From the desk of Willie Delwiche.

Key Takeaway:

• Downside volume surge shows selling accelerating.
• Risk backdrop argues for caution.
• A new environment requires an adaptive playbook.

Our risk indicators continue to make the case that this is a risk-off environment. 14 of the 20 asset pairs we look at in our Risk Off vs Risk On indicator have the risk-off component within 10% of new highs. The tilt toward risk off leadership is intensifying. This is echoed in our relative strength rankings, which show Energy slipping and Utilities and Consumer Staples (defensive sectors) taking over the top two spots. Four times as many NASDAQ stocks have been cut in half as have rallied 50% from their 52-week lows. The improvement seen here during the rally off of the March lows has been all but undone. We have continued to see more stocks making new...

From the desk of Willie Delwiche.

Key Takeaway:

• Optimism fades as risk off reigns.
• Inflation hopes spring eternal.
• Beneath the global trends it’s Pax Britannica.

The hope that emerged from the epic March bounce and the promise of seasonal tailwinds has run into the harsh reality that the breadth backdrop remains challenging and the risk environment has not meaningfully improved. Simply put, this was not the April the bulls were looking for. Optimism has been nipped in the bud (AAII bulls dropped to their lowest level since 1992 last week) and our longer-term risk on /risk off indicator has fallen back toward its March lows. But nothing is actually that straight forward. Looking within our US Risk Off Index, we see three of them are at or near new highs, while two are breaking down to new lows. Even within areas that typically move...

From the desk of Willie Delwiche.

Key Takeaway: Q1 returns reflect a bifurcated market. Weekly data shows breadth struggling for traction. Inflation-fighting proposals are political palliatives, not economic solutions.

We closed the book on Q1 last week and some of the stats are stunning:

• There was a 50 percentage point  spread between the best performing sector (Energy) and the worst performing sector (Communication Services) in the quarter, the widest such gap in years.
• An even greater dispersion was seen between the best performing ACWI market in the quarter (Brazil) and the worst (Egypt).
• From an asset class perspective, commodities (+27%) posted their best gain in decades while bonds (-6%) experienced their worst loss in decades. The 60/40 (stock/bond) benchmark portfolio stumbled to one of its worst starts in the past quarter...

From the desk of Willie Delwiche.

Key Takeaways:

• Rally lacks conviction.
• Looking for a thrust I can trust.
• Fed and bond market moves become headwinds for stocks.

In addition to these market concerns, the liquidity backdrop is presenting a more acute challenge for equities. The Fed raised rates 25 basis points last week and the futures market is now looking for another 100 basis points of tightening combined at the May and June FOMC meetings. Corporate bond yields are rising at their fastest pace since the financial crisis and more than half of global central banks are now in tightening mode. During the last cycle, it took the 2-year Treasury yield more than 6 years to move from its low to back above 2%. This cycle it completed that move in just over 1 year. The pace of tightening (from the bond market and from the Fed) matters for equities. Stocks tend to struggle when that pace is elevated, as it appears to be in this...

From the desk of Willie Delwiche.

Key Takeaways:

• Market experiencing most persistent weakness since Financial Crisis.
• Path forward is about finding new opportunities rather than repairing past paradigms.
• Energy & Latin America benefitting from Commodity strength.

We are in the midst of the longest stretch of consecutive days of more new lows (NYSE+NASDAQ) than new highs since the financial crisis. While there have been more intense peak-to-trough drawdowns in the popular averages over the past decade and a half (late-2018 and early-2020 come to mind), it is the persistence of the weakness in the current experience that is noteworthy. Whether looked at from a market perspective or a macro perspective, the longer the disruption, the harder it is to just bounce back...

From the desk of Willie Delwiche.

Key Takeaways:

• In an effort to fight inflation, the Fed is likely to accept volatility but will be wary of stress.
• Equity market trends are deteriorating.
• Preserve capital and sanity - market doesn’t hand out participation medals.

