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Morning Commentary

THE WEAKENING FOUNDATION & MACHINE SELLING

By Charles Payne, CEO & Principal Analyst
12/2/2021 9:39 AM

That was a humdinger – the market getting roiled into the closing bell points to a number of culprits, but it’s the culmination of very weak internals finally buckling.

S&P 500 Map

The carnage continues to pile up with more and more new lows and massive downside volume – yes, humans began to sell with the machines, although it was still mostly the algorithms (or algos).

Market Breadth

NYSE

NASDAQ

Advancing

986

1,178

Declining

2,413

3,529

52 Week High

35

63

52 Week Low

237

571

Up Volume

960.70M

1.94B

Down Volume

4.44B

4.36B

Wipe That Grin Off Your Face

YARN | -Sir, no, sir. -Wipe that disgusting grin off your face. | Full  Metal Jacket (1987) | Video clips by quotes | 03a7484b | 紗

The market came out of the gate with gusto, and it felt like investors could breathe again, perhaps even smile. Gains held during the second round of testimony from Jay Powell and Janet Yellen. Then indices began drifting ahead of the headline: Omicron Hits America!  Every sector was higher on the day, but each closed underwater at the low point of the session.

S&P 500 Sectors

Omicron Has Landed

The first American diagnosed with Omicron triggered midday selling (although I suspect the news was leaked, as there was a lot of lost altitude hours before the headline hit the tape) that was met with some buying.

Sell Programs

The last hour of trading was almost all about a series of algorithms triggering sell programs, which in turn triggered even more sell programs. It sent the market spiraling in a concentric circle before the closing bell.

Dr. Fauci gave a press conference at the White House that veered into good questions such as the travel ban on certain African nations but no others (something that was railed against by these same folks in 2020). 

Apparently, the individual is doing well with mild symptoms that are already improving. But the market needed a reason to sell off, and there can only be the first case once- the delayed selling cascaded into the last hour of trading.

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Incarnations of Powell

It happened 25 years ago, this December 5 – Alan Greenspan, then head of the Federal Reserve, uttered this phrase: “irrational exuberance,” to answer the question “how do we know when asset classes are unduly escalated?”

He admitted the Fed should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy.

The S&P was trading at 745 that day and proceeded to swoon to 720 by December 16th. But that warning wore off, and the market turned around and became even more irrationally exuberant.

Now that Jay Powell has admitted to miscalculating the duration and intensity of inflation, will investors take the bait or shake off this latest incarnation of the Fed chair?

Powell 1.0

Not a trained economist, Powell came into the job using the traditional Fed Playbook, which justified four rate hikes in 2018, even as it was clearly a compounding disaster.

Following the December 2018 hikes, the Federal Open Market Committee (FOMC) gathering with Powell said the central bank balance sheet wind-down was on autopilot.

Powell 2.0

On January 4, 2019, Powell reversed course from just two weeks earlier to say, “We’re listening carefully with – sensitivity to the message that the markets are sending and we’ll be taking those downside risks into account as we make policy going forward.”  Hence, no more autopilot unless you count rate cuts and fat monthly asset purchases.

Powell 3.0 is a mystery for now, and I do not think he’s going back to the book on policy with employing nuance.

Message from Bond Market

Lost in the carnage of the last four sessions is that the Atlanta Fed Gross Domestic Product (GDP) Tracker climbed to 9.7% growth in the current quarter – it began at 6.6%.

Ten-year bond yields are slipping while two-year bond yields keep gaining, and suddenly, the yield curve is flattening even more. It suggests a sluggish economy in late spring 2022. Would the Fed hike rates in that scenario? I guess it depends on which version we are talking about.

FRED Graph

Portfolio Approach

We took profits in Consumer Discretionary yesterday in our Hotline Model Portfolio.

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Today’s Session

Most names on the NASDAQ Composite are in nuclear meltdown mode, and it’s decision time.

I think most of these names are oversold, but ‘meltdown mode is meltdown mode.’ Investors have to think twice about taking these kinds of hits. By the same token, tax-loss selling will increase, and if you determine the names drowning won’t come back in 30 days, it could be time to bite the bullet. It all has to revolve around the value proposition.

Image

The index is at its 50-day moving average – let’s see if it holds.

Chart

There is a lot of confusion, and that breeds fear, and that triggers panic. That last hour of trading was a prime example of how quickly a weakening market can stumble.

In the midst of all of this are stocks that will be monumental grand slams down the road.

For now, however, it’s a bumpy road.

Watch the Russell 2000, which is extremely oversold – the most of any major equity index.

Chart

By now, we know it’s all about the close as the market has seesawed back and forth all morning. 

Buy Signal?

Individual investor intuition has been spot on all year long, but now pessimism is exploding, and I’m concerned.  Don’t panic.

Image

Meanwhile, I can guarantee institutions will see this spike in individual investor bearishness as a buy signal.

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Special Note

Some subscribers have reached out to say they are afraid.  In 2001, we were deluged with such concerns. In 2009, there was a lot, but nowhere near the tech bubble and last year almost everyone wanted to know what should they be buying.  Right now, there aren’t a lot of folks asking, but it’s important we communicate effectively during periods of angst.

There are newer investors and I want everyone to take a mental breather – the Fed changes certain things and Omicron delays certain things. But the underlying fundamentals are not changing so dramatically you need to panic or lose sleep (I will do that for you).

If you are not a current subscriber of our premium Hotline Service, contact info@wstreet.com to get started today.  We are going to take advantage of this selloff!

 


 

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