The fourth of five regional Fed manufacturing indices was released this morning from the Kansas City Fed.  The 10th district’s Manufacturing Composite hit a new record high in March rising 8 points to 37.  Expectations also set a new record climbing 3 points to 41.  Those readings indicate the region’s manufacturers have seen a historic rate of growth and expect that to continue over the next six months.

Given the record reading in the headline index, most categories of this month’s report came in at historically elevated readings. Breadth was also impressive with only three categories declining month over month: Number of Employees, Average Workweek, and New Orders for Exports.  In spite of those declines, the levels are consistent with healthy growth.  Breadth for expectations was more mixed with an equal number of categories rising and falling versus the February report.

Growth in demand only accelerated modestly as the new orders index rose a single point to 33, and order backlogs rose by a more significant 7 points.  The ability of the region’s manufacturers to fulfill those orders, meanwhile, was much stronger in March as both shipments and production set new record highs rising 22 and 15 points, respectively.  Production expectations also set a new record high.

That higher production also came in spite of supply chain slowdowns.  The delivery times index rose back up to the November record high of 55, erasing any of the past few months’ improvements.  The expectations index saw the same results in which any recent reversal lower has now been erased as it set another record high.

Similar to delivery times, a huge month-over-month increase in prices paid this month led the index to reverse much of the past year’s decline, though, that was preceded by a large increase in expectations last month. The prices received index has been more rangebound recently but it too ticked higher in March. That is while expectations are rising at a much more rapid rate, setting more all-time highs.

In spite of higher prices paid and supply chain delays, material inventories experienced record builds in March as that index took out the former record from October 2017.  Finished good inventories, meanwhile, came up one point shy of its October 2017 record.

The only notably weak area of the report was employment metrics. Both number of employees and average workweek remain in expansionary territory but pulled back in March for both current conditions and expectations.  Click here to view Bespoke’s premium membership options.

There’s nothing like higher prices to cure investor blues, and the last week has been a perfect example of that.  AAII’s weekly sentiment survey saw a double-digit increase in the percentage of respondents reporting as bullish this week with that reading rising from 22.5% up to 32.8% and matching the highest level of optimism in 2022.

Those gains to bullish sentiment borrowed entirely from bears as the percentage of respondents reporting as pessimistic fell from nearly 50% of respondents down to 35.4%. The 14.4 percentage point decline marked the largest weekly decline in bearish sentiment since July 2010 when the reading had fallen by 19.27 percentage points. More recently, however, there have been a couple of other double-digit drops in bearish sentiment including a 12.3 percentage point decline in the first week of March and an 11.9 percentage point drop in December.

Bears continue to outnumber bulls, but the margin has narrowed to the smallest degree since the first week of the year. The bull-bear spread has risen to -2.6 after leaping higher by 24.7 points week over week; the largest one-week increase in the number since October 2019.

Looking at it another way,  this week marked the first time since October 2019 that bullish sentiment rose by at least 10 percentage points while bearish sentiment fell by at least 10 percentage points in the same week. In the table below, we show each prior instance of simultaneous double-digit swings in bullish and bearish sentiment without another occurrence in the previous six months.  As for how price action has responded to such swings in sentiment, the S&P 500 has generally seen consistently positive performance in the months ahead, but only one week and one-month performance has been significantly stronger on an average or median basis than what has been the norm. Click here to view Bespoke’s premium membership options.

Homebuilder stocks are under pressure again today following a weak earnings report from KB Home (KBH) which has the stock trading down over 3%.  The weakness in KBH has also shown up in the iShares Home Construction ETF (ITB) which is down 1.6% and on pace for its lowest close in more than a year.

Rising rates have been cited as a major cause behind the weakness in homebuilder stocks, but they aren’t the only factor.  As mentioned in the KBH call this morning, constraints in the supply of both labor and materials has also slowed down business for homebuilders.  They literally can’t build houses fast enough to meet demand.  The chart below compares the performance of ITB versus Bankrate.com’s 30-year mortgage rate (shown on an inverted basis in the chart).  Over time, there has been a positive correlation between homebuilder stocks and rates, but there have also been periods where the two have diverged as well, and if you’re long homebuilder stocks, you should be happy that mortgage rates aren’t the only factor driving performance of homebuilder stocks.  If that were the case, the recent surge in rates (shown by a falling red line in the chart) would have resulted in a crash in homebuilder stocks.

While homebuilder stocks trade near 52-week lows today and have underperformed the broader market, the current level of underperformance is hardly extreme relative to recent history.  The chart below shows the rolling 50-trading day performance spread between ITB and the S&P 500 going back to the start of 2010.  At the current level of 11.4 percentage points, the current level of underperformance by the homebuilders has been seen at three other periods since the start of the pandemic in 2020. Click here to view Bespoke’s premium membership options.

Since early December, initial jobless claims have risen and remained above multi-decade lows. That is until this week.  Seasonally adjusted claims fell for a second week in a row down to 187K this week.  That is the lowest reading since claims came in at 182K all the way back in September 1969.

While not to take away from the historically strong reading as NSA claims also hit a new low for the pandemic of 181.1K, before seasonal adjustment, jobless claims have not exactly fallen to as significant of a low as the adjusted number. Although that is the lowest level for the current week of the year since 1969, there have been recent periods like the fall of 2018 and 2019 in which claims were even lower. Declines in initial claims have historically been common for the current week of the year, but the next couple of weeks have typically seen claims experience a brief bump before resuming a seasonal downtrend roughly through mid-spring.

Continuing claims have fallen even more consistently with week-over-week improvements in 7 of the past 10 weeks. Now at 1.35 million, continuing claims are down to the lowest level since the first week of 1970.  Click here to view Bespoke’s premium membership options.

