From the desk of Willie Delwiche.

Key Takeaway:

• Rally strengthens as participation broadens.
• Risk environment is still cautious as downtrends linger.
• Macro situation is a concern but has not been causing stress.

Breadth thrusts are firing, participation is expanding and for the first time this year new high lists are longer than new low lists. From the perspective of market internals, the rally over the past two months could hardly have been stronger.

This strength is showing up in our bull market re-birth checklist. July brought upside volume thrusts and the first breadth thrust (based on the percentage of stocks making new 20-day highs) in over two years. Last week brought to an end the string of 37 consecutive weeks of more new lows than new highs on the NYSE+NASDAQ. The trend in our net new high advance/decline line also turned higher.

Our bull market re-birth checklist has now had 4 out of 5 the criteria met. While this does...

From the desk of Willie Delwiche.

Key Takeaway:

• Sustained market strength tends to be quiet.
• Noisy price swings can obscure underlying downtrends.
• Bulls holding serve on rally but hardly pressing an advantage.

The price moves in this environment have been impressive in both directions. One-quarter of the stocks in the NASDAQ are more than 50% above their 52-week lows, but more than 40% are still 50% or more below their 52-week highs.

Last week, for the first time since early April, more stocks on the NASDAQ made new highs than new lows. That ended the consecutive streak of days with new lows > new highs at 83. This was more than two weeks longer than the previous record stretch (which ended in December 2008 - prior to financial crisis lows). Like many of the stocks that make up the index, the NASDAQ Composite is well off its lows. But it is still more than 12% below where it was the last time new highs exceeded new lows.

The...

From the desk of Willie Delwiche.

Key Takeaway:

• Fed in spotlight as Powell & Co move rates to last cycle’s peak.
• A dovish pivot when financial stress has never been lower seems unlikely.
• Persistent bear market leaves bulls needing to prove their case.

While high relative to the previous decade, the Fed could in 2019 at least make the argument that inflation and wage growth were low from a historical perspective. Additionally there was evidence that financial stresses were starting to build. Now, the wage and price pressures that were still incubating in 2019 have erupted to their highest levels in decades while at the same time the financial stress has never been lower (according to the St. Louis Fed’s index).

The market has currently priced in another 100 basis points of tightening over the final three FOMC meetings this year (September, November, December). There is some expectation that Powell will use his post-FOMC press...

From the desk of Willie Delwiche.

Key Takeaway:

• Stocks celebrating small wins.
• For evidence to improve we need to see sustained strength.
• Fed confronted with deteriorating economy while still waging inflation fight.

When new lows have exceeded new highs for 34 weeks (and counting) and the Value Line Geometric Index (a proxy for the median US stock) is no higher now than it was five years ago, even small amounts of good news get celebrated. We saw some of that on Friday.

A decline in the longer-term inflation expectations number in the University of Michigan Consumer Sentiment Survey helped fuel a broad stock market rally. Recall that it was an unexpected uptick in inflation expectations in the preliminary June data that prompted the Fed to raise rates by 75 basis points last month. Odds of a 100 basis point rate hike at next week’s FOMC meeting had been on the rise following the release of unexpectedly hot readings for CPI and PPI. By the...

From the desk of Willie Delwiche.

Key Takeaway:

• Commodities facing pressure.
• Bonds looking for tailwinds.
• Stocks relying on hope.

The first half of 2022 was one for the record books, but it was more dubious than distinguished. Only two years (2020 & 2009)  in the past quarter century experienced more 1% moves in the first half than did 2022 and only one (2008) finished the year with a higher percentage of 1% moves than we have experienced in the first half of this year. Both stocks and bonds were down in back-to-back quarters for only the third time in the past 45 years. This contributed to the benchmark 60/40 stock/bond portfolio experiencing a first half of the year that was twice as bad as another in the past quarter century. According to data from Ned Davis Research, it was the worst first half for a balanced portfolio since the 1930’s.

There are plenty of observations about how the worst first halves are followed by strength in...

From the desk of Willie Delwiche.

Key Takeaway:

• Indicators suggest echoes of Financial Crisis.
• Looking for signs of strength, not just absence of weakness.
• Burden of proof is on the bulls to show that strength can persist.

At this point, we cannot know whether the current environment will ultimately end up bearing more than a passing resemblance to the 2008/09 financial crisis. There are, however, enough similarities between now and then that the comparison is worth considering.

