The stock market is on a slow downtrend with pockets of stocks falling 20% ​​or more

Stock futures edged higher ahead of Fed's Jackson Hole symposium

Traders on the floor of the New York Stock Exchange.

Source: NYSE

Landmines for the market are increasing. Seasonal weakness combines with uncertainty over the impact of the delta variant of Covid-19 on consumer behavior, with rising labor and material costs driving up prices as well as poor China’s economic data.

While the S&P 500 is still up around 1% from its all-time high, they exert their influence over large segments of the landmines market.

“In recent months, most stocks have fallen more frequently than they have risen – evidence of weak market conditions,” said Sam Stovall, CFRA’s chief investment strategist, in a recent note. to customers.

Other strategists have also noticed this discrepancy.

“As the stock markets hit new highs, the divergence of the futures downline suggests we may be heading higher,” Scott Minrad, global investment manager at Guggenheim, said in a recent tweet. “In the past, divergences like this have indicated that the market is vulnerable to a sell-off.”

The 20% drop club is growing

About 15% of S&P 500 stocks are down more than 20% from 52-week highs, but a very large part of the mid- and small-cap universe is down 20% or more. These latter groups are less tech-oriented and more vulnerable to economic downturns:

slow fall
(the percentage of stocks that are down 20% or more from their 52 week highs)

  • S&P 500 15%
  • S&P Midcap 30%
  • S&P Small Cap 48%

The weakness linked to Covid is affecting sectors linked to the reopening, such as industry and retail.

“This phase of the pandemic presents downside risks to the economic recovery, including inflationary components that are more vulnerable to disruptions in demand for services,” Barclays economist Blarina Urusi wrote in a recent note to clients. .

Industry / Materials
(% of 52 week high)

  • American airlines 26%
  • FedEx 20%
  • Du Pont 20%
  • PPG 18%
  • caterpillar 17%
  • Stanley Black & Decker 17%
  • Lockheed Martin 14%
  • 3M 12%

Retailers
(% of 52 week high)

  • Nordstrom 41%
  • Deviation 36%
  • Abercrombie 24%
  • Kohl 19%
  • Ross Stores 16%

The slowdown in China, especially the drop in retail sales due to COVID concerns, is significantly affecting luxury retailers, many of which are based in Europe.

luxury retailers
(% of 52 week high)

  • Kering 21%
  • Tapestry 20%
  • Richmont 17%
  • Movado 15%
  • LVMH 14%

Supply chain and labor issues are affecting the ability of some home builders to fully deliver orders.

home builders
(% of 52 week high)

  • Pulp 26%
  • Ko Reception 21%
  • Dr Horton 17%
  • Lenar 11%

Concerns about the Biden administration’s control of drug prices have also plagued Big Pharma in recent weeks.

Large pharmacy
(% discount at the highest of 52 weeks)

  • Eli Lilly 14%
  • Bristol-Myers Squibb 11%
  • Merck 11%
  • Johnson & Johnson 8%

A break or a breakdown?

Most strategists, including Dubravco Lakos-Bujas of JP Morgan, are bullish in the market. However, Lacos-Bujas also admits that budget tea leaves are very difficult to read.

“Given the unique nature and impact of the pandemic, it is more difficult to analyze current cycles than historical cycles,” he said in a recent note to clients. “This cycle is essentially a superposition of two interconnected cycles – a COVID cycle and a regular business cycle (including labor, capital expenditure, inventory).”

Why are so many analysts and strategists optimistic? It is all based on the principle that the delta variance will turn out to be a decreasing force and income will not decrease significantly.

“As the delta version eases, we expect those worries to go away,” Lacos-Bujas said, adding that the 4Q21 holiday season (in contrast to the disappointment of last year’s holiday season ) and cross-border activity still remain high. There will be a recovery to a disappointing level. .

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