This Rally Will Not Hold

The One-Minute Market Report is tailored for those who want a quick recap of what's going on, without the usual fluff and filler. I try to focus on the main drivers of the current market action, and offer some brief commentary along the way.

A Quick Summary

• The S&P 500 is down 8.0% from the Jan. 3 high.
• The S&P 500 rose 0.8% last week, but we're not out of the woods yet.
• The dip-buyers must now defend the -15% line or risk losing control.
• We are in a rolling bear market, with 43% of all stocks down 20% or more.
• A hawkish Fed, surging inflation, slowing economic growth, and now a war in Ukraine are formidable headwinds.
• There are pockets of opportunity to be found.

Charts 1 & 2. Major Indices

For the past week, Europe and Asia markets got hit the hardest as Russia-Ukraine tensions escalated into a full scale invasion. Volatility spiked on Thursday but eased back to finish lower on the week. 

The small-cap Russell 2000 continued to recover from a bad start to the year. Commodities continued to power higher as oil and natural gas prices spiked, and agriculture items like wheat and corn were bid up. Blockchain caught a bid after a three-week slide.

On a year-to-date basis, commodities, precious metals, and volatility lead the pack. 

Companies that have embraced cryptocurrencies are taking a hit, as is the tech-heavy Nasdaq. The small-cap Russell 2000 had a bounce last week, but it still remains depressed on a year-to-date basis. 

Charts 3 & 4. S&P 500 Sectors

For the week, healthcare performed well, gaining 2.2%. But year-to-date, it is still lagging with an -8.2% loss. Defense stocks like Lockheed (LMT) and General Dynamics (GD) are getting a boost from the Ukraine invasion, gaining 2.4% for the week and 7.8% year-to-date..

Utilities are finally seeing some buying interest, up 2.2% for the week and ahead of the broad market year-to-date. This is a classic flight to safety trade. Auto manufacturers are struggling - down -3.5% for the week and nearly -12% year-to-date. This is a case of "you can't sell what you don't have."

Chart 5 & 6. Equity Groups

These two charts show the performance of stocks that share certain characteristics, like value vs. growth, large vs. small cap, and cyclical vs, defensive. I created these groups to offer a way of visualizing the flow of investor money - where it's going and where it's coming from.

One noteworthy trend is the flight to safety trade as reflected in the outperformance of defensive stocks. This is likely to continue as investors watch how the West responds to the Russian invasion of Ukraine. It looks like volatility will be with us for a while, until there is some kind of resolution.

Foreign markets gave back some of their gains last week but are still ahead of US markets. The narrative is that sanctions will hurt Europe and Asia more than the US, given their closer proximity to the conflict and their dependence on Russian energy and agricultural exports.

Big Tech (S&P Top 7) can't get out of its own way, leading the market lower. 

Chart 7. Industries 

Here are the largest 28 industries I track. It's no surprise that Big Oil is the leader by a wide margin. Steel producers are doing well, as are agricultural businesses. Home furnishings like tile, carpets, paint, furniture, appliances and bedding are struggling this  year, and water utilities are in last place for reasons that escape me.

Charts 8 & 9. Stock Winners & Losers Year-To-Date

The final two charts drill down into the specific stocks that have gained and lost the most year-to-date. 5 of the 10 top performers are involved in the oil business. This looks like a durable trend, and not just an oversold bounce or a reaction to the Russia-Ukraine tensions. 

Producers of steel and other commodities are also doing well this year.

Of the ten biggest losers year-to-date, 4 are from the healthcare sector and 4 are from the tech sector. Semiconductor manufacturers are especially hurting due to their high starting valuations, and because you can't sell what you don't have. 

Final Thoughts

After a rough start last week, the market reversed course on Thursday and Friday in a big way. Does this mean the the dip-buyers are back? I wouldn't bet on it. They succeeded this week, but will they show up again next week? The situation in Ukraine is very fluid, and anything can happen. Expect more bouts of volatility (a euphemism for big down days) and more failed rallies.

It's an absolute certainty that the dip-buyers will eventually take the market to a new high, but I don't think we've seen the bottom yet. I'm betting that the 10% level will be breached again, and they will have to draw the next line at -15%.

The great rotation out of tech and into energy and other commodities continues, and will probably keep going for the first half of the year, if not longer. And the rise of value over growth should remain intact. The same is true for foreign vs. domestic markets, once the picture on sanctions becomes more clear.

Regarding tech, I think the future belongs to AI, robotics, and cybersecurity. These companies are under the same price pressure that the big tech names are experiencing, but once they stabilize I think they will become the new leaders in the tech space.