It was a very rough day in the stock market yesterday, but the S&P was still able to hold its key support level (its 50 DMA), so it was not a disaster by any means. Besides, the S&P still stands just 3.1% from its all-time high. Therefore, even though it might have seemed like things were getting ugly yesterday, the decline has been VERY modest. However, since we have not had a pull back of even 5% since God was a child, it doesn’t take much to get people lathered up this summer.
Given that the decline has been so mild so far, we were surprised to read several pundits declaring that we’re seeing some “capitulation” in the stock market. Don’t get us wrong, markets do not need to become washed-out before they see near-term bottoms…and thus they certainly don’t need to see capitulation. However, the 3% declines in the S&P 500, the Nasdaq Composite and the DJIA are not the kinds of moves that can ever be described as “capitulation.” Sure, we’ve seen 10% declines in the Russell 2000 and the Transports, but even 10% corrections are not the kinds of moves that are associated with capitulation (especially since both of those indexes had rallied over 130% into their recent highs). Again, it goes back to the fact that we have not seen any meaningful pull back in such a long time. People forget what REAL capitulation looks like…the kind we saw in March 2020, December 2018, early 2016, etc.
Having said this, we did see some very negative breadth yesterday, so we dounderstand why some people are thinking that that the market could see a bounce after yesterday’s more than 1% decline. To be more specific, the breadth on the S&P 500 closed at 7.4 to 1 negative. That is not an extreme number. However, we did see it at 17 to 1 negative at one point yesterday…and that is a very large number. In fact, it is a number that has signaled minorbottoms in the past, so it could be something that is followed by a bounce that lasts a few days.
However, given that we have seen numbers like 25-30 to 1 negative (and even 50-to-1 negative) at REAL capitulation lows, we find it hard to describe the recent sell-off as something that has taken the stock market to a “washed-out” level. In fact, it’s not even close in our opinion.
On top of “capitulation” comments, we also read how some people are saying that the drop has made valuation levels more compelling. How in the world a move from 22.9x forward earnings to 22.3x on the S&P 500 would make valuation levels more appealing is beyond us.
What we’re saying is that this recent mild decline could be followed by a bounce over the coming days (maybe even weeks). However, that would not necessarily mean that the worst is behind us. It also does not mean that the bounce will be a strong one. As we pointed out yesterday, the market does not usually top-out in July, but history does tell us that important tops can frequently start showing some cracks a month or two before the market starts to decline in a substantial way. Therefore, the recent disruption in the stock market could be the kind of early warning signal that is followed by a more significant decline a month or two down the road…and not the “non-event” (or “great opportunity”) that many people seem to be portraying it right now.
In other words, this decline might not be signaling an immediate correction in the stock market, but to think it’s a GREAT “buying opportunity” is ridiculous. 3% pull-backs are NOT “great buying opportunities”…and neither are 10% corrections!!! This is particularly true given that after the recent drop, the S&P is still trading more than 22x forward earnings and more than 3x sales!!! (The P/E ratio on the Russell 2000 is “N.A.” because those companies, as a whole, don’t make a profit.)
Therefore, the risks in the stock market remain elevated. If the delta variant does not become a bigger problem, the Fed is going to taper back on their emergency levels of stimulus. If the stock market was a cheap one (like it was the last time the Fed tapered back in 2013), we WOULD say that ANY little decline WAS INDEED a “great buying opportunity. However, since the market is quite expensive, we would advise investors to be careful about becoming overly aggressive on the buyside after the recent drop in the stock market.
For those who want to put money to work in a more defensive way, we think Chevron (CVX) would be a good play. As we said over the weekend, we remain bullish on energy stocks on an intermediate/long-term basis, but remains cautious on a short-term basis. However, we have also said that we’re getting closer to a re-entry point for the group. One stock that investors don’t have to wait on is CVX. The reasoning is simple. The company is well managed, it’s trading at 15x forward earnings, it has become oversold at a time that it is also testing its 200 DMA, and it offers a very nice 5.6% dividend yield. In other words, if we’re a little early on this name, we’ll be “paid to wait.” (1st chart attached below.)
We’ll finish by highlighting Bitcoin. As we’re sure you’ve heard, the cryptocurrency has broken below the key $30,000 level this morning. The break below the $30k level is only a slight one. It did the same thing on June 22nd, but was able to regain that level by the close that day. Therefore, we’ll have to see more downside follow-through before we can say that it going to see another leg lower.
Bitcoin has been bouncing off that level for two full months now, so it’s starting to get oversold, thus the bears have to be very careful about raising a big warning flag too quickly. In other words, Bitcoin seem poised to make another $10,000 move again. The problem is that we’re not sure if that $10k move will take it to $20k or $40k, but our thinking is that the move will come by the end of the month. Therefore, nimble traders should be able profit handsomely from this cryptocurrency one way or the other…after several weeks of being bored by this asset class.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.