Consolidations are normal. Markets breathe in and breathe out. They zig and they zag. They rarely get as extended to the upside as they did in early September 2020, and now in July 2021.
The Nasdaq 100 Index Leads The Nasdaq Composite
A current case in point is the Nasdaq 100 index, home to FAANG and other beloved tech heavyweights. Where the Nasdaq 100 goes, that’s where the Nasdaq Composite goes, due to the sheer size of the Apples and Googles that make up part of the FAANG acronym.
The Relative Strength Index (RSI), which is very popular with futures traders, got to 77.50 in this last run-up, almost matching the climactic top from early September 2020, when it got a few ticks above 80, so we became almost as extended as we were back then, when it took three months to clear the early September 2020 all-time high with two tradeable dips.
The Fear Of The Spread Of The Covid Delta Variant
It would be normal to go sideways over the summer months, especially considering the fast spread of the Covid Delta variant, and more cases globally. My understanding is that Moderna (NASDAQ:MRNA) works well against Delta, in addition to the fact that researchers are working on boosters, including variants and a Delta-specific vaccine. Congratulations to Moderna for its inclusion in the S&P 500. The company sure exceeded expectations, competing on par with a massive pharmaceutical conglomerate like Pfizer (NYSE:PFE).
Other obvious triggers for a consolidation would be a more aggressive signaling for a change in Fed policy, which is unlikely – given the Powell testimony last week, and much hotter inflation numbers, which are possible given recent trends. Powell said that changing monetary policy because of bottlenecks is not a good idea, as prices will “normalize” after the bottlenecks disappear in 6-12 months.
Since this is the beginning of Q2 earnings reporting season, if good earnings (on average) are being sold into, that means the market is ready to take a breather. Selling into good earnings reports is a sign that the surge in stocks has already anticipated the good earnings and they are fully priced, for the time being.
The Average Stock In The S&P 500 Index Are Not Doing So Well
When one looks at small- and mid-cap indexes, one sees few new highs in the last three to four months. The same is true for the average stock in the S&P 500 Index. The relative action of the S&P 500 Equal Weighted ETF and the normal market-cap based ETF shows that the average S&P 500 stock (reflecting the bulk of the stocks in that index) is not doing as well as the S&P 500 Index itself.
Such periods of increasing and decreasing relative activity of small- and mid-cap stocks are normal, and we very well may see them surge in the fall, depending on how this reopening of the economy goes, but I am worried that there are still parts of the country where vaccination rates are only about 30%. The Delta variant will cause surges in infections there and we will likely see a spike in hospitalizations and deaths.
I have no idea how close we are to herd immunity, but if we aren’t there yet, then a 4th Covid spike is virtually guaranteed in unvaccinated regions. That could cause more restrictions and less of a reopening in economic activity than previously expected.