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Morning Commentary

CHANGING OF THE GUARD?

By Charles Payne, CEO & Principal Analyst
1/5/2022 9:38 AM

Yesterday, buyers did materialize late in the session, cutting losses on the NASDAQ Composite in half and lighting the S&P back into the plus column…until the very last moments of trading- which was a bigger red flag than the rest of the session. A massive sell program kicked in on huge volume (see top chart). Meanwhile, the yield curve continues to drift lower (see bottom chart).

Value versus Growth Debate – Has the Tide Really Turned?

It was a wild session initially seized by algorithmic trading that loaded up on value and dumped growth.  That action was soon joined by human traders caught in the crossfire, as the narrative this time is that all the stars are aligned to reverse a five-year trend.  A great chart from NASDAQ puts the moment into perspective.

Growth has outperformed value for half a decade and has been trending high since 2007. The tables turned last March when the ten-year bond yield spiked. Growth reclaimed the narrative and momentum, but failed to break out through the earlier top, and through it all, Relative Strength (RS) continued to weaken just as market breadth continued to erode. It is still too early to say for sure a paradigm shift is actually occurring.

Blinking Can Be Costly

This is one reason we hold certain growth names as investments even when they are deeply underwater.  There have been a lot of false alarms, and stocks that are now legendary were dumped along the way, as folks were moved more by price and movement than underlying fundamentals. That is the risk with high Beta names – because if there are signs those underlying fundamentals have stalled or turned down, then taking a loss means taking a big hit. For the most part. many of the most exciting names are newer companies that will deal with inconsistent execution and winding paths to profitability. So, when ‘hot’ moves away and machines are triggering selling pressure, there is significant pressure to bail.

But that’s the nature of high Beta names - the key is having a reason to own them even when under pressure. An efficient market hypothesis suggests the market is so brilliant because everyone has access to all the information that the price is the price. Bunk! There is no way that theory holds water when stocks make double-digit moves off zero fundamental news.

There may be times to bite the bullet, but make sure it’s not your emotions taking control: 

One More Thing

The great Ed Yardeni of Yardeni Research posted this chart that speaks to the notion that NASDAQ has made a 2000-like peak. Remember that rallies shifted into a parabolic mode with reckless abandon. There is no way the country is gripped with irrational exuberance over stocks – or anything else for that matter.

Image

Has Inflation Peaked?

Yesterday, the December Institute for Supply Management (ISM) Manufacturing report missed consensus and dipped under 60.0 for the first time in months. In addition, it was the lowest result in eleven months. So, what’s the good news?

ISM Manufacturing

United States ISM Purchasing Managers Index (PMI)

Components and percentage point change:

Prices down 14.2 percentage points is HUGE. Don’t get me wrong, it’s still high in historical context, but that is a major decline. 

The Federal Reserve

Just about everyone agrees the Fed has waited too long to shift course, and even with faster tapering, their ability to impose restraints on inflation are negligible. Of course, they could take a nuclear option, but only economists that don’t have to worry about crashing the stock market can make such lofty proclamations. 

So, if the Fed is moving too late, and there’s a chance their work will not take maximum effect for at least a year or later, when the economy could be on a downslope, just how hard would Powell & Co go anyway?

Portfolio Approach

We are making several adjustments to our Hotline Model Portfolio both on sector weightings and current buys. It is still too early to say for sure if a paradigm shift from growth to value is actually occurring.

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Today’s Session

We are watching the NASDAQ, as pressure continues to mount and selling begets more selling. The  next support looks like the 100-day moving average.

Chart

Here Come the Jobs

The ADP Jobs report came in 100% above Wall Street consensus and November was revised higher to 534,000 from initial read of 505,000.   Strong gains in construction 62,000 and manufacturing 74,000 were just some of the highlights.

https://adpemploymentreport.com/2021/December/NER/images/charts/Change-in-Nonfarm-Private-Employment-December-2021.gif

I also think its great news that small business hiring picked up after plunging after the American Families Act and extended federal unemployment benefits.

Waiting on the FOMC minutes – but I think the market is overpricing inflation and interest rates, so please do not panic.


Comments
Are Biden’s fed policies similar to Carter admin policies?

Michael Bennette on 1/5/2022 2:39:45 PM
Very interesting! I am totally new at all this but the I agree with you. I feel the market will come back stronger than before. Businesses are learning to be leaner and as productive with fewer employees. If anything has suffered it is customer service!

Patricia Gerlach on 1/5/2022 10:54:05 PM
 

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