Bespoke Stock Scores — 8/16/22
Biggest Gainers Since 6/16 Low
Today marks two months since the mid-June low. At the time, the S&P 1500 had declined 23.5% relative to the January 3rd high. Since then, the index has recovered substantially, gaining 17.7% off of the low. Although the S&P 1500 is still 10.0% off of its closing high, these gains have been well received by investors as the market has shown resilience in the face of rampant inflation, worsening housing data, rate hikes, supply chain constraints, and increased labor costs. This rally comes as oil prices pull back, CPI came in lower than estimated for the month of July, and earnings come in better than expected. The graph below shows the price moves in the SPDR S&P 1500 ETF (SPTM) over the last twelve months. Click here to start a two-week trial to Bespoke Premium and receive our paid content in real-time.
Since the June low, there has been a reversal in performance trends, as the laggards have tended to lead the way higher (on a percentage basis) while the former leaders have generally lagged. Between the start of the year and the 6/16 low, Energy and Utilities were the best performing sectors, while Technology and Consumer Discretionary were the worst. Since then, we have seen the inverse as Technology and Consumer Discretionary have been the top-performing sectors while Energy has been the worst.
The chart below shows the 25 best-performing S&P 1500 stocks since the 6/16 low. As you can see, these stocks generally underperformed the broader index until the low, trading down by an average of 46.9%. However, since the lows, they are up an average of 90.4%, led by the newest meme stock: Bed Bath & Beyond (BBBY). Due to the drawdowns through 6/16, these stocks are still down YTD on a median basis (and even on an average basis), but they are an average of 47.6% above their 50-DMAs and 22.3% above their 200-DMAs. They’ve come a long way, and shown in the charts below, many have reached some extremely stretched levels, but even after the rallies, they still have a ways to go before coming out of the darkness. Click here to start a two-week trial to Bespoke Premium and receive our paid content in real-time.
Six-month price charts for each of these stocks are included below. You can track a custom portfolio of these names by clicking here.
Housing Descending
Updates on Building Permits and Housing Starts were mixed relative to expectations for July. While Building Permits exceeded forecasts by 34K, Housing Starts missed forecasts by 81K falling to the lowest annualized rate (1.446 million) since February 2021. Housing represents a large share of the US economy on both a direct and indirect basis, so its health says about the state of the overall economy, Below we have updated our chart of Housing Starts on an average 12-month basis overlaid on top of recessions. Every recession since the late 1960s has been preceded by a rollover in the average rate of Housing Starts, and usually, the rollover starts well in advance of the recession.
For the current period, Housing Starts remain right near their highest levels of the cycle, but if you look real closely, you can see that the level peaked three months ago. Looking out over history, there are plenty of other periods where Starts declined for a few months but didn’t roll over. In other words, based on what we’ve seen so far, Housing Starts have yet to show signals of an imminent recession. Based on this month’s reading and the readings from a year ago, barring a major rebound, the 12-month average is likely to keep declining in the months ahead. Another factor to keep in mind about the historical relationship between Housing Starts and recessions is that in most cases, the recession didn’t usually begin until months after the peak of Housing Starts. Click here to start a two-week trial to Bespoke Premium and receive our paid content in real-time.
Taking a closer look at recent trends, the chart below shows the 12-month average of Building Permits and Housing Starts since the start of 2010. It’s easier here to see the decline in Starts over the last few months. Building Permits, meanwhile, have continued to trend higher.
On a single-family basis, though, both Building Permits and Housing Starts have shown signs of rolling over. Single-family Housing Starts have been moving sideways for over a year now and have just recently seen an acceleration in the rate of decline while Building Permits have been trending lower for a full year now.
Finally, the chart below compares the performance of Housing Starts over time to the performance of homebuilder stocks using the iShares US Home Construction ETF (ITB) as a proxy. While the two have tended to track each other over time, over the last couple of months, ITB has rallied while Housing Starts have been dropping. Either the market knows something about future developments in the residential housing market or investors have gotten a little offside in their positioning.
Chart of the Day: 90%+ Stocks Above 50-DMAs
Bespoke’s Morning Lineup – 8/16/22 – Checking in on the Home
See what’s driving market performance around the world in today’s Morning Lineup. Bespoke’s Morning Lineup is the best way to start your trading day. Read it now by starting a two-week trial to Bespoke Premium. CLICK HERE to learn more and start your trial.
