This is the daily notebook of Mike Santoli, CNBC’s senior markets commentator, with ideas about trends, stocks and market statistics. An oversold U.S. market is trying to come to grips with three days of challenging but not wholly surprising macro headlines, leaving the indexes whippy around the 3,900 level of the S & P 500 . European energy scarcity/runaway power costs are mostly manifest in depleted global-growth expectations and an unrelenting (so far) surge in the dollar. But oil/gas prices are sort of selling the news and the macro message does little to undermine the idea of relative U.S. economic resilience set by Friday’s jobs numbers and today’s ISM services gauge. The key short-term task for the tape is to respond to some significant oversold conditions (very low percentage of stocks above a 10-day average, etc.) after three straight down weeks and a 1.5% afternoon drop on Friday. The S & P 500 has spent very little time under 3,900 (or over 4,200) the past four months, with the dive toward 3,600 representing peak stagflation panic and the ramp to 4,300 into mid-August animated by a powerful oversold rally and some “Federal Reserve pivot” expectations taking hold. The “don’t overthink it” take on the market remains a cautious one: Stocks are in a well-defined downtrend. They failed exactly at the declining 200-day average. The Fed is tightening into a slowdown (or worse) and might go until something ruptures. The European Central Bank is hiking into a recession. September is historically ungenerous. Further, if you think Fed balance sheet reduction is a real-world threat (vs. my take that it’s largely irrelevant), it accelerates this month. Against this, we have a market that already — at the lows — has undergone the typical damage of a nonrecessionary or mild-recession bear market. Valuations have returned toward roughly neutral levels. Only housing is unequivocally in contraction mode. We saw some pretty encouraging/reliable breadth/momentum signals fire off the June lows and sentiment/positioning remain quite pessimistic/defensive. Treasury yields are still rising and restraining equity risk sentiment: The 2-year note is back up to 3.5% and the 10-year near 3.34%. Stocks haven’t been able to make much progress in years with a 3%+ 10-year: It rose back above there in mid-August as S & P rolled over. Not an ironclad relationship, but with fragile growth and a strident-sounding Fed this will restrain valuations all else equal. The consumer price index release next week will come when the Fed is in a speaker blackout period, so the market will have to sort out whether it tilts the September hike toward 50 or 75 basis points (or other). I still think either of those moves — along with a sense that it’s the last large hike and maybe a pause is in sight — should be fairly unthreatening to stocks. The steadfast bears such as Mike Wilson of Morgan Stanley are vociferous in calling for earnings forecasts to drop hard in coming months, ushering in another flush lower for stocks. It’s hard to prove it won’t happen, though decent top-line trends and the ballast of steadier-earning megacaps make it less likely index profits collapse without much notice. It is true, though, that valuations are merely neutral (15x forward excluding the five largest S & P 500 index weights) and that’s only if profit forecasts hold up. Those calling for a break of the June lows are clustering around 3,300-3,500 (prepandemic highs) as a target. The Sept. 2, 2020, preelection peak of 3,580 is also interesting if we again begin to approach the June lows (which isn’t a forgone conclusion). It’s worth keeping in mind that even bad bear markets have tended not to spend all that much time at the ultimate lows — one of the things that makes tactically positioning for a “final flush” difficult. Market breadth today is soft but not dramatically weak. Credit markets are holding up pretty well. VIX up small, in the 26s, uneasy but not a rush for protection. Lots of single-stock put buying last week based on aggregate volumes, so this is another “oversold” indicator that suggests it’s a pretty hedged-up market prone to quick bounces.
A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, August 29, 2022.
Brendan McDermid | Reuters
This is the daily notebook of Mike Santoli, CNBC’s senior markets commentator, with ideas about trends, stocks and market statistics.
An oversold U.S. market is trying to come to grips with three days of challenging but not wholly surprising macro headlines, leaving the indexes whippy around the 3,900 level of the S&P 500.
European energy scarcity/runaway power costs are mostly manifest in depleted global-growth expectations and an unrelenting (so far) surge in the dollar. But oil/gas prices are sort of selling the news and the macro message does little to undermine the idea of relative U.S. economic resilience set by Friday’s jobs numbers and today’s ISM services gauge.
The key short-term task for the tape is to respond to some significant oversold conditions (very low percentage of stocks above a 10-day average, etc.) after three straight down weeks and a 1.5% afternoon drop on Friday. The S&P 500 has spent very little time under 3,900 (or over 4,200) the past four months, with the dive toward 3,600 representing peak stagflation panic and the ramp to 4,300 into mid-August animated by a powerful oversold rally and some “Federal Reserve pivot” expectations taking hold.
The “don’t overthink it” take on the market remains a cautious one: Stocks are in a well-defined downtrend. They failed exactly at the declining 200-day average. The Fed is tightening into a slowdown (or worse) and might go until something ruptures. The European Central Bank is hiking into a recession. September is historically ungenerous. Further, if you think Fed balance sheet reduction is a real-world threat (vs. my take that it’s largely irrelevant), it accelerates this month.
