Morning Comment: Narrow Rallies Rarely Last Very Long.

Some very negative news on the economic front got most of the blame for yesterday’s 2% decline in the stock market yesterday, but given that the market had rallied 27% over just three weeks, it was getting ripe for a bit of a breather anyway. In fact, everybody expected that all of these numbers would be horrible, so we would argue that the drop in WTI crude oil below $20 probably played an important role in the decline as well.

Yesterday’s action had good news and bad news in it. On the positive side of the ledger, volume was very low. At 4.2bn shares on the composite volume, it was the lowest reading we’ve seen since March 4th. However, on the negative side of things, breadth was more extreme yesterday than it was during Tuesday’s gains. For the S&P 500 index, it was 12.6 to 1 negative…and 9.3 to 1 negative for the NYSE composite index. Those readings were 6 to 1 and 2.4 to 1 positive during Tuesday’s decline, so given that Tuesday’s rally was much bigger than Wednesday’s decline, the fact that the breadth numbers were more extreme on Wednesday is another concern.

If there’s one thing for sure, the market has certainly become a stock picker’s market…something we’ve been predicting since late March. Most people are (correctly) talking about the outperformance of the NDX Nasdaq 100 index…as several big cap over-the-counter names like AMZN, NFLX & MFST continue to act VERY well…and all three stand in positive territory for the year (with AMZN & NFLX trading at all-time highs). However, we also have names like WMT and CLX trading in positive territory for the year AND at all time highs as well.

So you can see that it’s not just the big cap tech names that are outperforming, but there is no question that this rally is a very narrow one. As we highlighted yesterday, the NYSE cumulative advance/decline line has been lagging the broad market quite badly during this rally. This morning, we’d also note that the S&P equal weight index has also been lagging recently. Looking at the attached chart, you can see that after trading lock-step with the S&P 500 index throughout 2019…and thus confirming the strength of the rally last year, the S&P equal weight index began to lag early in the year. That, of course, was followed by the massive decline in February and March. Well, it has been lagging during this bounce as well. If this leading indicator works as well as it did before the February/March decline began, it should be telling us that we’ll see another decline in the broad stock market before long.

Of course, just because this three-week bounce has been a very narrow one does not mean that broad stock market HAS to roll-over any time soon. As we’ve been saying for many weeks, it is now a stock pickers market, and thus these names SHOULD be leading the way. However, there is no question that history tells us that narrow rallies do not last very long. So unless the broader market can play catch-up at some point soon, the outperformance of these small number of stocks is not a great development (especially for those who are highly weighted in passive investments).

As much as a lot of people had become much less bearish late last week and over this past weekend, it doesn’t look like we’re alone in some of our beliefs. We were sent a couple of market letters this week that talked about the exact things we’ve been harping on recently…as one touched on the belief that 2021 earnings need to be compared to 2019 earnings (not 2020)…and another one that talked about how similar this bear market has been to the bear markets of 1973-74, 1980-82, 2000-03 and 2007-09. So it seems like there are still several people who agree with our arguments….and thus not everybody has become less concerned about the impact the healthcare crisis will have on the economy and markets.

Still, there is no question that sentiment had seen a significant shift away from the ultra-bearish sentiment that existed a few weeks ago…or even as late as early last week. Therefore, we believe the upside potential for this most recent rally (this 50% retracement of the Feb/March decline) does not have a lot of upside follow-through left in it. With this in mind, we believe short-term traders should shift back to selling the bounces…and longer-term investors should be looking to add to positions at much lower levels than where it stands today. (Down 7%-10% is a place where we’d suggest dipping one’s toe back into their favorite stocks once again.)

We’ll finish with one last comment. There has been a lot of talk about the U.S. banks this week…with so many important ones reporting their Q1 earnings. However, we don’t want to forget about the banks on the other side of the pond. We just want to reiterate that the European banks continue to act very poorly. Despite the 16% bounce in the broad STOXX Europe 600 Index, the European bank index is testing its 2019 lows…and thus stands 45% below its 2019 highs. Our banks on this side of the pond are very well capitalized, but we cannot say the same thing about all of the world’s major banks. Just some food for thought for those wondering if the stock market can still retest its March lows during this bear market.

Matthew J. Maley

Managing Director

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.

Posted to The Maley Report on Apr 16, 2020 — 8:04 AM
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