Good Evening Someone in the Facebook group asked if I was buying the dip today...to paraphrase my response, "What dip?" Granted, stock prices have stopped going straight up every day and the more volatile growth stocks are down more but the indexes themselves aren't down that much. Stocks in the S&P 500 are down just 1.7% from the record and even the Nasdaq is only down 2.4% from its peak last Monday. It's easy when you follow the market every day to think of down days, especially when it's two in a row, as a buy-the-dip opportunity but make sure you're not jumping at every bump. Set the point at which you will deploy cash and buy back in, in percentage terms or a level on the index, and give the market time to truly give you an opportunity.

Let's Talk Money!

MARKETS

	NASDAQ	14,541	+ 0.11%
	S&P	4,405	+ 0.13%
	DOW	34,894	- 0.19%

• Markets:  We'll call the major indexes flat today because neither the slight increase in the S&P or Nasdaq nor the slight drop in the Dow was enough to show conviction. The small-cap stocks in the Russell 2000 fell significantly more, down 1.2% at the close, so there's still an air of fear in the market. Another big drop in crude prices and interest rates underscored worries of economic growth though surprisingly strong earnings continued to argue the contrarian side. COVID cases from the delta surge have yet to peak so it's likely weakness or at least weak sentiment will keep the market on edge for at least another few days or a week.

BEST AND WORST SECTORS

• Sectors: Six of the 11 stock sectors closed higher Thursday with leadership from the safety sectors; Utilties, Real Estate and Consumer Staples. The outperformance in Technology was due to strong returns in shares of Microsoft which is 21% of the group with 51 of the 74 stocks in the sector closing higher. Cyclical sectors including Materials, Industrials, Financials and Energy continued to lag on worries about slowing economic growth.
• Sector Trends: Maybe I'm just being argumentative or playing the contrarian too much but it's difficult to see the rationale for the week's market. There are two explanations, one valid and the other an opportunity, but both point to the same outcome. If weakness is the market finally adjusting to tapering of the Fed's stimulus, then we should see cyclical stocks rebound on continued economic growth. It's a valid argument, while the Fed has choreographed its plans the market is yet to really come down from the monetary support. If however, the weakness is from the delta variant surge, then economic optimism should also recover quickly once we reach the peak in daily cases. We know it's coming and the fact that this surge seems mostly avoidable, 90% of hospitalizations have been among the unvaccinated, it doesn't seem like people are slowing down like with past surges.

TOP STOCKS

• Bath & Body Works beat earnings expectations in its first release as a standalone company and joined a long list of retailers showing surging sales from the year ago quarter. The company reported $3.3 billion revenue, an increase of 43% from last year and earnings that grew 14% over the period.
• Synopsys reported strong demand for its semiconductor designs with increasing momentum into the third quarter. Revenue jumped 96% to $1.06 billion from a year ago with earnings of $1.81 per share which was 4% higher than last year. Management expects revenue of $4.2 billion and earnings of $6.80 per share for the full year.
• Netflix has regained nearly all its July selloff though it's still 9% from the April peak. Competition from Disney+ and slowing user growth has weighed on teh shares since missing earnings estimates for the second quarter.

Stocks

Energy Stocks May be a Win-Win

Oil prices are down 15% in the last six weeks and more than 7% in this week alone, taking WTI down to levels not seen since March. Stocks in the sector, once the leaders of the year, are now up just 3.5% over the last six weeks and underperforming the S&P 500 by 9% in the period.

But if the selloff really is about the delta surge and fears of a slowdown, it might be setting up as a win-win scenario for investors. If the surge in COVID cases peaks over the next two weeks, which looks likely given the U.K. as an example, then optimism for growth should quickly return and oil prices will rebound.

The environment for growth is still there with strong household and corporate balance sheets. Even as OPEC has committed to increasing supply, U.S. production has been slow to return and it was only a couple months ago that analysts were forecasting $100 per barrel prices.

If however the daily case count keeps rising for several more weeks, it will give the Fed all it needs to further postpone a reduction to its $120 billion monthly bond buying program. That would be a welcome change for the market, which is already pricing in an end to the stimulus.

In the oil space, the most exposed to prices are the pure-play shale explorers like Devon Energy, Diamondback Energy and NOV Inc. I added NOV and DVN to the 2021 Bow Tie Nation portfolio earlier today and may add others if the selloff continues.

Stock Market

Market Narrative Continues to Conflict with Earnings

The Wall Street Journal is out with an article today titled, ‘Delta Variant Looms Over Rebound in Clothes Shopping.’ The content starts off noting amazingly high earnings from stores like Macy’s, up 19% today, and Kohls, up nearly 7%, and then goes on to (try) argue that the recent surge in delta cases will derail consumer spending.

For the past week, analysts have been picking out everything they could to tie the recent market weakness to the delta surge and trying to make the market look rational. The narrative is that the delta surge is likely to slow growth and that is being baked into stock prices.

I’m not sure I buy it. It’s an easy narrative but I think investors are missing the forest for the the trees...or the trees for the forest, however the case may be. It’s easy to take an event and try to create a narrative out of it that makes sense of the market. The problem is, sometimes the market doesn’t make sense. Sometimes stocks are just weak because they were overbought and investors were looking for an excuse to sell.

They got that excuse in weak consumer confidence data last Friday, data that has never been reliable in predicting actual consumer spending. Then, playing the earnings game, CEOs gave the market more fodder by putting in caveats to rest of the year earnings. Warning investors that the delta surge may hurt sales in the third quarter gives you an excuse if you miss when earnings are released.

We aren’t really seeing the danger with the actual data though. Granted, earnings and economic data is largely from pre-delta, but the underlying strength of the economy is still very healthy. Households have trillions of dollars to spend, less debt than they have had in a decade, and don’t seem particularly concerned with going out. A few mask mandates have come back but we’re not talking anything like the lockdowns or closures of last year. This is all besides the fact that surges have been very time limited and we’re already in the 7th week of delta.

One of the biggest mistakes in investing is looking for a narrative to rationalize a preconceived opinion on the market (or a stock). Creating your story around stocks and directionality is important but it needs to be grounded in hard evidence, not a desperate hope to use anything to make sense of prices.