Morning Comment: Updating my view not the semis, the consumer staples and the Fed.


  • The consumer staples stocks have continued to perform in-line with the S&P 500 since early March. Investors should consider adding exposure to this sector…as it should provide upside (market-sized) returns if the broad market continues to rally going forward….AND provide downside protection if the market sees a correction.
  • A week ago, we said the chip stocks were at a key technical juncture. Right now, there are signs the situation is going to resolve itself to the downside…but we’ll have to see more downside follow-through to confirm a change in trend.
  • Richmond Fed President Barken made some comments yesterday that emboldened our view that the Fed is going to wait until long-term yields are higher…and THEN start “talking about” tapering back on QE (so that they can say that it’s already priced-in). Thus, do not wait for a Fed “tapering” announcement before you start expecting higher-long-term rates….especially since Dallas Fed President laid more groundwork for a tapering move over last weekend.


It was a bit of a mixed day in the stock market yesterday….as the DJIA, S&P 500 and Russell 2000 all rallied, but the tech laden Nasdaq fell by about 0.5%. We’d also note that the S&P gave back more than half of its early morning gains by the close…and finished the day near the lows. All of this took place on low volume and breadth that was nothing special, so it was not the most compelling day we’ve ever seen for the broad stock market.

We did, however, see some noticeable moves in several different groups. The energy stocks saw a strong rally…and the industrials and material stocks were able to move nicely higher as well. It was interesting to note that the consumer staples also had a good day…as the XLP consumer staples ETF experienced some further gains. As we highlighted a little more than a week ago, the rally in the XLP since early March has kept up with the S&P quite evenly…as both are up about 11% since March 4th.

As we mentioned when we highlighted this group on the bullish side of the ledger recently, the XLP had badly underperformed the S&P in the months following the election. This is what we usually see when a rally is in the mid-innings of a ball game. However, when a bull run starts becoming mature (especially in an expensive market like the one we have today), the consumer staples tend to rally right in-line with the S&P 500. (When the rally is in the mid-innings, investors ignore the defensive names…so the group underperforms. When the rally is getting mature, investors start to move some of their money into those defensive consumer staples names…to give themselves a little bit of a hedge.) This is what took place in 2000, 2007, 2018, and in late 2019/early 20. Thus, the fact that the XLP has gone from badly underperforming…to performing in-line with the S&P…is something that tells us that the rally since the March 2020 lows is maturing.

Of course, the “in-line performance” could last for quite a while…as the SPX and XLP could rally in unison for quite a while longer. However, we believe that it is a good idea for investors to add a little more exposure to this sector…because if history is any guide, the XLP should provide a “win/win” situation for investors at this time. In other words, you shouldn’t lose any performance if the market continues to rally…and you should outperform the broad market if it finally begins to tumble. This strategy worked very well in 2000, 2007, 2018, and 2020…and thus we believe adding some exposure to this sector would be a good strategy to follow right now.


Changing gears a bit, the chip stocks had a bit of a rough day yesterday…as the SMH fell by more than 1%. The SMH was the focus of one of our pieces from the beginning of last week…when we said it was at key technical juncture. As you can see from the chart below, the SMH has dropped 5% since then…and it has also fallen more below the first two support levels we had highlighted (the lows from mid-April and its short-term trend-line from early March).

Having said this, the break below the April lows has only been a very slight one so far, but the earnings season has not been a catalyst for a breakout to new all-time highs. Therefore, it’s action over the last week raises a yellow warning flag for the chip stocks. If it moves more meaningfully below that support level (of $242), it will raise the odds that the SMH has formed a “double-top”…which would obviously be quite bearish…….The next level we’ll be watching is the $235 level. That is where the trend-line from March 2020 comes-in…and thus a break below that line would raise the odds of a “double-top” in a serious way.

Having said all this, we do admit that it will likely take a material break below the March 2021 before we would be able to confirm a major change in trend, but any further weakness in the group would still signal that a correction was in the offing. (To repeat, we’re talking about the March 2021 lows from 5-6 weeks ago…not the March 2020 lows.)

However, there is another reason why we’re worried about the chip stocks. This has to do with the MACD chart on the SMH. Even though the SMH made a “higher-high” in February…and then matched that high in April…the MACD chart rolled-over and saw a negative cross at “lower-high” in each of those last two examples. In other words, as the price of the ETF has been strong over the past few months, the strength of the rally has been waning. Therefore, this is another reason why we’re worried about this key leadership group…and it’s also another reason why we will be keeping a VERY close eye on the SMH over the coming days and weeks.


Finally, we’d just like to update a third comment we made recently. Midweek last week, we predicted that when the Fed finally states that they’re thinking about tapering back on QE, they’ll say that it’s already priced into the market…and thus it is nothing to worry about. The problem will be that the reason there will be “nothing to worry about” will be due to the fact that the damage will already have been done to the bond market!

Yesterday, Richmond Fed President Barken basically said what we predicted last week…that the Fed’s goal is to tell us they’re going to “taper” AFTER the bond market has already priced it in! When asked what kind of impact the tapering of QE will have on the market, he said, “The market will see what we’ll see” (in terms of the data)…which implies the market will respond before the Fed actually makes a public statement on the issue.

BTW, there is no way that the hawkish comments from Dallas Fed President Kaplan over the weekend…were made without the knowledge and consent of the Fed Chairman. (He said, “We are now at a point where I’m observing excess and imbalances in financial markets”…and thus it would be a good idea to start talking about tapering back on QE “at the earliest opportunity.”)……These are the types of comments that should be screaming one very important thought into EVERY investors’ ear: Do NOT wait for the Fed to actually say they’re going to taper-back on QE…before you start thinking about what you’re going when long-term interest rates rise even more than they already have so far.…because those rates are already going to be meaningfully higher BY THE TIME they make that statement!!!!




Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

TheMaleyReport.com

275 Grove St. Suite 2-400

Newton, MA 02466

617-663-5381

mmaley@millertabak.com


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on May 04, 2021 — 9:05 AM

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