Today marks the two-year anniversary of the COVID Crash low on March 23rd, 2020. After falling 34% from 2/19/20 to 3/23/20, the S&P has seen a gain of exactly 100% since then. Below is a chart showing the rolling 2-year price change in percentage terms for the S&P since index data begins in 1928. Remarkably, this has been the best two-year gain for the S&P since 1937!

As for two other major US indices, the NASDAQ Composite and Russell 2,000 have been on their strongest runs since the period coming out of the Global Financial Crisis.  Looking further back, though, the late 1990s saw much larger rallies in two-year spans for the NASDAQ, while the post-GFC era is the only comparable period for small caps.

Below we show the rolling 2-year percentage change for the eleven S&P 500 sectors.  As you can see, this two-year run stands out as one of the best for most sectors.  Energy’s run has blown any previous record out of the water as the sector has risen 224% since the COVID low two years ago.  Aside from Energy, the current two-year rallies for most sectors have been the largest since the couple of years coming out of the Financial Crisis or the 1990s for sectors like Technology and Health Care.  Click here if you would like to see Bespoke’s premium research.

Two years ago to the day, the S&P 500 put in a low after a 33.9% pullback from the closing high on 2/19/20.  While the S&P 500 is once again off its highs, the index sits just over 100% above that 3/23/20, low and 32.7% above the pre-pandemic high. In the table below, we show the current S&P 500 components which have rallied the most since the COVID Crash low as well as how much each stock declined during the crash.

While it was not a member of the S&P 500 at the time of the COVID crash, being added on 12/21/20, Tesla (TSLA) is currently the S&P 500 member which has risen the most since the broader market low. After being more than cut in half, it has since risen over 1,000%.  The next best performers are Devon Energy (DVN) and APA Corp (APA); a couple of Energy sector names that saw even larger declines of 72.8% and 84.86%, respectively from 2/19/20 to 3/23/20.  Along since Freeport-McMoRan (FCX), both stocks have risen well over 800% over the past two years. Of the list of the 25 best performers in the S&P 500, the only one that managed to move higher during the COVID Crash was vaccine producer Moderna (MRNA) which had risen 40.43% as the rest of the market collapsed.

By the time of the 3/23/20 low, the index’s worst performers since the pre-pandemic high (2/19/20) had seen monumental declines with many of those stocks dropping over 70%. On the other end of the spectrum, only four stocks had eeked out a gain and only another seven stocks had fallen single-digit percentage points.

As for what those stocks have done since then, below we have created equal weight indices comprised of the S&P 500 members that are still actively traded that were the 20 best and 20 worst performers from 2/19/20 to 3/23/20. Each basket as well as the S&P 500 are indexed to 100 at the COVID Crash low.  As shown, what had at one point been the most beaten-down names, have crushed it over the past two years; hypothetically having turned $100 into $481 having even held up well during the recent bout of weakness for equities.  For comparison, the biggest winners in the early days of the pandemic bought at the lows would have only seen $100 turn into $137.64 while the S&P 500 as a whole would have a little more than doubled.Click here to view Bespoke’s premium membership options.

With the S&P 500 up over 1% in five of the last six trading days heading into Wednesday, we expected to see some strong breadth readings to go along with the gains, but in looking at the daily readings, since last week’s low, we were a little bit underwhelmed with the readings we saw.  Going back to 1990, on days when the S&P 500 was up 1% or more, the average daily advance/decline reading for the index has been +323, and since the lows of the Financial Crisis, the average has been even stronger at +373.  Furthermore, an average of one out of every four 1%+ daily gains for the S&P 500 since 1990 have qualified as ‘all-or-nothing’ days (when the net A/D reading for the S&P 500 is greater than +/- 400) while the percentage is 42% since the Financial Crisis low in March 2009.  Turning to the five 1%+ days the S&P 500 has had since last Monday, the daily net A/D readings have been +389, +329, +341, +199, and +226, for an average of just +297.  That average is modestly below the long-term average, but well below the post-financial crisis average.  Not only that but there hasn’t been a single all-or-nothing day since last Monday’s low.

The pace of all-or-nothing days for the S&P 500 hasn’t just been on the low side since the beginning of last week.  So far this year, there have only been two all-or-nothing days for the S&P 500 (2/25 and 3/2, both up days), which puts the pace for 2022 at just nine.  Normally, when we provide updates on the number of all-or-nothing days in the market, we qualify it with the fact that volatility in the market tends to come in bunches, so the pace of all-or-nothing days usually comes in fits and starts as well.  The only difference this time around is that we have already been in what has been a very volatile period for the markets, so if we aren’t getting all-or-nothing days now, how volatile will the market need to get before the pace starts to pick up?

The chart below shows the number of all-or-nothing days in the market by year going back to 1990.  While the pace of all-or-nothing days was very slow from 1990 through the early 2000s, once the Financial crisis arrived, the frequency really started to pick up and has stayed elevated ever since.  Since 2007, the average number of all-or-nothing days has been 32 per year, but at this year’s rate, the S&P 500 is on pace for just nine all-or-nothing days, which would be the lowest since 2017 and just the second year since 2006 that the total was in the single-digits.  Again, there’s still a lot of time left in 2022 for this pace to change, but at the current rate, 2022 is shaping up to be an outlier of a year.

Now that we’ve established that there have been such a low number of all-or-nothing days in the market, what are the implications?  One notable one is that with less correlation between individual stocks, there’s less of a tide lifting or sinking all ships environment in the market, and that puts an increased emphasis on stock picking relative to indexing.  Click here to view Bespoke’s premium membership options.