Monday: “Can’t trust that day,” the Mamas & the Papas once sang. And that was certainly the case for the stock market this past week.
If all we had to go by was Monday’s selloff—the one that saw the Dow Jones Industrial Average drop 725.81 points, or 2.1%, to start the week—then we’d have to assume investors had decided that the spread of the Delta variant of Covid-19 was something worth dumping stocks over.
And then the selling stopped. By the end of the week, the Dow had advanced 373.70 points, or 1.1%, to a record 35,061.55, closing above 35,000 for the first time. The S&P 500 index gained 2%, to 4411.79, while the Nasdaq Composite climbed 2.8%, to 14,836.99, also record highs. It’s another reminder that one-day moves don’t always have the meaning we ascribe to them.
In hindsight, it’s hard to figure out just what happened. Yes, renewed Covid fears were at least partially responsible, as cases had nearly tripled over 14 days, and headlines about breakthrough cases caused visions of renewed lockdowns to dance through investors’ heads. So were tumbling Treasury yields, which saw the 10-year fall below 1.2%, suggesting that the bond market was sniffing out bad news to come, particularly with the Federal Reserve set to meet on July 27 and 28. But it also seemed to be a case of investors looking for a reason where there just might not have been one.
“It was a compressed, let’s-cram-all-our-neuroses-into-one-day kind of selloff,” says Dave Donabedian, chief investment officer at CIBC Private Wealth US. “And it passed very quickly.”
That it did, and it suggests that there might have been less afoot than the headlines suggested. In recent weeks, market breadth appeared to have been sending a warning, with just 40% of S&P 500 stocks above their 50-day moving averages even as the index was hitting new highs. It’s that kind of internal weakness that can often result in a quick pullback. “This deterioration simply caught up with the market on Monday,” writes Wellington Shields’ Frank Gretz. “That’s just the way the market works—news follows price.”
The decline certainly wasn’t fatal. The S&P 500 dipped below its 50-day moving average but managed to close above it, providing support for the index to rebound. The tumble also helped the market turn “oversold” after being “overbought” for a long while. Earnings have been doing their part, too. Some 88.3% of S&P 500 companies have beat their earnings forecasts—even more than over the past four quarters—while a ridiculous 84.2% have topped analysts’ expectations, compared with an average of 73.7% over the past four quarters. It’s hard to be bearish against that kind of backdrop.
Still, if there is a day to be afraid of, it might be this coming Friday. Sundial Capital Research’s Jay Kaeppel notes that July has a fifth Friday this year, the 31st time since 1950 that’s happened. And that fifth Friday hasn’t been very good for stocks, with the index falling nearly two-thirds of the time. The S&P 500 has declined an average of 0.7%, with a median loss of 1.3% on down days and a median gain of 0.6% when it rose.
Friday: Now there’s a day you can’t trust.