One of the themes of the year has been the heavily weighted tech stocks have kept markets afloat until such time others can catch a second wind to catch up. Last week they finally got hit. The big one for this generation’s Qualcomm, which was the Internet’s RCA. I’ll say it here, there will come a day where Amazon will get very hard. I wrote this in my Thursday night newsletter to clients and sure enough, Friday morning it got hit. I think it is a candidate to get hit by antitrust action at some point.
But that’s a story for another day. Right now, the FANG stocks are getting hit. The question is whether there will be follow through. But other sink holes in the market are developing. The Transports got smashed on Thursday and it was only three weeks ago they gave the Dow a Dow theory confirmation when both went to new highs. On Thursday and again Friday the Dow itself hit new all-time highs. You see the trannies going the other way so this is becoming the classic non-confirmation.
Not only that but biotech is getting hit as well. Drug names had a rough week as two separate cancer drugs are not living up to expectations. Do you want to see what the madness of crowds looks like? I never heard of Keytruda until last week although I should’ve because their commercials have been aired on sporting events. You know, those commercials that tell you about all the side effects.
Apparently, it’s a drug that is Merck’s war on cancer. A Reuters story from the July 24 stated Phase III trials of Keytruda failed to extend survival rates in patients with advanced head and neck cancer. The drug is supposed to block something tumors use to hide from the immune system and expose the cancer cells which shrink the tumors. Okay, that fair enough. MRK got destroyed on Tuesday. On Friday, Merck’s profit soared 61.5% partially based on a sales surge by Keytruda. Did you get that? Here’s a drug that doesn’t do what it’s supposed to do yet the cancer industry is buying it like it was candy. This Phase III failure was a big reason biotech got hit last week because it shows millions of dollars of research for these drugs may be getting flushed.
Is it any wonder the VIX hit below nine last week? For the first time in a while, it is starting to look like the wagons are circling as the calendar hits August. The theme for this week will be how the FANG stocks, as well as these other groups, rebound. If they don’t, we may find this could be the top but the only way we would know it is by looking back in the rear-view mirror. My client Paul is right, perhaps we should forget the wagons and start getting concerned about the circling swans.
The VIX may be at the lowest point in a generation but I believe risk has never been higher. There is the potential for a lot of things to go wrong. Going through the headlines, it appears the fuse with North Korea is running short. A couple of weeks back it was reported in numerous places the last diplomatic options were being played out which would take several weeks. I believe they are now in the 9th inning.
As far as Congress is concerned, last week the disgraceful GOP refused to follow through on their promises to the American people of the last seven years when they failed to do anything concerning health care. Can you believe after six weeks of drama Congress left Washington for their August recess? How many times did the market rally based on the fact they’d stay in session to hammer out of a deal no matter what? For every accumulation day based on false hope, the market should get hit.
That gets us to David Stockman, a man who is becoming more prophetic with each passing day. By now you know what he said. But how many realize that when the do-nothing Congress comes back they will have just 12 working days to solve the debt ceiling problem which Treasury Secretary Steve Mnuchin announced has a Sept. 29, deadline. In a letter to lawmakers he said the borrowing limit needs to be raised by that date or the government risked running out of money to pay its bills.
I don’t know about you, but that doesn’t strike me as the optimum environment to talk about tax reform. Maybe it’s a good thing Congress doesn’t keep their promises. Earlier this year they promised health care had to get done before tax reform. Right now, the technical situation is once again deteriorating at the same time it looks like the crowd isn’t going to get what it wants when it comes to the Trump growth agenda. I’d like to see how everyone wiggles out of this dilemma.
Getting back to the VIX it is beyond my comprehension with all these problems swirling around, we could be at such historic complacency levels. If you go back to 2000 and 2007, at least there was euphoria along with the complacency readings. If there is euphoria out there, I’m not feeling and I don’t see any proof of it on the business channels the way we did in those other cycles. Personally, I believe the complacency readings are a result of the crowd burying their heads in the sand or people are getting inured to the news or both. I don’t see how this can be sustained.
As the week started Amazon got hit again as did other tech names. But the Dow was up again in this game of musical chairs. Briefly, another big area to watch this week is the EUR-USD, which is back at Charlie Hebdo levels. Last week European markets started getting very nervous as the currency inched higher. They also violated a 144-day window. It will be interesting to see if they can be engineered to stall here. Yeah, I said it, happy Monday.