The Stock Market May Be About To Relive The Fourth Quarter of 2018 All Over Again

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September 21, 2021

Stocks – FDX, UPS, UBER

Macro – SPY, HGX, DJT

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Tomorrow is the big Fed meeting, and as I have been saying, I expect that the Fed will indicate in “Fed-speak” that the reduction of its asset purchases will begin at the November meeting. To this point, the market has been calm about the tapering, but I don’t see how that will last for long. Based on the market valuations, it doesn’t look possible that tighter financial conditions have been priced in yet. Not with an S&P 500 trading at 20.5 times its next-twelve-months earnings estimates. I know people will argue that low rates drive higher multiples; that is simple, not true. If it were the case, Germany and Japan would trade at higher valuations than the US, and they do not. They trade at discounts, despite having comparable growth rates. Anyway, we can talk about this another. (RTM Premium content – RTM- Gearing Up For The Eye Of The Storm)

Ultimately, what drives PE’s are growth rates, and growth rates are falling here and all over the world. Peak growth has passed and the Fed simply waited too long to begin this process. Now they will begin to reduce purchases into weakening global growth. The market will not like this, and it will likely reject this change in policy the best way it knows how –by ramping up volatility.

It isn’t so easy for the Fed to simply not taper at all, the bond market would not be happy about it nor would the dollar. The dollar would tank, and inflation worries would ramp up. From a political standpoint, the US needs low rates to finance its budget, and if the Fed doesn’t appease the bond market this time, the Treasury will be having to issue debt at much higher rates. Powell is simply boxed in.

This is nearly the exact scenario that was witnessed during the “rates are far from neutral” or the “auto-pilot” moments of 2018. We will get a good sense of this tomorrow, how the market reacts to the Fed.

S&P 500 (SPY)

The S&P 500 started out strong but could not hold those gains, finishing down nearly 10 bps. From intraday peak to trough the decline was almost 1%, and if you were a bull after seeing yesterday rally off the lows and the gap higher this morning, the finish was quite the let down.

The S&P 500 futures seem to have the best technicals at this point for me to work with and it seems that the top we witnessed to start the month was likely the end of a Wave 5, and we are now in a corrective wave. I haven’t really had the time yet to count this pattern out completely. But I am of the belief it may only be the start of the first leg lower. The trend lines seem to be fairly strong and well defined. The next level of support on the trend lines comes around 4,240, which does correspond with a level of support from mid-July.

Housing (HGX)

The housing sector continues to look terrible, with the index nearly touching the lows of July. The RSI says the index isn’t oversold yet, and that further declines are still to come. Now the 200-day moving average is in jeopardy.

Dow Jones Transports (DJT)

The Transport took out the 200 day-moving-average yesterday and fell again today. Not a good look there.

FedEx (FDX)

It will not get any help tomorrow from FedEx either. The company missed analysts’ earnings estimates tonight and warned about higher labor costs. The stock is down over 4% after-hours and has a big level of support at $235. That will need to hold. After that, we could be targeting a gap fill at $183.

UPS (UPS)

UPS is all falling tonight by around 2%. The gap fill is at $178.

Uber (UBER)

Uber ripped higher today by more than 10% after it said it was on track to be EBITDA positive. The stock jumped right to resistance at $45 and a hit wall. Now we know why there was so much call activity in the name in recent weeks. (Premium content – RTM Exclusive: Has Uber Finally Bottomed?)

Ok, I have to run, but will have more tomorrow after the Fed.

Mike

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