Courtesy of Doug Short.
Note from dshort: A few minutes ago I received an email from Jason Leach, a copy of one that he had sent to clients earlier in the day. Given the drama of today’s market behavior, I found his analysis, shared below, quite fascinating.
The market began to sell off significantly in the overnight futures session last night (waking me as the S&P futures hit an alert I had set just 15 minutes before).
I arose to determine the cause(s) of the sell-off, and later the acceleration of the sell-off once the cash market opened this morning.
The causes include:
- Multinational companies in Europe (Adidas, Anheuser-Busch Inbev) commenting on the Ukrainian conflict impacting their operations.
- Russia responding to sanctions with some produce bans on Ukraine and Poland.
- Argentina defaulting on its debt.
- U.S. Employer Cost Index increasing more than expected this morning (indicating wage inflation could be picking up inciting fears of the Federal Reserve increasing rates sooner than expected).
Earlier this week, significant weakness in Industrials (breaking down out of a two year up channel), Consumer Staples, Energy, Semiconductors, and Homebuilders pointed to the market possibly having put in a near term top.
Yesterday, good GDP data and a Federal Reserve statement (that was relatively market friendly) were both met with selling across sectors.
Tomorrow is the once a month jobs report that could accelerate selling if interpreted to be too strong (rising rates are coming). Alternatively market participants may interpret it and other data positively and the brief sell-off could stop.
Our long term holdings, notably the recent earnings reporters, are all reasonably cheap if not extremely so.
Given the near term uncertain geo-political, economic and thus market situation, I took them off this morning looking to re-enter the positions once the aggressive selling ends.
I would emphasize that this period will be as short as possible as the companies mentioned above are undervalued given their earnings growth rates, relative P/E ratios and other metrics.
All dips in the markets have been brief over the past two years (due to Fed stimulus, corporate cost cutting and large stock buybacks). Until proven otherwise, and in spite of the industrials chart and length of this market run shown below, I will operate under the assumption that a brief market downturn will again be the case.
I will be watching key levels of our undervalued long term holds to re-enter each position as broad market selling slows.
© Jason B. Leach, CFA
JBL Wealth