“You should always go to other people’s funerals, or they won’t go to yours.” – George Herman Ruth
Below is a snippet of content from today’s Morning Lineup for Bespoke Premium members. Start a two-week trial to Bespoke Premium now to access the full report.
Investors generally expected a weak tone out of this morning’s updates to Building Permits and Housing Starts, and weak homebuilder sentiment provides a clue as to why. Yesterday’s update on homebuilder sentiment from the NAHB for the month of August showed that the US residential housing market is rapidly cooling off. Take the last four months, for example. In three of these four, the headline sentiment reading from the NAHB has missed expectations by at least five points. Historically, the reported reading in this index tends to come in by +/- two points relative to expectations, so misses of five or more aren’t very common. Put another way, before this May there were only ten other months since early 2003 where the headline reading missed expectations by five or more points.
Besides the fact that the last four months have been so weak relative to expectations, it has also now been nine months and running that the headline homebuilder sentiment report has been either in line with or lower than expectations. The last time Homebuilder sentiment was better than expected was back in November! The current streak without a better-than-expected reading now ranks as the second longest since at least 2003. The only streak that was longer came during the early stages of the housing crash in August 2006.
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Daily Sector Snapshot — 8/15/22
Chart of the Day: Early Bird Not Getting The Worm
Homebuilder Sentiment Tanks… Again
As mortgage rates remain elevated relative to 2021 levels but housing supply remains thin, NAHB’s Housing Market Index fell again this month, reaching the lowest level since May of 2020. Last month, the index posted its second largest month over month decline, and following this report, the index has fallen by 18 points over the last two months, the third largest two month decline on record, falling just short of April and May of 2020. Click here to start a two-week trial to Bespoke Premium and receive our paid content in real-time.
The NAHB Housing Market Index has now declined for eight consecutive months, which is tied for the longest monthly losing streak since the index’s inception in 1985. The only two other periods with an equal number of monthly declines were the eight months ending in October 2007 and before that September 2006. As most Americans remember, these periods were followed by precipitous declines in home values. Interestingly, the NY Post reported that Google searches for “sell my home fast” spiked by 2,750%.
All of the sub-indices within the report fell as well, indicating broad weakness. Apart from Future Sales and sentiment in the Western region, all of the other sub-indices experienced declines that were in the bottom 5th percentile of all periods. However, the current readings are not nearly as negative. Future sales and traffic are in the 18th and 23rd percentile, but the Northeast is still in the 63rd percentile. Although the current readings aren’t as low as the readings leading up to previous recessions, it is difficult to be positive given the current trends.
As shown above, no geographic region has been safe from the plunge in sentiment, but the Northeast has held up better than the others. Over the last eight months, the West, South, and Midwest regions have seen their largest eight-month declines in the index on record, while the decline in the Northeast is the third worst on record. Click here to start a two-week trial to Bespoke Premium and receive our paid content in real-time.
The stocks most affected by these trends – homebuilders – struggled during the sustained sell-off between the end of 2021 and mid-June, but have recovered by over 28% relative to the lows. However, the ETF is still down over 22% relative to the highs. The recovery might be due to the fact that much of the negativity has been priced in, historically low valuation multiples, and a pullback in interest rates. The chart below shows the performance of the SPDR S&P Homebuilders ETF (XBH). As you can see, XBH has broken its downtrend and has been moving consistently higher carving out what might be a new uptrend.
Empire Collapses
The first regional Fed manufacturing reading for the month of August which came from the NY Fed showed a massive slowdown in general business conditions. The headline number was expected to fall but remain positive at 5. Instead, the index plummeted all the way down to a contractionary reading of -31.3. That is the fourth lowest reading on record, the lowest reading since May 2020, and the largest one-month decline since April 2020. In other words, New York area manufacturers reported rapid deterioration in business conditions in the first half of August.
Breadth was equally horrendous. The sole index that managed to move higher month over month was Prices Received while declines in all of the others resulted in all but four categories falling into contraction territory. Future expectations are only slightly more positive than current conditions, albeit these too are seeing readings in the bottom few percentiles of their historical ranges even after significant moves to the upside month over month.