Consider what we are seeing from a price perspective and across a handful of other indicators:

Price: Failed rallies have been followed by lower lows on the S&P 500 since the index peaked in January of this year. A similar pattern developed following the market peak in October 2007. The damage done to a 60-40 passive portfolio has been greater this year than at a similar post-peak point during the financial crisis, but it’s perhaps not a coincidence that prior to this year, the only time in the past quarter century that both stocks and bonds were underwater in back-to-back quarters was...

From the desk of Willie Delwiche.

Key Takeaway:

• Patient investors will let the bulls prove their case.
• Economic risks on the rise as data disappoints.
• Central bank action adding pressure to market and economy.

When we look at the data we have in hand, avoiding recession is looking more and more like a dubious proposition. Last week’s retail sales data showed that adjusted for inflation, retail sales in May were below year ago levels. While COVID-related distortions have added to the volatility in sales data, the last three recessions  have all been associated with year over year declines in retail sales. XRT (the Retail ETF)is currently more than 40% below its November peak and the two prior times it found itself in a 40% drawdown (2008 and 2020), the economy was already in recession. New orders data from the Philly Fed show an...

From the desk of Willie Delwiche.

Key Takeaway:

• Stocks and bonds weighing on portfolios.
• Federal Reserve faces a credibility test of its own making.
• Turmoil usually ends after something gets broken - this time it may be investor resolve.

It’s clear now that the late-May bounce and early-June consolidation was more an absence of selling (in both stocks and bonds) than a meaningful increase in appetite for these assets. Now that selling pressure has re-emerged, stoked by persistent inflation, stocks have moved to new lows for the year and bond yields have surpassed their 2018 highs. For many investors, particularly those in 60-40 (or similar) stock/bond allocations, this is producing a market environment that is virtually without precedent in the past quarter century. Comparisons to the Financial Crisis come to mind. Perhaps that is...

From the desk of Willie Delwiche.

Key Takeaway:

• Yields pause, but trends are still higher.
• Sector leadership is providing little support for the indexes.
• New lows collapse but new highs are scarce.

Sector level trends reveal the challenge for the indexes at this point. Energy and Utilities are the only sectors in longer-term up-trends at this point. Even if we expand strength to include the Materials sector (which with the other two are seeing strong trends in our shorter-term price, momentum, breadth model), we are only talking about 10% of the overall S&P 500.

To put it another way: even after the 60+% rally in XLE (Energy ETF) this year and broad weakness elsewhere, there are still three individual companies (AAPL,...

From the desk of Willie Delwiche.

Key Takeaway:

• After bounce, trend environment still trying.
• Health of the economy hinges on the desire and ability of consumers to spend.
• Risk On case needs to prove its point.

At one level it is easy to be enamored with last week’s rally. It was the best weekly gain for the S&P 500 since November 2020 and for only the fifth time in the past decade, all 72 industry groups in the S&P 1500 (24 large-cap, 24 mid-cap and 24 small-cap) were up on the week. Curiously, all five of those times have come in the wake of the COVID lows. But despite those impressive price gains, the risk off environment remains intact. The trend in the NASDAQ 100 is under the most pressure it has dealt with since the Financial Crisis. The same can be said for the passive portfolios that many investors seem to think only...

From the desk of Willie Delwiche.

Key Takeaway:

• Bear market story playing out beneath the surface.
• Contrarian play is in bonds not stocks.
• Challenges ahead, but commodity trends remain robust.

Friday’s mid-day swoon saw the S&P 500 move to new lows for the year and for a time had the index more than 20% below its January peak. By the end of the day, however, those losses were recovered. The index finished up on the day and closed at “only” 18.7% below its all-time high. Friday’s final hour surge was not enough to keep the index from falling for the seventh week in a row. While these swings might pose a dilemma if you insist on seeing a 20% decline to slap a bear market label on the current environment, such is not our concern. I look around and see that it has been six months (and counting) since we last had more new highs than...

From the desk of Willie Delwiche.

Key Takeaway:

• Friday’s rally needs follow-through to change the environment.
• Narrow strength and broad weakness producing more new lows than new highs.
• Yields pull back, but stress is building.

After Friday’s bounce, the Value Line Geometric index is at the same level that it was to begin 2021, which is also where it was to begin 2018. For those so inclined, it hasn’t been so much a buy-and-hold environment as it has a buy-and-hold-on-tight environment. While there have been pockets of strength along the way, they have not persisted. The challenge for the indexes right now is that the sectors that are seeing the best strength are relative lightweights. Between 60% to 80% of stocks in the Consumer Staples, Utilities and Energy sectors are trading above their 200-day averages (for the S&P 1500...