Moderate Decline On Tuesday
The stock market had a lazy Tuesday in which it barely moved until it fell in the afternoon. It’s humorous that some claim the Wednesday Fed meeting caused stocks to fall. That’s implying traders suddenly ‘discovered’ a Fed meeting was coming the next day at about 3PM when the selloff started.
S&P 500 fell 0.65%, the Russell 2000 fell 1%, and the Nasdaq fell 1.27%. This was an across the board decline as the small cap value stocks fell and the cloud stocks fell. IWN small cap value index fell 0.29% and the CLOU cloud index fell 0.59%. Tesla stock was down 4.1%.
Precious metals are the hottest assets in the world this month. Gold is up 8 days in a row for the 3rd time this year. Gold hit $2,000 in the early trading session. As of Tuesday evening, it was up 0.59% to $1,956. Silver was up 1.03%. GDX index closed down 0.64%. Silver and gold are 41% and 18% above their 200 day moving averages. Dollar index is extremely oversold which is helping power this rally in precious metals.
As of Monday, the dollar optimism index was in the 1st percentile over the past 10 years. DXY dollar index is down 3.88% in the past month. A dollar rally could hurt stocks and precious metals. As you can see in the chart below, the dollar index is near its long term support trend line. It might bounce here. Maybe we will see a huge change where yields increase and value stocks outperform growth stocks.
Huge Test For FAANMG Stocks
Personally, I don’t think the Fed meeting will be that informative. We already know the Fed won’t hike rates for years and the Fed will do whatever it takes to support the economy. On a scale of 1 to 10, with 1 being the most dovish, the Fed is at 1.
This adds to a previous point that the stock market’s selloff in the last hour on Tuesday had nothing to do with the Fed. Last meeting, the Fed made sure to have strong dovish guidance in that it said it wouldn’t shrink the balance sheet once QE is over. There is nothing left that the Fed can do.
An unlikely, but impactful point that could be made is if the Fed says financial markets are overheated. With all that’s going on in the economy, you wouldn’t think the Fed would mention speculative trading. Fed has called the market overextended before, but it hasn’t affected stocks.
None of us can be sure what the Fed could do to support the economy while preventing speculative bubbles. Just an attempt would likely cause a correction.
4 FAANMG earnings reports this Thursday are more important than anything the Fed says because they control the market. We are likely near the end of this 6 year outperformance period of FAANMG. As you can see from the chart below, the put to call ratio on these major internet stocks has never been lower.
Some might be wondering what the new S&P 500 leadership will be. Value will likely outperform growth, but the S&P 500 will fall. In other words, there will be no leadership. It would take massive movement for value stocks to become large enough to drive the index up.
Also, keep in mind value stocks won’t be able to grow their earnings nor be as powerful as the FAANMG stocks. They will never get the same valuations growth stocks get. They are so cheap they have plenty of room to run before coming close to those multiples.
Point here is traditional old economy businesses will rally, but they won’t carry the American market. It’s possible foreign stocks outperform American stocks. In that case, the new global leaders could be from emerging markets. Europe has such little economic growth and so few tech stocks, it’s tough to see these countries leading the next bull run.
Everyday the COVID-19 situation gets better. Positive rate was 7.8% which is below 8.5% last week and the peak of 9% in July. There were 64,729 new cases and 1,245 new deaths on Tuesday. 7 day average of new cases fell to the lowest level since July 15th.
As you can see from the chart below, Arizona has improved greatly, while Florida’s moving average is stubbornly high. 7 day average of new national deaths is 973 as my predicted 1,000 threshold will be hit this week unfortunately. In April, new cases peaked on the 10th, hospitalizations peaked on the 15th, and deaths on the 21st. If that relationship holds true, deaths per day will peak in early August.
Headlines in mid-July were terrible. Media is still running negative headlines, but it’s tough to ignore the decline in new cases. Once deaths start falling in August, positive sentiment will come back. Latest fear is that new cases will rise again when schools are back in session.
Many disagree because the proper precautions will be in place. We had a 2nd wave because the areas that didn’t experience the first spike reopened without precautions. Most are not expecting a terrible new wave this fall/winter. We will find out how the next flu/COVID-19 season will go by October or November.
Gold is the most important asset now that it is on an 8 day winning streak and the tech/EV stocks have stopped hitting new highs. So far, the market has avoided cratering this earnings season. Let’s see if it can avoid a catastrophe this Thursday when 4 of the big internet companies report.
We will learn more from their stocks’ reactions than the actual reports. I wouldn’t be surprised if they fall even on good numbers. Personally, I’m the most concerned with Amazon because AWS will very likely have a sharp deceleration in sales growth. It might be closer to 25% than 30%.
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