Daily Summary – March 5, 202 - We got a rally, now what?
I ended last night with: "while I certainly wouldn't be going all in tomorrow, I've definitely been picking, and would not at all be surprised to see a strong day. But right now it seems like rates are the story so what I'll be watching is how bond traders react to the payrolls number."
Taking the second first, bond traders reacted pretty much how you'd expect to a huge jobs beat (which was actually even better in hindsight considering how the weather likely influenced jobs in construction and other areas) with the 10-yr yield moving up 30 basis points rapidly (although below levels it had reached in the overnight session) right to the 1.6% level where for whatever reason (short covering?) it reversed (at 9.45am) and while it stayed over yday's levels for most of the session finished almost unchanged. On the first (the strong day prediction) it started out that way with stocks moving up in the pre-market but the SPX futures contract hit its 50-day at 9.18am and at that point indices suddenly reversed falling in quick but jagged fashion 1-3% percent (other than the Dow which held up really well) and, other than SPX, below y'day's lows right up to 11.20. I think we can say things looked pretty dicey at that point. But with no apparent catalyst, stocks bottomed with a sharp reversal, and just as rapidly started climbing up and out of their hole to finish with solid gains across the board. Here's a 1m chart of the SPX futures contract starting at the open of futures trading last night through the close.
That put a capper on what was quite the volatile week. Here's a look at the whole week.
We saw similar action in the Naz, NDX, and RUT except the losses during the week were steeper and the recovery not as far, so all ended up red on the week.
As we saw last two days, value easily outperformed once again, but at least everyone was green today.
Technically, we're sort of where we were yesterday just a little bit higher. SPX and RUT still above 50-days but below 20-days (but SPX did get back over that trendline from March), Naz still above 100-day but well below 50-day (and below 12900 level), and NDX did have a change in getting back over its 100-day but like the Naz well below 50-day. So the good news is that all of them have pretty minimal immediate resistance to the upside.
Turning to the sector action, the SPX sector flag a thing of beauty with all sectors up a least two thirds of a percent, ten over 1%, seven over 2% and one (energy) up almost 4%. Great day. Energy was up 10% this week. I've been asked several times this week about what I'm doing with my energy stocks. As you may know I came into last March a little overweight (as I'd been buying MLPs), got up around 45% in energy in April (another 10% if you count the sold puts), and I've been trimming last few months to keep my exposure in the 40-45% range. I had thought I was going to take that down to 25% when stocks got back to pre-pandemic levels and WTI got to $60, but the OPEC meeting this week has me reconsidering. I will still likely put some stocks up for sale via sold OTM calls in coming weeks, but it's clear that OPEC wants to keep prices supported, so now I'm thinking we're likely to see a bigger overshoot to my long term $55-60 WTI price target. As such I see asymmetric risk/reward to the upside still with my holdings so I'll be letting them run (but continuing to trim) for now.
Technically, with the big reversal health care and RE got back above 100-days, materials above 50-day, energy pushed to a 52-week high (although still a bit below its trading range from 2019), and staples got back over its 200-day.
All key subsectors had big reversal days finishing solidly up but none really changed in terms of the technicals.
Breadth definitely bounced back, but given the solid gains in the indices and that very green sector flag, I was a bit disappointed, particularly by the Naz. Positive volume there only 58% and issues 67%. Hardly overwhelming buying. NYSE better at 71% volume and 76% issues. Maybe some of this can be chalked up to the early bought of selling, but this looks to me like the Naz rally in particular was more short covering ahead of the weekend then buyers wanting to step in because they see good value.
Outside of equities another solid day for crude with WTI pushing up over $66 and pennies from the 2019 high, copper bounced back with a big day, and dollar pushed up to just under 92 DXY. Gold, nat gas, VIX, and long bonds all red, although as noted above, long bonds finished well off the lows almost flat.
Light week for data next week. I'll be posting on NFIB, jobless claims, and JOLTS for sure.
Earnings season is winding down but we do get over 500 reports next week almost all smaller caps.
I asked yesterday "are we there yet?" in terms of being through the selling. I said "For sure I think we're getting there, particularly on the Naz/NDX". That proved correct for one day at least but I remain concerned by a few things. Sentiment has cooled but is far from bearish. Technicals remain poor. As I noted the buying volume today doesn't seem like buyers really engaged. But we are oversold, and a lot of froth has come off the top, particularly of the high fliers, so I could for sure see today lasting another day or two, but I think any rally will be short-lived, and we'll see these levels in those indices again.
I'm more constructive on the SPX and RUT although I think they still need more time correcting in time or price to really make a good base for a rally so that technicals, sentiment, etc., can set up properly. That said, those things haven't mattered as much since March, so maybe they won't matter again.
Overall, I stand by my thinking that any selloff will be contained, particularly as to SPX and RUT, as the bread and butter of stock market gains - strong earnings, ample liquidity, and good credit conditions all remain with big green checks. Oh, and speaking of checks, we have a $2T stimulus coming down the pike. Don't see how that can't be positive for the market. So for now, I'm still buying the dips.
Please have a wonderful weekend.
To see more content, including summaries of some of today's economic reports go to
https://sethiassociates.blogspot.com
Pullback is right on time.
Mentioned a couple of months ago need to be careful with stay at home stocks once vaccines rolled out (who is going to want pizza after eating it every week for a year).
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