Remember what a slow news day looks like? It's hard to believe, but one April day in 1930, the BBC reported, "There is no news." Then the broadcaster just played piano music for 15 minutes. Not these days. There's endless stories, scandals, emergencies, tragedies, and debates. August slows down at work, so shouldn't the markets be quiet?
Actually, no. August often brings volatility, which brings questions and sparks conversation. This week, I spoke with traders, researchers, publishers, and money managers. I had a lot of conversations about the market. The picture I emerged with is this: despite the ugly price action, U.S. stocks are the best place to be. Let's go over why and what happened.
The reversal: Heavy selling dropped the S&P 500 2.98% Monday – this was after a sloppy streak of five down-days the week prior. Monday saw 18:1 big money sells vs. buys. That's huge. Tuesday looked like relief, but under the surface, we saw 4:1 sells vs. buys – the selling wasn't over. Wednesday's positive price action still saw 2:1 sells vs. buys. But Thursday showed that buyers were back, and the selling was likely over – for now. Big buyers outnumbered sellers 5:1. Finally, things looked even on Friday, with volumes calming down significantly.
When the dust settled, one thing was clear: investors want out of energy. If you look below, the Mapsignals table indicates the sectors in which buying and selling were concentrated. Unsurprisingly, traders bought real estate for its higher yields as rates headed lower. The 10-year Treasury yield fell to nearly 1.61% intraday Wednesday. More on that in a moment, but look at the yellow numbers on the right – 10 out of 11 sectors got sold heavily; that is, more than 25% of the universe logged big money sell signals.
But one should jump out: energy. Last week saw 131 sell signals in a sector universe of 87 institutionally tradable stocks. That's also huge.
This explains part of why financials got whacked. As energy stocks (specifically oil and gas) feel the pinch, profitability comes into question. If energy companies start going bust and are levered with debt, lenders will be on the hook: financials. We saw a similar scenario play out in August 2014: oil prices tumbled and led to massive pressure on oil and gas stocks, which in turn pressured financials.
As rates collapse, that also pressures financial stocks. Lenders make money on interest. If rates drop, margins shrink. And rates are in a global crunch. Currently, 19 countries have negative yields somewhere on their bond yield curve. Only one is not an EU country: Japan.
Remember me blaming the high-frequency (HF) and algorithmic traders when market storms whipped up in the past? They amplify volatility with low liquidity. August is a perfect storm. Traders go on vacation, while less volume trades. Cue the HF-traders to test shorting stocks on bad news days. When tariffs get announced – watch out!
You can see it too in earnings volatility. It would be interesting to compare second quarter earnings volatility to the rest of the year. I am watching unusual downside moves when a company misses expectations or guides lower. I believe it's another case of the mice playing while the cats are off to the Hamptons.
And if you're looking for news as a market guide, be careful. Last week, China announced that it would halt buying U.S. agricultural products, and the media played up the peril of U.S. farmers. As Louis Navellier pointed out to me, the market didn't buy it. China is the largest consumer of soybean products, and how did soybean futures respond? They rallied 3%!
You're probably wondering: "where’s the good news?" After all, I did tell you I'm bullish on stocks.
First, there's earnings. For the second quarter of 2019, 90% of the S&P 500 companies have reported results, and 75% beat earnings expectations – above the five-year average. Of the health care companies that have reported, 97% beat earnings. Ironically, the energy sector has the biggest aggregate earnings surprise. Meanwhile, 57% of reporting S&P 500 companies beat sales estimates.
The blended earnings decline is 0.7%. That may sound bad, but don't forget that earnings had grown at a monstrous rate since the Trump administration introduced drastic tax cuts. Companies felt an immediate impact to their bottom lines. So, seeing a small trail-off is to be expected. In fact, I'd argue that the lack of a larger slide is a sign of strength.
FactSet said that more than 40% of companies cited tariffs on earnings calls in the second quarter vs. the first quarter, led by industrials. While that may seem bad, it's still well below the same time a year ago: 23% lower. So, tariffs are less concerning now to corporate America than they were last year. Mentions of "tariffs" had dropped for three straight quarters until second quarter of 2019. Now, concerns may be creeping back.
Look: sales and earnings are strong, while global rates are very weak. Again, you earn way more money in your pocket collecting dividends holding the S&P 500 than you do earning interest on government bonds.
Navigating markets can be like a high-wire walk: stay focused and don't get sidetracked. Nik Wallenda has 11 Guinness records on the high wire. He said: "I've trained all my life not to be distracted by distractions."
The Bottom Line
We (Mapsignals) continue to be bullish on U.S. equities in the long term, and we see any pullback as a buying opportunity. Overheated markets can offer sales on stocks if an investor is patient.
Disclosure: The author holds no positions in any stocks mentioned at the time of publication.