End of Month Thoughts
Changing of the Tides?
September was a month that will be viewed as a pause in some important trends or a reversal in the prevailing tide. The biggest development is the potential reversal in the dollar which has been falling since March. Risk assets have had a clear inverse correlation to the buck so there are big implications here if the trend is changing.
Major US Equities
In the US Equity Markets, a strong August was followed by stalling activity in September. The big picture still favors growth over value and large over small but the fight might be getting more intense.
QQQ is still in a strong uptrend and from this perspective, the COVID-19 bear market looks like a small wobble in a solid trend. October could be a key month after the September stall. Many of the growth ETFs have a similar look.
Small value is clearly in a tough spot. The rebound from the March lows is stalling at the congestion zone that dates back to 2016. Looks the same for other value ETFs.
Another trend that has been on my mind for the past few weeks is the dismal performance of the dividend theme. High Dividend and Large Cap (S&P 500) Yield ETFs are stalling after making feeble rebounds from the March lows. Dividend growers (DGRO) are holding up better. It seems that investors are focused on the risk that dividends will be cut and are willing to bet on the companies that are bucking that trend.
At the sector level, Technology still has the momentum along with Discretionary and Communication Services. Materials have come on of late but will the commodity trade derail this trend? Energy and Financials remain in the no-go zone.
Fixed Income - US
Momentum in the US Fixed Income space continues to favor longer duration treasuries but that was put to a test in August & September where shorter duration actually held up better. There was clear trend toward a steeper yield curve. This is something to watch, with implications for the growth over value trade. So far I find it hard to change my tune but am keeping an open mind. The Fed has committed to keeping rates low even if inflation begins to pick up. The question in my mind is will investors test the Fed’s resolve of not wanting to take rates below the zero bound. The 10-year yield is a good example of this fight right now.
IG Corporates are a better spot than High Yield at this point. Munis are holing the breakout level.
Global Regions
Growth is a theme that is working outside the US as well but did show some stalling action after pushing to a new monthly high. The rest of the world continues to trade flat and is pretty uninteresting. Drilling down to the country level there are some themes that support the growth picture. Taiwan is trading near its highs and has a large (>50%) weight toward technology. This seems like a bullish data point for the tech trend in the US and globally to remain strong. This can be seen in the global sector ETFs where IXN is at the top of the momentum list.
The Dollar
After falling off a cliff since peaking in March, the dollar is beginning to show signs of life. This is arguably the biggest development in the markets right now in my opinion. The September reversal in the dollar toward strength completely engulphed the August price action. If the dollar continues to rise, there is potential for the strength in equities from the March lows to reverse.
The biggest implications are likely seen in the Euro and in the commodity currencies. The commodity currencies have come to life in the past few months as the prospect for inflation has been on the rise. The Fed has said that they are willing to let inflation overshoot its 2% target before thinking about raising rates. A stronger dollar would throw a wrench in this trend toward inflation. Implications for precious metals and other parts of the commodity complex. Getting the dollar right from here is going to be important.
Commodities
Precious metals have run into resistance and are beginning to stall. Ags are trying to stage a rebound from depressed levels and are the favorite in the complex in the near-term. The dollar looks to be having a bigger impact on the metals for the time being. Here is the big reversal for GLTR at resistance on the monthly chart. Copper is a wild card, up on inflation expectations or down on lack of growth. It does not fit neatly into one theme are the other.
Take - Away
It’s probably too early to call a change in the main trends that have been in place. Growth still leads value, large still leads small. The US is broadly better than the rest of the world. The dollar is in the early stages of a possible reversal. The main trends are toward stagflation but the “flation” portion of this argument is the most at risk if the dollar keeps moving higher. Growth growth outperformance tells me that investors are still paying up for it in a little / no growth world.
The biggest developments away from the charts are:
Will we get more fiscal stimulus? What is the timing if we do? Right now it looks like market expectations are low for anything before the election so this could be a positive surprise if we get something before November 3rd.
The Election. The market seems to find its way but there is the scope for big uncertainty as to the winner. Markets were under pressure through the end of the year in 2000 when the outcome was not immediately clear.
Layoffs and Bankruptcies. This week saw an uptick in the number companies laying off workers. Will this push the stimulus debate to the top of the list?
The IPO and SPAC markets are wide open. Is this excess supply going to derail bullish equity trends? I still have a hard time with SPACs. Yes, there are some exceptions but are these really quality companies?
