Balancing Act
Over the past month, there have been a number of economic reports, including Consumer Confidence, Chicago PMI, Philly Fed, Retail Sales, and Consumer Sentiment, that have come in better than expected. With that positive track record, last Friday’s job report of 266,000 new jobs, when one million were expected, came as a surprise to both investors and economists.
It was no surprise that the report quickly became a topic of political debate, but the financial market’s reaction was even more interesting. Some analysts, myself included, thought that the stock market might react negatively to a sharply lower number. But that was not uniformly the case.
Last Week’s Markets
The hourly chart shows that, earlier in the week, the Dow Industrials was making higher highs (line a). The S&P 500 was level leading up to Friday, and while the S&P 500 futures did drop in initial reaction to the jobs report, the stock market opened higher. The Nasdaq 100
10 Year T-Note
The daily chart of the 10 Year T-Note Yield shows Friday’s drop into the support zone and then the reversal to the upside. By the close of trading on Friday, yields were higher. Reversals either up or down are often an important signal for technicians, as they indicate a quick change in sentiment. I have frequently written about reversals, but in recent years it seems like they have received less attention.
If Friday’s action did mark a significant turn, then yields should soon close above the 20-day exponential moving average (EMA) at 1.599%. Of course, a break of the downtrend (line a) would provide further confirmation that yields are ready to move even higher. The potential upside targets are in the 1.90-2.00% area. The Moving Average Convergence-Divergence (MACD) Histogram came close to turning positive at the end of April, and now shows a positive divergence (line b). I will be updating their status during the week on Twitter.
Breakeven Inflation
Higher yields are consistent with the expectation of higher inflation, even though it seemed like rising inflation was no longer a concern just a few weeks ago. One data series that many follow in regard to inflation is the Breakeven Inflation Rate, which represents a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities.
This chart shows a significant breakout in January 2021 as the resistance (line a) was overcome. The strong uptrend from last March’s low (line b) shows that the rate is now at 2.49% which is where the market expects annual inflation to be during the next 10 years.
The trend of inflation and rates also has an impact on whether growth or value stocks will perform better. So far in 2021, the S&P Growth Index (IGX) has gained 8.5% while the S&P Value Index (IVX) is up 17.4%. This out-performance by the IVX has gotten the market’s attention.
The IVX is composed entirely of value stocks, and the IGX of growth stocks. Value stocks are stocks that exhibit a strong balance sheet and are considered to be undervalued based on the analysis of their fundamentals, like book value, earnings and sales to price. They are often favored in a rising-inflation environment, as they can more easily pass on higher costs.
Growth stocks typically exhibit the “strongest growth characteristics”. They are often part of new industries with an alluring narrative and a higher potential for profit. Higher rates are generally not good for growth stocks as they have more debt and higher yields that can increase their debt costs. These stocks are often more volatile than the overall market and have more difficulty passing on increased costs.
Growth- Value
The most common method of determining the trend in $IGX versus $IVX is to run a ratio of the two. I’ve frequently used a similar analysis comparing the Russell 1000 Growth ETF (IWF)
The ratio had a low in early March of 1.8498, and then rallied to a high of 1.9625 two weeks ago. It then turned lower after testing the resistance (line b) and its weighted moving average (WMA). The rebound appears to complete the top formation, and a decline below the March low would confirm this view.
It is important to note that a top in the ratio does not mean that growth stocks will not go even higher, but rather that, over time, value stocks should outperform.
Markets
Last week’s data does reflect the better performance by value, as the value-heavy Dow Jones Transportation Average and Dow Jones Industrial Average were up 3.4% and 2.7%, respectively, while the growth-focused Nasdaq 100 Index was down 1%.
SPY
The S&P 500 was up 1.2% and the Spyder Trust (SPY)
The market internals were strong last week, as the weekly S&P 500 Advance/Decline line rose sharply to another new all-time high. It has been above its EMA and positive since May 2020 and in early July, is surpassed the high from February 2020. The NYSE Stocks-Only A/D line did not move to a new all-time high until November 2020, but is also in a strong uptrend.
Even though the failure of the market to have any meaningful correction so far this year does increase the risks, the recent sharp-but-brief market decline has helped create some good opportunities.
JPM
For example, even though the Nasdaq 100 dropped 1.85% last Tuesday and the S&P 500 was down 0.7%, JPMorgan Chase
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