AMKBF - 3 Recent Signs The Market Has Topped Out

2023-08-07 17:00:29 ET

Summary

• The S&P 500 and Nasdaq just experienced their worst weekly performances since March, with the Nasdaq down 2.9% and the S&P 500 falling 2.3%.
• There are some more recent signs that suggest a possible significant move down in the equities market might occur in the next few months.
• These include a deterioration in the jobs market, a noticeable fall off in shipping/freight volume, and chinks forming in the "Magnificent Seven."

Don't expect to get into heaven with a pocket full of gold .”? Anthony T. Hincks.

Both the S&P 500 (SP500) and Nasdaq (COMP.IND) just had their worst weeks since March. For the week, the Nasdaq was off 2.9% while the S&P 500 fell 2.3%. I have been saying for the past few weeks that equities are more than overbought ( I , II ) and that there are substantial risks ( I , II ) investors seemed content to ignore.

However, it feels like the chickens are finally coming home to roost, and I have spotted several more signs that the economy and markets are deteriorating. This very well could be just the start of a possible significant move down.

Chinks In The Magnificent Seven:

The Nasdaq and S&P 500 were led higher in the first half of this year, largely on the backs of the " Magnificent Seven ." Without these seven mega-cap stocks, the S&P 500 would have been slightly down in the first half of 2023. Instead, the index delivered a 15.9% return. Some members such as Amazon ( AMZN ) have posted stellar second quarter earnings and moved higher late last week. Meta Platforms ( META ) did the same a week before on the back of its own impressive second quarter numbers .

However, the stock of Microsoft ( MSFT ) has fallen since it posted quarterly results on July 25th even as the software giant easily topped top and bottom-line expectations. Shares of Tesla, Inc. ( TSLA ) have pulled back sharply since it reported second quarter numbers on July 19th, even as the electric vehicle ("EV") maker beat top and bottom-line estimates. Tesla has started somewhat of a "price war" in the EV space, and the company just noted July saw its lowest monthly production in China so far this year. I recently posted five key reasons investors should be concerned about Tesla, and why I am short the stock via bear put spreads .

Then we have Apple ( AAPL ) that fell five percent on Friday after it reported its own second quarter results , that stepped over analysts top and bottom-line projections. The stock closed at its lows for the day and is now under its 50-DMA for the first time since January. This was the third quarter in a row that the Cupertino Juggernaut has delivered year-over-year quarterly sales declines. Based on management guidance, that should be four in a row when the company next reports quarterly results three months from now.

Even with Friday's pullback, the stock trades north of 30 times forward earnings and eight times forward sales. This is much too rich, given both sales and profits are projected to fall in FY2023. This is one of many reasons I hold out of the money bear put spreads against Apple, which I highlighted in this recent article. It feels more likely AAPL hits $160 a share before $200 in the months ahead.

The challenges with some of the core members of the Magnificent Seven could be a significant headwind to the overall market in coming months, given how crucial they were to the rally in equities in the first two quarters of 2023.

Deterioration Of The Jobs Market:

The economy has faced myriad challenges throughout this year. These include the most aggressive monetary tightening policy by the Federal Reserve since the early 80s, collapsing values in key parts of the commercial real estate sector, as well as the second, third, and fourth-largest bank collapses in U.S. history earlier this year. The Leading Economic Indicators have also fallen for 15 straight months now. One of the few consistent pillars of strength within the economy has been the jobs market. Unfortunately, employment is ALWAYS a lagging economic indicator. In addition, problems seem to now be migrating to the labor market.

The July BLS Jobs Report that came out Friday showed 187,000 positions being added in July. This was less than the 200,000 expected by economists polled by Dow Jones. Looking at the report in more detail, it appears the jobs market seems to be deteriorating worse than the headline numbers portray. The number of full-time jobs actually fell by 585,000 to 134.274 million in July. The number of part-time jobs rose 972,000 to 27.153 million. In addition, every single BLS monthly jobs report that has been posted in 2023 to date has ended up being revised lower. The Birth/Death model for July also seemed a bit " hinky ."

Falloff In Shipping/Freight Volume:

There appears to be increasing challenges within the logistical/transportation sectors. Yellow Corporation ( YELL ) just became the largest trucking bankruptcy in U.S. history. Fortunately, this was well-anticipated, and hopefully this event will cause few disruptions within the logistical ecosystem.

More concern is what falling freight and shipping volumes are saying about the health of the economy. A.P. Møller - Mærsk A/S ( AMKBY ) is the world's largest owner of container ships and operates approximately one out of every six of these vessels globally. Therefore, it is a good proxy for global trade. The company recently lowered its forecast global container volume growth to a range of -4% to -1% compared to -2.5% to +0.5% previously.

Freight volume at the port of Los Angeles is down 23% year to date. Recently, Union Pacific ( UNP ) said its second-quarter profit declined 14.5% to $1.57 billion, or $2.57 per share, as the company hauled 2% less freight. The transportation sector seems clearly signaling that significantly falling economic activity or outright recession is on the horizon.

These are some key reasons my portfolio remains very conservatively positioned. In a best-case scenario, the market could muddle along for the rest of the year and consolidate its gains from the first half of 2023. If the economy does hit a recession, a pullback of 15% to 25% seems likely.

Therefore, I have approximately 50% of my portfolio in short-term treasuries. They pay north of five percent, nicely above the current rate of inflation. Roughly 40% of my portfolio is within covered call positions on names with rock solid balance sheets, reasonable valuations and decent prospects. The rest is mostly in cash as well as some short bets utilizing out of money bear puts spreads, a couple of which I highlighted in this article.

It just feels now is not the time for greed, but for extreme prudence and caution.

The closest enemy ship might be your own. ”? Craig D. Lounsbrough.

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