Offsetting this likely need for more aggressive tightening is the potential for sanctions to strain the financial system in unexpected ways. When liquidity gets disrupted signs of stress can emerge. A widening in high yield spreads and/or a breakdown in the ratio between high yield bond and Treasury ETFs would be evidence that volatility is morphing into stress. That could slow the pace at which the Fed tightens and in the process worsen the problem of inflation.

From the desk of Willie Delwiche.

Key Takeaways:

• First 10% correction in two years signals the end of an extended period of relative calm for stocks.
• US breadth is slipping while global breadth is more resilient.
• Recent stock market volatility is unlikely to knock the Fed off course.

Breadth deterioration was not just a story for the second half of 2021, it has persisted, with twist, into 2022. The persistence: more and more stocks on both the NYSE and NASDAQ have been making new lows while fewer and fewer industry groups in the S&P 1500 have remained in up-trends. The twist is that while breadth trends in the US are deteriorating, global breadth has been more resilient. Nearly half of the stocks in the MSCI Europe index are trading above their 50-day averages while for the S&P 1500 it is less...

From the desk of Willie Delwiche.

Key Takeaway: New highs being seen in areas where most investors have little exposure. Liquidity pressures build as corporate bond yields rise. Indexes consolidating after recent highs lacked broad support.

• Energy remains at the top of the relative strength rankings, followed now by Financials. Materials continued to climb, rising to the number four spot this week. 
• Defensive sectors saw their recent relative strength moderate last week. Consumer Staples dropped one spot, Utilities were down two spots and Real Estate fell by three.  
• Our industry group heat-map shows this is a sector/group-sensitive rather than size-sensitive market right now. Growth sectors are being dragged down regardless of size.

From the desk of Willie Delwiche.

Key Takeaway: Bonds make good on their resolution to take rate hikes more seriously. Breadth thrust prospects are fading but global resiliency is encouraging. Fed will be late to the rate hiking party and so recent tightening cycles may not be as relevant.

 

• Sector-level volatility is producing big swings in relative strength rankings. Thanks to a double-digit positive weekly return (while the median sector was down), Energy surged to the top of our rankings, followed by Consumer Staples in the number two spot. 
• Financials also surged in the rankings and joined Staples and Energy in making new highs last week.
• Health Care, Technology and Consumer Discretionary all plummeted in the rankings, with weakness being seen across various capitalization levels.

From the desk of Willie Delwiche.

Key Takeaway: Falling bond yields do not inspire confidence. Industry group trends faltering as breadth weakens. Holiday cheer has already turned sour.

• After last week’s big jump from Consumer Staples (which held in at #4 this week), it was Utilities making a big move (from #9 to #6) in the rankings. Defensive groups are seeing strength on an absolute basis (more on that in a moment) and that is translating into higher sector rankings and improving conditions at the industry group level.
• Real Estate has taken over the top spot in the rankings while cyclical sectors seem to be in a race to the bottom.

From the desk of Willie Delwiche.

Key Takeaway: A surge to new highs can leave stocks out of breath. S&P 500 at an all-time high while more NYSE stocks make new lows than new highs. FOMC meeting likely to feature Fed grappling with surging inflation.

• The Technology sector remains at the top of our relative strength rankings. While mega-cap leadership is helpful, sector strength goes beyond that. It is the top-ranked sector from an equal-weight perspective as well as among small-cap sectors. This is also reflected in our industry group heat map, which shows strength out of the Hardware and Semiconductor groups across market cap levels.
• Consumer Staples saw a big jump in the rankings this week, and there is plenty of improvement within the Food & Staples Retailing and Household & Personal Products groups within the sector.

From the desk of Willie Delwiche.

Key Takeaway: Mid-caps lead the way as new highs lists expand. Breadth heading in a positive direction but still has work to do. Market rewarding stocks that beat earnings expectations, punishing those that miss.  

• The Energy and Financials sectors continue to be areas of strength on both a relative and absolute basis. They are the top ranked sectors in our relative strength work and finished last week at news highs. 
• Real Estate has rebounded in relative strength and is in the third spot overall. At the small-cap and mid-cap level, Real Estate finished at new highs last week. 
• Consumer Staples, Utilities, and Health Care remain the weakest sectors.