Sox issue) does not have to do with the trend towards late-day declines. This IS a concern, but there are three other key issues which have seen (or are starting to see) an important changes in trend that concern us the most.
First, long-term interest rates have broken key trend-lines and made meaningful “higher-highs.” (First chart below.) This means a change in trend for long-term rates has taken place. Second, China has moved from promoting (or at least allowing) significant levels of leverage and risk to build up in their economy & their markets…to one where they are clamping down on those levels of risk and leverage in a significant way. (When the world’s second largest economy clamps down on risk-taking and leverage…in a world that is VERY highly leveraged…it has to have an impact on the entire global economy/marketplace.)
Finally, the very small number of earnings reports we have seen so far recently are signaling that the supply chain problems are cutting into the margins of some companies. This is a signal that we’re starting to see signs that the rate of earnings growth that we have experienced so far this year is beginning to wane. No, this does not mean that earnings are going to roll-over. However, given how expensive our stock market is today, it cannot afford to have any kind of material slowdown in the rate of earnings growth. This is especially true given that long-term interest rates are starting to rise.
As for today, anything can happen. The futures are trading higher…and we could even see a strong rally today. However, given the “internals” in the stock market…along with the three big concerns changes in trend we are seeing in the fundamental backdrop that has developed in recent weeks…we believe the stock market will fall further before it bottoms. A meaningful break of last Monday’s lows (and yesterday’s close) will signal that there are more rough seas dead ahead. (Second chart below.)
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.