Investors Follow The Algorithm

Yesterday was another impressive session that began under a fair amount of pressure, although I wonder why the humans who joined the algorithms in early selling thought they were selling. Whatever the reasons were, selling triggered additional selling; once it paused, buyers made their moves.

First, they stopped the decline; then they began to add, and moments before the close, there was a little more urgency or panic buying.

This market is like The Little Engine that Could – the story that has enthralled schoolchildren for more than one hundred years. Except this market doesn’t see the daunting task of moving higher even when it opens under pressure. This Little Engine is working off muscle memory of investors ready to buy every dip, even swallow dips.

Market Breadth & Leadership

Seven out of eleven sectors were higher, with buying spreading beyond traditional havens to Technology (XLK) and Communication Services (XLC).

While the S&P 500 Heat Map dovetailed nicely with a market that staged a late rally, the big trading platforms portray a different story. 

The NASDAQ Composite was ugly, with decliners almost 3:1 from advancers, and there were 149% more new lows than highs.

More Signs of Economic Weakness

The New York Fed, “Weekly Economic Index” of ten indicators, continues to weaken. This is a remarkable development, which helps to explain why the Citi Economic Surprise Index continues to slide.

Bond Market & Other Markets are Paying Attention

The experts continue to bang the drums loudly about the Fed hiking rates and to wreck the rally; they keep ignoring economic data and reactions to economic data.

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The stock market wouldn’t hit new highs if there wasn’t a force embolden to buy dips under the assumption the Fed will not stop the party. I bet some of the buyers are at firms where strategists are promoting the notion of tapering sooner rather than later.

Bond market yields continue to tumble lower. For those suggesting the jobs report sealed the deal on Fed policy, look at the ten-year yield. It began racing higher after the July jobs report was released on August 6^th.  The yield has come back down.

Ten Year Bond Yield

Portfolio Approach

There are no weighting changes in our Hotline Model Portfolio this morning.

Today’s Session

Walmart (WMT)

Beat on the top and bottom line and hiked guidance for the quarter and full year.  The company took share in grocery where comps were +6.1%. The shocker was e-commerce was +6.0% from 2020, the street was looking for +16.5%, +103% from 2019.

Composition of Comp Sales

FY Guidance

• Net sales +6 to 7% or $30.0 billion - prior guidance low single digits
• Earnings $1.40 against consensus $1.31

Retail Sales

The street was bracing for -0.3% monthly decline in retail sales, but the actual result of -1.1% is significantly worse.

• Control group -1.0% against consensus of -0.2% will hit GDP estimates – adding to the trend of negative economic surprises.
• Building materials down sharply from +7.5% in June – which might be explained as refocusing outside the home.
• Online -3.1% matches the big e-commerce miss at Walmart. 
• Clothing -2.6% suggest stimulus checks have been all used up. Note +3.7% in June.
• Restaurants and Bars +1.7% from +2.4% in June.

Reaction

After the Retail Sales release, equity futures bounced a little and the ten-year yield actually rebounded as well. The latter is something of a head scratcher, although not big enough to be conclusive.  Stocks might have halted downside pressure knowing this is yet another reason for the Fed to stay on hold.