Trading in the overall marketplace yesterday was quite strange. It looked like we were going to get a repeat of what took place two Mondays ago. Back then, concerns over the delta variant of the coronavirus raised concerns about second half growth. That caused bond yields, oil prices, and stock prices to plummet.
Yesterday, there were more concerns about second half demand…and it once again led bond yields and oil prices to fall significantly. However, these concerns were not enough to impact the stock market. Sure, the moves in those other markets pulled-down the equity market from morning highs, but the broad stock market indices still closed the day pretty much unchanged. Given that crude oil fell by almost 4% and the yield on the U.S. 10yr note closed at just 1.17%, the fact that the stock market was able to hold up so well was surprising.
Then again, every little, tiny decline in the stock market has been bought with both hands this year, so maybe it shouldn’t be surprising that investors ignored the moves in the other markets yesterday. (Why let the market fall even 2%-3% before you buy with both hands…if it is going bounce-back within a day or two anyway?)
Having said this, the complacency in the market was not complete. Although investors were not selling stocks, it did look like they were buying at least some protection in the options market…as the VIX rallied almost 7%. Don’t get us wrong, that rise still left the VIX below 20, so it’s not like there was a major rush to put-on hedges in the stock market yesterday, but it still showed that SOME people were a little bit worried about the lack of movement in the stock market in reaction to the big moves in those other markets.
Looking at the groups in the stock market, however, we DID see some movement that indicated that investors are worried about growth in the second half. The S&P Material Stock Index fell more than 1% and closed 2.2% below its early morning highs. This basic materials index is now down 6.4% from its May 17th highs. That compares to a 5.4% GAIN in the S&P 500 since that date. Therefore, a meaningful divergence has developed between the two indices over the past 2.5 months.
This is a big change! From the March 2020 lows to the May highs, the economically sensitive material stocks outperformed in a major way. The S&P 500 rallied 90% over that time frame…while the Materials Index rallied a whopping 130%! So, as you can see, this key economically sensitive group has gone from outperforming in major way…to underperforming in a material way over the past 2.5 months.
Therefore, the action in the bond market is not the only thing signaling a slowdown in growth in the second half of this year. There are areas of the stock market that are telling us exactly the same thing. (We used the S&P Material Stock index to show the change in this sector of the stock market this morning, but the divergence is the same for the IYM basic materials ETF.)
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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