August 4, 2021
Good morning,
The early part of this week has been, so far, a bit of a low volume churn, otherwise known as August. It’s either the summer doldrums or investors are waiting for Friday’s employment data – probably both. Nothing to glean here, let’s move on.
As customary, the following is a reprint of the cover letter accompanying July’s Robertson Stephens Monthly Performance Reports sent out to clients last night.
Still Whistling … (But From Across the Street) … Past The Cemetery
The global economic recovery continued in July, although the spread of the more contagious Delta variant raised concerns that the path to full recovery may be bumpier than previously expected. For equities, daily volatility was up on the month and the rotation from small-cap-value to large-cap-growth accelerated. However marginally higher new all-time highs were set once again on the Dow, the S&P 500, the NASDAQ Composite and the All-Country-World-Index during the month. Missing from that new high list for July are the Russell 2000 (last high in Mar) and the Emerging Market Indices (last high in Feb).
While that was all well and good-ish for equities, it was the eye-popping declines in rates in the fixed income markets that got most of the attention last month – the yield on US-10yrs declined below 1.2%. There are two explanations for the lower rates making their rounds in the market. It’s either a rare technical condition caused primarily by negative real rates in the market or bond investors are fearful that the economy won’t be very hot in the post-recovery period – I live in the latter camp as you may already know from the Morning Notes.
As August begins we find “the Tape” on the verge of a bearish breadth warning. A highly valued indicator at NDR is called the “Big Mo Tape” and while it is transparent to the initiated, it is a little black box like in its complex comprehensive structure – perhaps it should be called a white box indicator. It is made up from the percent of healthy trends and momentum from some 100 industry groups. It is a measure of how broad a bull market is on a cyclical basis – most technicians call this “breadth”. Lately, it has neared levels that have historically been negative for stocks, on average.
A second indicator of breadth, one that is easier to see, is the percentage of common stocks which are above their 10-week (intermediate term) and 40-week (cyclical) moving averages. Today, they are both well off their highs at 42% and 66% respectively, while the popular averages are setting higher highs regularly (even if they are marginal). What is important to this technical overload I’m writing you is that when both signals of breadth begin to break down, the market averages usually struggle. Note, both signal indicators are on the verge and have not become definitively negative yet. However, I believe they may be particularly important at this time because it is the time of year when the historical cycle trends in the market turn down for 2021 (chart). We will need clear cut breadth breakdowns to take cautious action but now you know what I’m looking at and why.
Be well,
Mike
Sources: Addepar, Bloomberg, JPM Asset Management and Ned Davis Research