A quick summary
- The market got hammered today.
- Tech stocks were especially hard hit.
- Pundits are blaming the drop on quickly rising interest rates.
- Will the Dip-Buyers step in once again to bring us to new highs?
The S&P 500 is only down 2.7% from its most recent high.
It was a bad day for sure, but let's put in perspective. Today's decline of 2.5% on the S&P 500 doesn't make the top 100 list of bad days since 1950, but it came close.
Furthermore, the S&P is still above its 12 month trendline, although it is very close.
Volatility is rising.
The long-term average for volatility, as measured by the VIX index, is around 13. Today it's more than twice as high. You can't read too much into the VIX numbers but something is afoot.
The Fear-Greed Index
CNN Business publishes an index that tracks the balance between fear and greed among investors. Here is the most recent reading.
After spending several months in the greed side of this indicator, investors are now becoming more cautious about what's coming next.
Earnings & Earnings Estimates
The chart below shows the S&P 500 (blue line, left scale) superimposed on the quarterly per-share earnings of the S&P 500 (gold bars, right scale). The last five bars are earnings estimates going forward.
The market is forward-looking and it seems to be counting on those rosy earnings estimates to hold. Wall Street analysts are usually too optimistic with their estimates and downward revisions are common as we get closer to the current earnings season.
What I see in this chart is the potential for market corrections as analysts begin to rein in expectations.
Final Thoughts
Today was a scary day, and tomorrow has the potential to be even scarier. But I believe that the Dip-Buyers will once again step in to put a floor under the market and push prices to new highs. They have been doing this since the last bear market bottom on March 23, 2020.
The proximate cause of today's market rout was the spike in the 10 yr Treasury bond. This can signal coming inflation or a change in Fed policy on short term rates. Chairman Powell has said repeatedly that he will continue to keep short term rates near zero until the economy shows durable signs of improvement.
We might be getting close to this, given the rollout of Covid vaccinations and reopening of many businesses and institutions. So, one might ask why the market dropped today when the fundamentals of the economy are as good as they are?
It might just be a case of "buy on the rumor and sell on the news." The market has been anticipating better earnings, more re-openings, wide availability of Covid vaccines, and a new round of stimulus checks that will spur consumer spending.
Now that these things are coming to pass, perhaps the market is like the dog who caught the car: what does he do now? Valuations are high, and there is a rotation going on. High-flying tech giants are being sold, while boring cyclical names are the new darlings of today's investor.
Look no further than the rallies in copper and silver - basic commodities that benefit from an economic recovery. This is a stock-pickers market. There will be big winners and big losers.
As an example, consider Tesla (TSLA). It's down 25%, even after announcing it was embracing Bitcoin. Apple Inc. is down 17%. FNMA is down 27%.
On the upside, Salem Media (SALM) is up 131%. Teradata (TDC) is up 85%. This is why I say that this is a stock-picker's market. My Triple Cross Moving Average indicator is still in buy mode, but another down day tomorrow may flip it to sell mode. Stay tuned.