Weekly Update

Two Sector Charts Give Us Overall Market Clues

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Published September 2, 2022


Since Fed Chair Powell’s comments a week ago markets have been off-kilter. The notion of a Fed shift to lowering interest rates in the first half of next year has been squashed, replaced by expectations that rates will remain flat at an elevated level for most of 2023. The bearish narrative is that come October corporate earnings reports will deal further evidence of a notable slowdown in the U.S. economy. Slowing economic growth combined with stubborn interest rate policy makes for an unhappy stock market. The bullish case points to very solid employment numbers and generally good consumer financial health with expectations that any recession will be brief and shallow.

Either way, we remain in a bear market for about the past nine months. For clues when the market has had enough of this bear market business we look to two very influential sectors – consumer discretionary and semiconductors. Below we show the equal-weight consumer discretionary ETF (symbol RCD). We prefer looking at this version for broader market clues. The usual weighted ETF (symbol XLY) is overwhelmingly driven by three companies (Amazon, Tesla, and Home Depot) which together comprise over 50% of the ETF and can, therefore, be sharply skewed by performance in one of these companies.

The equal-weight discretionary chart shows a sharp rollover in the long-term moving average (thick black line) around the beginning of this year. Outside of the late-July rally, the downtrend has been sharp and steady.

The equal-weight discretionary chart shows a sharp rollover in the long-term moving average

There is no such issue with the weighting of the semiconductor ETF – symbol SOXX. There are some analysts who feel the semiconductor industry is setting itself up for a long downtrend as factories are being built and substantial investment made in this very cyclical boom-bust sector. Still, the sector is usually a good bellwether for investor risk appetite and enthusiasm about future economic growth.

semiconductor ETF – symbol SOXX

When both of these sectors are back above the thick black lines on the charts above, the stock market will be in good shape. Until that occurs, risk is high in the market and all rallies should be viewed with suspicion.

Market Update

The week began with stocks continuing to respond negatively to Fed Chair Powell’s speech from the prior Friday. Yields moved up and stocks moved down, closing with a -0.7% slump. All 11 market sectors fell Tuesday as the selling added a third straight losing session. This time investors lopped off -1.1% from the broad market value. Stocks closed August on a down note with yet another loss Wednesday. The -0.8% slide found oil prices lower by almost -3% bringing the monthly downdraft for oil to -12%. The stock market had opened the month with two weeks of gains. But a move higher in interest rates and a stern anti-inflation message from the Fed quashed hopes for an easier Fed policy in coming months and left stocks down -4% for the month. The notorious month of September opened with a positive reversal in stocks. After a weak -2% morning session, stocks rebounded to close higher by +0.3%. The gain came despite a warning from chipmaker Nvidia on sales and fresh China covid lockdowns which sent commodity prices reeling. The upward move in stocks continued into Friday with support from a ‘goldilocks – not too hot, not too cold’ monthly jobs report. The report showed hiring slowing from July’s report as labor force participation grew. But investors ultimately deemed the report as offering little to change the Fed’s position on rate hikes. Stocks gave up the morning gains to a -1% loss.

Stocks slid back into their bear market posture unable to hold gains and ending with a -3.22% weekly loss on the S&P 500 (SPY). The growth-focused Nasdaq 100 (QQQ) tumbled -3.99%. Smallcap stocks (IWM) ended the week -4.70% lower.

Warm wishes and until next week.