The Streaks Are Over!
Stocks fell on Monday, ending the streak without back to back down days. It ended at 30 days, tying the longest streak since 1955. Furthermore, the 1.57% decline ended the S&P 500’s streak without a 1% decline. It reached 74 days which tied the one ending in October 2018. There were 2 longer streaks which lasted 109 and 112 days in 2018 and 2017. The stock market isn’t overbought anymore as the CNN fear and greed index fell 15 points to 47 which is neutral.
Most of the gains for the year are gone as the S&P 500 is only up 0.4% year to date. This great run has finally ended. Bulls shouldn’t be disappointed it’s over because stocks were getting expensive. It’s better to have a correction to avoid a bubble forming. A lot of times stocks underperform when EPS growth starts to improve. 2020 could be one of those years. Recent weakness in oil prices, the underperformance of small caps, and the decline in the 10 year yield were all signs the market was going to fall.
As you can see from the chart below, the utilities are now the best performer on the month. They are up 5.55% year to date, while tech is up 3.78%. Energy has been the biggest loser. We’ve seen good Markit PMI readings, yet markets are acting like a global slowdown is coming.
Obviously, a lot of the movement in markets has been because of the outbreak of the coronavirus. It’s not just about potential cyclical weakness and the stock market being due for a correction. S&P 500 had its biggest decline since October as the number of coronavirus cases has increased to 4,515 and the death toll in China is up to 106.
United Airlines stock fell 5.21%; it is down 13.46% since January 17th. Shanghai Composite has avoided losses since it has been closed because of the New Year celebrations. Unfortunately, the timing of the holiday meant there was more travel which potentially led to the spread of the coronavirus.
This is an awful tragedy, but as an investor, I’m not that concerned. If the selloff is mostly because of this virus, there will likely be a rebound whenever positive headlines start to come out about it being under control. Watch the airline stocks to determine when the market starts to relax about this virus.
Stocks will completely ignore any weak economic data related to this virus whenever the reports come out in a few weeks/months. Equities are forward looking and sniff out one time events quickly. It’s just a matter of determining when this one time event ends. I’d start to buy stocks if they fell 2% further.
Market Details: Very Low 10 Year Yield
Nasdaq fell 1.89% and the Russell 2000 fell 1.09%. Small caps had been underperforming, but they didn’t today. That makes sense because they are domestically oriented and coronavirus is mostly a Chinese issue. That explains why tech was the 2nd worst performer. Apple fell 2.94%. It’s surprising that healthcare didn’t fall much given Bernie’s rise in the betting market; it was down 0.76%.
When you delve deeper into the sector, you see the market is reacting to the polls as the IHF healthcare ETF fell 1.93% on Monday and is down 4.15% in the past 3 days. Recent Iowa polls are the most confusing as one has Sanders up by 9 points and one has Biden up by 6 points. Average of the past 4 polls has Sanders up by 3%.
Personally, I think Sanders has New Hampshire in the bag as he has been leading in the past 6 polls with an average lead of 8%. In a rare poll of Utah, Sanders was ahead by 13 points. Biden’s national lead is down to 5.3%. Sanders clearly has the momentum, and might win 3 of the first 4 early states, Biden is still the frontrunner despite what the betting market shows.
Specifically, PredictIt has Sanders with 40% odds and Biden with 36%. I think stocks would be declining further if it wasn’t for the fact that the betting market is starting to give the GOP a better chance of winning. It’s still a very risky concept to have Sanders as the nominee. If he leads in polls versus President Trump after winning the nomination, stocks will fall very sharply.
Besides the action in stocks, the other big news was the 8 basis point drop in the 10 year yield. It’s now only at 1.61%. This has occurred in part because inflation expectations have dropped with the decline in commodities prices. CRB Bloomberg commodities ETF is down 6.68% year to date. 52 week low in the 10 year yield, which occurred last September is 1.43%.
Apple Earnings Are Coming
The chart below shows Apple’s historical sales guidance and actual net sales. Estimate for this coming quarter is from Horace Dediu. Despite being a bear, I’m expecting Apple to show AirPods and Apple Watch did really well. I’m bearish because its valuation has gone through the roof due to it being valued as a services firm. Apple is still a hardware company primarily.
The chart below shows Sprint’s December quarter results. Wearables did really well for Sprint which is great news for Apple. Consensus is for +35% wearables, home, and accessories growth. If Sprint’s numbers are representational of the how Apple did, the segment should have above 50% growth.
It was correct about there being a correction coming, wrong in predicting energy to do well, and correct in pointing out that Sanders had good odds to win the nomination. It’s tough to say he will win, but I think the market is still underappreciating his odds.
This is referring to the stock market, not the betting market. Apple Watch and AirPods probably did amazingly this past Christmas, but Apple is expensive and should decline this year.
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