A timeless bear market rule explains why dip buyers can’t get a break: Morning Brief

Market Trading EssentialsMay 26, 2022

4 minutes read

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Thursday, May 26, 2022

Today’s newsletter is by Jared Blikre, a reporter focused on the markets on Yahoo Finance. Follow him on Twitter @SPYJared.

It’s no secret that stocks and the 401(k)s that hold them have been battered and bruised this year, as every fledgling rally eventually whipsaws investors further into the red.

Last week, the S&P 500 (^GSPC) nearly closed 20% down from its record high — threatening to plaster ‘bear market’ headlines across the evening news. But the S&P avoiding this label is little comfort to many investors, as the Nasdaq has been in bear market territory since crossing this chasm on March 7.

In this market environment, it seems everything moves up or down, with these swings changing on a day-to-day, or sometimes minute-to-minute, basis. This is not market leadership.

Bob Farrell — one of the O.G. gods of technical analysis — explains why this dynamic is such a problem for any bulls still out there. Spelling it out in rule seven of his famous 10 rules of investing, Farrell said: “Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.”

And narrow leadership is where we found the market roughly six months ago.

Despite the S&P 500 minting a 28% total return last year, problems were surfacing under the hood.

The following chart from Bank of America technical research strategist Stephen Suttmeier, CFA, CMT shows the New York Stock Exchange advance-decline line. This line serves as a measure of market internals, or what’s going on underneath the surface of the index. It shows how broad, or narrow, participation is in the market at a given point in time.

Signals like a deteriorating advance-decline line can grow and persist for long periods of time — frustrating both bulls and bears.

As we see in Suttmeier’s chart, the S&P 500’s rally that started in Q4 2020 finally stalled out and went sideways throughout most of 2021. This rally then broke to the downside in January of this year, retested the breakdown level, and travelled south to present levels.

A textbook example of a market that lacked solid leadership. And now, the damage suffered by the biggest stocks in the market can no longer be concealed.

Last week, Walmart (WMT) and Target (TGT) earnings revealed the big box retailers suffering from margin pressure and rising inventories, news that spooked the broader markets amid concerns over inflation and consumer spending.

The five biggest losers by market cap — Apple (AAPL), Tesla (TSLA), Alphabet (GOOGL), Walmart and Microsoft (MSFT) — shed a cool half a trillion dollars in market capitalization last week alone. Year-to-date, this group’s losses total some $2.2 trillion.

“The breadth of the market is important,” Suttmeier writes.

“Broad-based rallies have the potential to continue, while narrowing rallies are prone to failure. A market rally driven by a handful of blue chip names suggests that the [small- and mid-cap] troops have abandoned the largest cap generals, which is a weak setup for market breadth.”

At the beginning of the year, a buy-the-dip that had worked since the pandemic lows was the sell-side’s favorite trade. But now, we’re in a different economic and market regime — with soaring inflation, an increasingly hawkish Fed, shellshocked consumers, the list goes on — and buy-the-dip doesn’t work anymore.

So, what to do now? Investors may be best-served playing defense, waiting for the bullish signals to mount. To be sure, these signals are adding up, but we may need a final capitulation to reach this cycle’s ultimate lows.

How painful that event may be remains the market’s greatest unknown.

—

Jared Blikre is a reporter focused on the markets on Yahoo Finance Live. Follow him @SPYJared.

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What to Watch Today

Economy

8:30 a.m. ET: GDP Annualized, quarter-over-quarter, 1Q second (-1.3% expected, -1.4% prior)
8:30 a.m. ET: Personal Consumption, quarter-over-quarter, 1Q second (2.8% expected, 2.7% prior)
8:30 a.m. ET: GDP Price Index, quarter-over-quarter, 1Q second (8.0% expected, 8.0% prior)
8:30 a.m. ET: Core PCE, quarter-over-quarter, 1Q second (5.2% expected, 5.2% prior)
8:30 a.m. ET: Initial Jobless Claims, week ended May 21 (215,000 expected, 218,000 during prior week)
8:30 a.m. ET: Continuing Claims, week ended May 14 (1.310 million expected, 1.317 million during prior week)
10:00 a.m. ET: Pending Home Sales, month-over-month, April (-2.0% expected, -1.2% during prior month)
10:00 a.m. ET: Pending Home Sales NSA, year-over-year, April (-8.0 expected, -8.9% during prior month)
11:00 a.m. ET: Kansas City Fed Manufacturing Index, May (18 expected, 25 during prior month)

Earnings

Pre-market

Macy’s (M) is expected to report adjusted earnings of $0.83 per share on revenue of $5.36 billion
Dollar Tree (DLTR) is expected to report adjusted earnings of $2.02 per share on revenue of $6.77 billion
Dollar General (DG) is expected to report adjusted earnings of $2.31 per share on revenue of $8.71 billion
Ulta Beauty (ULTA) is expected to report adjusted earnings of $4.45 per share on revenue of $2.12 billion
Lions Gate (LGF) is expected to report adjusted earnings of $0.09 per share on revenue of $964.64 million
VMware (VMW) is expected to report adjusted earnings of $1.56 per share on revenue of $3.19 billion
Alibaba (BABA) is expected to report adjusted earnings of 7.10 (CNY) per share on revenue of 200.59 (CNY) billion
Burlington Stores (BURL) is expected to report adjusted earnings of $0.66 per share on revenue of $2.04 billion
Jack in the Box (JACK) is expected to report adjusted earnings of $1.34 per share on revenue of $262.93 million
Buckle (BKE) is expected to report adjusted earnings of $1.00 per share on revenue of $308 million

Post-market

Costco (COST) is expected to report adjusted earnings of $3.02 per share on revenue of $51.50 billion
Dell Technologies (DELL) is expected to report adjusted earnings of $1.40 per share on revenue of $25 billion
Gap (GPS) is expected to report an adjusted loss of $0.14 per share on revenue of $3.46 billion
Autodesk (ADSK) is expected to report adjusted earnings of $1.34 per share on revenue of $1.15 billion
Workday (WDAY) is expected to report an adjusted loss of $0.02 per share on revenue of $291 million
Sumo Logic (SUMO) is expected to report an adjusted loss of $0.17 per share on revenue of $66.09 million
American Eagle Outfitters (AEO) is expected to report adjusted earnings of $0.25 per share on revenue of $1.14 billion