Tuesday trading action finds US stocks nervously seeking direction
Please hold for final -T WASHINGTON – Tuesday’s post-Labor Day opening action in US stocks seemed hardly encouraging. The Dow and the S&P 500 averages have been immersed in red ink for the day thus far, although the highly tentative action in the tech-heavy NASDAQ remains marginally in the green, up a feeble 0.22% as we write today’s article around 1:30 p.m. ET. In short, Tuesday trading action thus far finds stocks nervously seeking direction.
Stocks, in fact, have seemed lost in the aftermath of the Fed’s mealy-mouthed early pronouncements from their virtual Jackson Hole confab ultimately amounted to nothing. Making matters worse, September and October tend to be the most treacherous months for stocks.
More on the troubling Tuesday trading action
The problems embedded in our Tuesday trading action were made worse this year by the dawning realization that elections do have consequence. Plus another confirmed fact. Namely, that America is currently under the leadership of a virtual president who spends more time in an alternate reality than he does on this planet.
Joe Duarte explains it all. Or at least most of it
Veteran analyst Joe Duarte posted a piece over at StockCharts.com today on this topic. It sums up his current attitude toward investing in this market. I think it’s worth quoting at length.
“Of course, we have to get past October, which is usually full of surprises. Meanwhile, common sense should prevail, which means that our recent guidelines remain intact:
-Don’t fight, but don’t trust the Fed
-Trade one day at a time and consider shorter timeframes
-Focus on companies in go-to niches
-Balance risk management/income/capital preservation with short-term opportunities to trade
-Consider option-related strategies to hedge any stock market bets and produce income
-Take profits in positions that have gained 10-20% or more
-When buying stocks, purchase small lots
-Keep somewhat tighter-than-usual sell stops in the range of 5% rather than 5-8%
-Never let a winner turn into a loser
-Consider contrarian strategies, such as I describe in my latest Your Daily Five video
-Be ready to switch from cautious to outright bearish or bullish rapidly
“‘The edge of chaos is a transition space between order and disorder that is hypothesized to exist within a wide variety of systems. This transition zone is a region of bounded instability that engenders a constant dynamic interplay between order and disorder.’ – Complexity Labs”
The Twin Tylers weigh in with a deeper dive
So what’s going on here? The Twin Tylers of ZeroHedge caught me napping on this one. They observe that quietly, and without much notice, traders and insiders have started worrying about an impending economic slowdown in Q3-Q4. And perhaps stretching into calendar year 2022. This might go a long way toward clarifying the “whys” surrounding our troubling Tuesday trading action in US markets.
Bear with us here, as the following quote plus tweet might seem a little densely packed.
“One week ago, when observing the recent spate of warnings from such banks as Morgan Stanley and Bank of America about the increasingly troubling state of the US consumer – who absent a periodic government stimmy and having drained excess savings, has been forced to use credit cards to a record extent – and the impending deflation of record profit margins – as rising wages and soaring commodity prices eat into the bottom line – we said that “we should start seeing Q3 earnings warnings in the next 2 weeks.”
If MS and BofA are right on slumping consumer demand and margin contraction we should start seeing Q3 earnings warnings in the next 2 weeks.
— zerohedge (@zerohedge) August 30, 2021
“We didn’t have long to wait and just one day later, one of the largest US liquor companies, Brown-Forman, makes of such brands as Jack Daniels, cut its outlook for fiscal 2022, predicting “volatile” results through the year thanks to supply-chain disruptions adding that it expects ‘more significant’ unfavorable impact from supply chain disruption to hit margins in FY22.”
Unpacking the argument and reading the tea leaves
So let’s unpack this a bit, particularly ZH’s first paragraph. To boil all this down, advisors at Morgan Stanley (NYSE:MS) and Bank of America (NYSE:BAC) believe the average American consumer is tapped out.
From product shortages to Biden-caused gasoline price hikes that have been ongoing for the better part of 2021, US consumers have run through their much-ballyhooed stimulus payments. They’ve also spent most of their rainy day savings and are now resorting to charging up credit cards (after spending a year paying them down).
This shift led them to rely far more heavily on high-interest rate credit to maintain home supplies, indulge in a bit of travel, and complete long-delayed home repairs and / or renovations. Now, consumers appear reluctant to go much more deeply into debt. That’s something that many of them learned about quite painfully.
This happened after they got hit upside the head by the Great Recession.
So perhaps this is the real reason for the currently weird trading action in US markets. This and associated reasons would certainly help explain why – aside from feeble pre- and post-holiday trading volume – our markets currently seem so maddeningly iffy.
Industrials clobbered, Deere takes a beating
Fallout due to these market and economic perceptions seemed to hit heavy industrial stocks quite hard today. The smackdown particularly affected companies like Deere (NYSE:DE). That Dow component, a stock we’ve recently begun to buy, got whacked for a roughly $17.50 per share loss this morning. It has yet to meaningfully recover.
We think that hit was ridiculous, a typical September overreaction. Nevertheless, it didn’t feel very good, even though it induced us to start averaging down by picking up a few expensive shares. Because today, they were a hell of a lot less expensive than they were last week. Grrr.
Big pharma also whacked today
Big pharma stocks also took a hit today, including a few of our holdings like Abbvie (NYSE: ABBV), Abbott Labs (NYSE: ABT) and Johnson & Johnson (NYSE: JNJ). ABBV shares had already suffered considerable damage last week for reasons I don’t quite comprehend. Flirting with the $120.00 per share mark at that time, they plunged horrifically late in the week.
They continued getting hit today. These shares will likely close around $108.00 per share, give or take. Again, we bought a bit more. We shall see.
We’ve had trouble with these shares before, particularly when we were investing in Allergan, which ultimately merged with Abbvie a couple of years back. We’re going to try to hold this volatile stock here mainly because its outsized 4.6% dividend makes it worth holding during potentially hard times.
That’s about all we have for today. Our final tip: Follow Joe Duarte’s cautionary bullet points from earlier in this article. In fact, read his whole column by following the link. Good advice is hard to find these days, and Joe’s advice is usually pretty good. Particularly in confusing times. Like today, as our Tuesday trading action looks to close on a decidedly down note.