The most pronounced drop of any category was New Orders and Shipments with month-over-month declines of 35.8 points and 49.4 points, respectively. For both, that was the largest month-over-month drop on record with both indices now in the bottom 1% of all readings as a result. Unfilled Orders fell deeper into contraction with a less dramatic 7.5 point decline month over month.
Expectations were the inverse of that story. New Orders, Shipments, and Unfilled Orders all saw upper decile monthly increases with Unfilled Orders’ 18.1 point rise the second largest on record behind May 2010.
The past couple of months have seen plenty of evidence that supply chain stress has begun to ease, and this month’s report from the NY Fed added yet another data point of evidence. For the first time since May 2020, the Delivery Times index fell into contraction meaning responding firms reported a decline in how long it took for products to reach their destinations. That trend is also expected to continue as six-month expectations continue to hover around the low end of the historical range.
Alongside supply chain pressures, inflation pressures have likewise shown signs of easing. The Prices Paid and Prices Received index have both peaked and come in well off of prior highs of the past year indicating fewer firms are paying suppliers more or raising their prices.
Across manufacturing reports of late, employment metrics have been somewhat of a bright spot as they have managed to hold up in spite of signs of slowing demand. In August, employment did not stand out as strongly. On net, firms continue to increase their number of employees but at the slowest rate since October 2020. Meanwhile, the Average Workweek contracted to an extent not seen since the first few months of the pandemic, late 2015, during the Financial Crisis, or in the aftermath of 9/11. Meanwhile, companies are beginning to pull back on capital spending at a rapid rate as indices tracking plans for Technology Spending and Capital Expenditure have fallen sharply. For the latter, the two-month decline is now the fifth worst of any period on record. Click here to learn more about Bespoke’s premium stock market research service.
S&P 500 Reaches Extreme Overbought Levels
On Friday, the S&P 500 rallied 1.7% to round off the fourth straight week of gains. Relative to the mid-June lows, the index has rallied 16.7%, a notable move as YTD weakness subsides (at least for now). With Friday’s move, the S&P 500 also closed more than two standard deviations above its 50-day moving average for the first time since 12/29/21, marking the end of a 155-day trading day streak in which the index did not close at ‘extreme’ overbought levels.
A streak of this length had not been reached since 2015, and the longest streak since WWII ended in 2003 (768 trading days). All in all, there have now been 27 streaks since WWII where the S&P 500 went at least six months without registering a close in ‘extreme’ overbought territory. Click here to start a two-week trial to Bespoke Premium and receive our paid content in real-time.
For investors who are long equities, it’s hard not to like the way stocks have performed in recent weeks. However, with the market reaching overbought levels after a sharp rally, fears of a pullback increase as moves of this magnitude may be unsustainable. Historically speaking, median returns following the end of prior streaks without an ‘extreme’ overbought reading that lasted at least six months have, in aggregate, been followed by decent returns. For every time period we looked at (next day, next week, one month, three months, and six months), median returns were positive and better than the historical average for all comparable time periods since WWII. Over the next three months, for example, the S&P 500’s median performance was a gain of 4.4% which is 1.8 percentage points better than the historical average for all six-month periods. From a historical perspective at least, when equities reach ‘extreme’ overbought levels after a prolonged period without a similar reading, fears of an imminent reversal were typically unwarranted.
Positivity rates tend to be superior as well, apart from one month forward. Over the next week (which would be through the end of the week in this case), the S&P 500 has performed positively 77% of the time, which is 20 percentage points higher than that of all periods. Over the next three and six months, the positivity rate has been 73%, which is also quite positive. Click here to start a two-week trial to Bespoke Premium and receive our paid content in real-time.
To paint the full picture, the maximum drawdown following these occurrences was in November of 1981, when the S&P 500 fell by 10.8% over the next three months and 11.6% over the following six months. On the flip side, the best performance occurred following the January of 1975 occurrence, when the index went on to gain 14.4% and 17.7% over the next three and six months, respectively. Over the following month, the data has a range of -7.1% to +6.6%. Click here to start a two-week trial to Bespoke Premium and receive our paid content in real time.