EB Daily Market Report - Monday, September 20, 2021

Executive Market Summary

• Futures were very weak overnight and we've seen bearishness accelerate throughout today's session
• The Volatility Index ($VIX) is up 35% to just above the 28 level; the VIX at 30-35 tends to mark key S&P 500 lows in a secular bull market
• Cryptocurrencies are also selling off with bitcoin ($BTCUSD) and etherium ($ETHUSD) down 8.83% and 9.66%, respectively
• Commodities are mostly lower as crude oil ($WTIC) falls 2.18%; gold (GLD, +0.63%) is benefiting, as it usually does, from the increase in fear
• The 10-year treasury yield ($TNX) is down 6 basis points to 1.31% as the dollar (UUP, +0.08%) rallies
• All 11 sectors are lower, led by energy (XLE, -4.33%) and financials (XLF, -4.02%); defensive sectors are leading on a relative basis with utilities (XLU, -1.15%) down the least
• Only 4 S&P 500 companies are higher, led by American Airlines (AAL, +1.14%); energy names are among the worst performing S&P 500 companies

Market Outlook

We're seeing a number of key technical support levels being lost today, which isn't all that unusual when fear rises - and fear is definitely rising. I've discussed the bearishness of the 2nd half of September on numerous occasions and just last Friday pointed out the annualized returns of the S&P 500 for every day from September 20th through September 26th. That data represented tendencies on the S&P 500 since 1950. Even during the secular bull market that began in April 2013, we've seen bearish action from September 20th through September 26th. So I'm not at all surprised by the weakness that's engulfed the market today.

I want to provide you a reminder of how secular bull market bottoms form. One of the best ways to predict a bottom is by watching sentiment indicators. The Volatility Index ($VIX) will many times mark bottoms when it reaches the 30-35 level. Take a look:

The red arrows highlight the VIX trips to 30-35 that have marked prior bottoms. The two black arrows highlight the VIX in 2010 and 2011 during what I refer to as "aftershocks" from the 2008 financial meltdown. I've never lived through a pandemic and how the stock market operates after one. We do know that fear ($VIX) spiked to the mid-80s, similar to 2008. Will we see aftershocks in the VIX back into the mid-40s? I wouldn't think so, but I have no history to back me up. If late-September is an issue again and fear escalates, anything is possible.

If you've moved to cash, then I'd consider buying "pieces" of your favorite stocks back as the market sells off. You won't catch the exact bottom, but I believe it's a disciplined way to move back into equities over the next 1-2 weeks.

Sector/Industry Focus

There are charts that support a much bigger selloff right now and one of those charts would be the communication services sector (XLC) on a weekly chart:

Negative divergences suggest slowing momentum and loss of the 20-week EMA would confirm the potential of a 50-week SMA test. You can also see in the above chart that the weekly RSI has not been below 50 since April 2020. A trip back to RSI 40 would likely accompany more weakness as we work our way through September.

ChartLists/Strategies

I'm not a fan of shorting stocks in a secular bull market, but plenty of traders have no issues with that. I'm planning to remain in a substantial amount of cash for the foreseeable future. That's how I tend to manage risk when fear is elevated, as it is now.

I will continue to be very quiet on the trading front as I allow the market to settle down. As I write this, the Dow Jones is down nearly 1000 points and the VIX has spiked 36%. Jumping into long positions is a major risk, unless you're doing it as part of a plan to enter in multiple phases over a period of time, or as the market sells off.

Earnings Reports

Here are the key earnings reports for the next two days, featuring stocks with market caps of more than $10 billion. I also include a few select companies with market caps below $10 billion. Finally, any portfolio stocks that will be reporting results are highlighted in BOLD. If you decide to hold a stock into earnings, please understand the significant short-term risk that you are taking. Please be sure to check for earnings dates for any companies you own or are considering owning.

Monday, September 20:

LEN, CGNT

Tuesday, September 21:

ADBE, FDX, AZO, SFIX, CBRL, ACB, APOG

Economic Reports

September housing market index: 76 (actual) vs. 75 (estimate)

Happy trading!

Tom