From the desk of Willie Delwiche.

Index-level volatility picked up in September and by month-end the S&P 500 has experienced its first 5% drawdown in nearly a year. Beneath the surface, we’ve been seeing increasingly widespread and substantial pullbacks since early this year. More than 50% of NASDAQ stocks are more than 20% below their highs, and more than 20% are more than 50% below their highs. These percentages have been trending higher since February and reflect a market that has churned, corrected and seen a substantial amount of air come out of it since Q1. With the indexes themselves now catching down, Q4 could be when the average stock starts to get back in gear.

This is the video recording of the September 30th Weekly Town Hall w/ Willie Delwiche & JC Parets

09/30/21 2PM ET

From the desk of Willie Delwiche.

We see what we are thinking about. The first time I really became aware of this was a few years ago after we bought our Subaru. I had gone from not thinking at all about Subarus to driving one and now I was surprised to see how many other Subarus were on the road. I realized quickly that I was not an automotive trend-setter, but just being impacted by the way our brains work.   

It happened again recently, though this time with a more exciting car. 

I flew into Reagan National airport in Washington, DC, on a recent trip to visit family in Maryland. 

I met up with my sister when I arrived and headed over to the rental car counter. I had reserved a four-door mid-sized model but what I got instead was a two-door sports car. A convertible Ford Mustang, to be exact. To be clear, they didn’t force the car on me. The agent asked if it would be okay and I quickly agreed.

From the desk of Willie Delwiche.

From the desk of Willie Delwiche.

Key Takeaways:

• Bond-fueled cyclical rotation offers opportunity for better participation
• Breadth already better beyond our borders
• Commodity conflicts

Make no mistake about it, bond yields are rising. Yields on 2-year and 5-year T-Notes have surpassed their 2021 highs and are at levels not seen since their Q1 2020 COVID-related breakdown. The yield on the benchmark 10-year T-Note is above 1.50% and appears headed toward a test of the early 2021 high near 1.75% sooner rather than later. 

How high yields could rise in Q4 remains an open question. A two-handle by the end of the year does not seem far-fetched. As recently as 2019, 2’s, 5’s and 10’s all had yields above 2%. With inflation pressures showing little evidence of meaningfully subsiding the path of least resistance for bond yields appears higher. 

As we get ready for the final quarter of the year, we need to remember that while guesses are great, we don’t want to get ahead of what is actually happening. Evidence > Assumptions.     

• Energy, which was near the bottom of the rankings from both a cap-weight and equal-weight basis as September began, has continued to gain strength. It has been the top performing sector on a short-term basis (as well as on a YTD basis) and has climbed into the middle of the overall rankings and is at number 2 on an equal-weight basis.
• Health Care and Real Estate have dropped in the rankings, though the industry group heat map shows there remain pockets of strength at the industry group level within the Health Care sector.

From the desk of Steve Strazza @Sstrazza

Check out this week's Momentum Report, our weekly summation of all the major indexes at a Macro, International, Sector, and Industry Group level.

By analyzing the short-term data in these reports, we get a more tactical view of the current state of markets. This information then helps us put near-term developments into the context of the big picture and provides insights regarding the structural trends at play.

Let's jump right into it with some of the major takeaways from this week's report:

* ASC Plus Members can access the Momentum Report by clicking the link at the bottom of this post.

Macro Universe:

From the desk of Steve Strazza @Sstrazza

Our Top 10 report was just published. In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.

Resolutions For Rates

This could be the single most important chart in the world right now. We cannot understate this development.

We finally got a major resolution in the US 10-year yield, reclaiming that critical 1.40% level this week. And this begs the question as to what a rising rate environment might mean for investor portfolios. The first thing we know for sure is that we want to stay away from bonds, unless we’re shorting them of course. The second, and perhaps most important implication, is the renewed tailwind for cyclicals. When rates are rising, sectors like financials, industrials, materials, and energy are all typically outperforming, which is exactly what we’ve started to see in the last week.

From the desk of Willie Delwiche.

The story this week was bond yields and the mounting evidence that they are ready to move higher. 10-year yields in the US and Germany have climbed to their highest levels since July. The US 10-year T-Note yield has broken above 1.40% and could soon have 1.75% again in its sights. A 2-handle by the end of the year would not be surprising. Except for the May/June time period, German yields are the least negative they have been since crossing the zero threshold in mid-2019. These moves may reflect inflation expectations, but with the rise in the 2-year T-Note yield this week (highest level since March 2020) it is also the bond market taking seriously the possibility that the Fed will soon be joining the 30% of global central banks that have already begun to raise interest rates. For investors, this could be an opportunity to rotate back into cyclical sectors that do well in rising rate environments.

This is the video recording of the September 23rd Weekly Town Hall w/ Willie Delwiche.

09/23/21 2PM ET

From the desk of Willie Delwiche.

I'll admit it. I'm a Fed-watcher from way back. I enjoy it as much as anyone, and probably more than most (especially those within the All Star Charts community). 

While I never had to analyze the weekly money supply numbers to figure out what the Fed was doing, I've remained attentive as the Fed has revamped its mode of communication with the market time and again.

The latest iteration -- a written statement and press conference after every FOMC meeting coupled with summary economic projections released four times a year -- reflects the Fed's desire for transparency. It also supports the belief that forward guidance is a powerful tool at a time when interest rates are stuck near zero.

Market participants listen, absorb the message and the forecasts, and react. We did this dance again this week.

Here’s the latest batch of forecasts from the Fed:

From the desk of Willie Delwiche.