Technical Indicators Revisited
Last week we focused on the technical condition of the US equity market since a number of macro indicators were at borderline negative readings and were exposing a rise in marketplace risk. This week we find little resolution in most of these indicators. For example, the 25-day up/down volume oscillator has ratcheted up to negative 1.23 after nearly falling into oversold range; but its rebound is minor and inconclusive. See page 12. On the other hand, the 10-day average of daily new highs fell to 68 this week and is well below the 100 mark that defines a bull market. Simultaneously, the 10-day average of daily new lows rose to 247 and well above the 100 level that defines a bearish market. Last week we downgraded the moving averages of new highs and lows to neutral and this week it is downgraded to negative. See page 13.
Less decisive is the NYSE cumulative advance decline line, which is well off its high made on November 8 even though the S&P 500 is only 0.4% away from its November 18 record high. Total NYSE volume continues to be slightly above average on down days and just below average on rally days which is also an ominous trend.
Not surprisingly, there is quite a bit of disparity in the performance of the popular indices. The S&P 500 and Nasdaq Composite index are the strongest benchmarks and appear to be successfully rebounding from tests of their 50-day moving averages. This looks positive. The Dow Jones Industrial Average is slightly less strong and appears to be rebounding from a test of its 200-day moving average. However, the Russell 2000 index continues to trade below all three of its moving averages, and even after its advance of 3% on December 7 remains in the middle of the trading range that contained prices for the first eight months of 2021. The Russell 2000 index had a false breakout in November and is now showing a surprising level of weakness. All in all, the action of the Russell 2000 is more in line with the trend seen in the NYSE advance decline line. See page 11.
The difference in the indices is easily explained. The S&P 500 and Nasdaq Composite are heavily weighted in the largest popular technology stocks which include Apple Inc. (AAPL – $171.18), Microsoft (MSFT – $334.92), Amazon (AMZN – $3523.29) and Alphabet Inc. (GOOG – $2960.73). Once the Omicron virus was discovered these stocks became increasingly volatile and have been driving the performance of the S&P 500 and Nasdaq Composite index.
The Dow Jones Industrial Average is only 30 stocks, but it is not market cap weighted and is more diversified in terms of sector representation. In general, it has been slightly weaker in terms of price performance. Since it includes 2000 stocks, the Russell 2000 is a far broader representation of the overall market, and it has been the worst performing index in recent weeks. In sum, the underlying tone of the equity market remains suspect, and we would recommend holding quality stocks that can weather the volatility that is apt to continue through year end.
Economic Data Shows Growth but Too Much Inflation
The unemployment rate fell to a 21-month low of 4.2% in November, but the headline jobs report was a disappointment with an increase of only 210,000 jobs. On the other hand, the household survey which includes many more categories of “workers” such as agricultural employees, unpaid household workers and entrepreneurs, increased by 1.1 million jobs. This was an unusually wide disparity between the two surveys, and it may signal an upward revision to job numbers next month.
Another oddity in the household survey was that the number of people unemployed (see page 3) declined twice as much as the number of newly employed workers. This is a sign that people are leaving the workforce and it clarifies why the participation rate has been so slow to improve this year. The question is why are people leaving the workforce? Are more aging baby boomers retiring? Are working mom’s choosing to stay home? Has COVID inspired an increasing number of people to become independent entrepreneurs? Any or all of these possibilities may explain why fewer people are now included in the official workforce. However, the answer to these questions could point to when employment might finally fill the gap of 4 million workers lost between the February 2020 peak and November’s job report. See page 4.
Both the non-manufacturing and manufacturing ISM indices improved in November and the surveys showed solid increases in production and employment. We found it interesting that both surveys revealed a slowdown in the backlog of orders and in exports. See page 5. Some of this may be due to unresolved supply chain issues or it could be an offset to October’s record high exports. But it could also indicate that orders and business activity slow whenever COVID-19 cases begin to rise. For example, Europeans are currently protesting new strict regulations aimed to curb a rise in cases in many countries in Europe.
November’s Conference Board Consumer Confidence fell to its lowest level since February 2021. The main University of Michigan consumer sentiment index fell to its lowest level since November 2011, due in large part to the present conditions survey which at 73.6 is the lowest since the 68.7 recorded in August 2011. See page 6.
We believe the declines in consumer sentiment can be explained by the discovery of a new COVID-19 variant and the personal income report for October. Personal income rose nearly 6% YOY in October to $20.8 trillion and disposable income rose 4.1% YOY to $18.1 trillion. However, real personal disposable income fell 1.4% YOY to $15.4 trillion. This was a result of a 6.2% YOY rise in inflation and a 20% increase in personal current taxes. See page 7. In other words, purchasing power of households is declining. More importantly, in October, personal taxes equated to 12.9% of personal income, the highest percentage since late 2001. What concerns us is that sharp rises in taxes as a percentage of income have often been followed by recessions. See page 8. Monitoring taxes as a percentage of total personal income can help explain how fiscal policy impacts households and how, if not done wisely, policy can inadvertently trigger a recession. Another factor in terms of a weakening in consumer confidence is that the savings rate fell in October from 8.2% to 7.3%. This is notable since 7.3% is well below the long-term average rate of 8.9%. Crude oil prices fell 22% during the month of November but are still up 43% year-over-year. Hopefully the decline in crude oil prices will ease some of the pressure felt by the household sector as a result of rising gasoline and heating fuel prices. At the same time, this sell-off in oil raises the specter of weakening global economic activity. Stagflation could bring even more pain to investors in 2022.
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