Why I’m Not Worried About Those Scary Negative Breadth Studies
The Nasdaq hit a new high while many stocks hit lows. Is it a warning sign? Plus, a favorite gets a boost.
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Oil is down, bonds are up, and futures are higher early Tuesday. The United States Oil Fund (USO) is back to where it was on September 4, which takes some pressure off the inflation worries that have been driving rates higher.
The Problem Isn’t Crude, It’s Diesel
Unfortunately, the oil issue is far more complicated than Iran disrupting supply. Ships are now moving almost as much crude oil out of the Strait of Hormuz as they did before the war. Crude is flowing at about 76% of the prewar level.
But according to The Wall Street Journal, the problem is refined fuel. Gasoline and diesel make up only about 11% of the flow, compared with more than 20% before the war.
The reason is that refineries across the region, in Saudi Arabia, Kuwait, the UAE and Iraq, are still down after missile strikes and other damage. Most of the crude that is getting through is headed to Asia. China, Japan and South Korea are keeping their fuel at home.
The U.S. is supplying other countries, but that is tightening supply at home and has driven diesel to record levels. The national average for diesel hit $6.53 a gallon late last month, and it reached $8.44 in California.
The Trump administration is trying to deal with the issue by allowing tax-exempt farm diesel on highways through year-end, and the G7 agreed to release 100 million barrels of crude and fuel from emergency stocks. But analysts don’t expect a full recovery until well into 2027.
Fixing refineries takes time, and that is likely to keep fuel prices high even if Hormuz opens completely. Diesel is the lifeblood of trucking and moves everything from groceries to gadgets. The story here is that energy-related inflation pressure is not going to go away quickly or easily.
Higher interest rates cause cumulative damage over time. The WSJ also reports that a growing number of commercial real estate buyers are threatening to walk away from deals unless sellers offer better terms.
The economic calendar is light for the rest of the week. Third-quarter earnings season gets underway with the big banks next Tuesday, October 13, which will shift the focus away from these macroeconomic issues, but they will continue to be a concern for a while.
About Those Scary Breadth Studies
Jason Goepfert at SentimenTrader has been posting a lot of data about the extreme negative breadth as the indexes perform well. Monday night he noted that the Nasdaq closed at a record high with almost 200 more stocks at 52-week lows than 52-week highs. That is the second-most ever at a record close, next to November 18, 2021.
The comparison to November 2021 is troubling. That marked the end of the post-Covid rally. The Nasdaq peaked within days and fell about a third over the next year.
It is easy to find studies like this right now, and they can be unsettling, but they have two problems. First, there isn’t enough data. These are rare events, and one or two prior examples aren’t enough to say anything with confidence. Statistically, there just isn’t enough data to conclude a strong correlation.
The second is that every market cycle is different. History always repeats in the sense that there are always cycles, but each one has its own character. We already see that in the way the AI boom has developed compared with the internet bubble. There are similarities, but this time the action is far more narrow and concentrated in a small number of mega-caps.
The post-Covid rally of 2020 and 2021 was driven primarily by a flood of liquidity from monetary and fiscal policy. Governments threw cash at everything to save the economy, and that created it. The current rally is driven primarily by the development of a life-changing technology. Monetary conditions are much different. The Fed is raising rates rather than flooding the system with cash.
I would be surprised if the current breadth problem resolves itself the way it did in 2021. Breadth is the most important issue facing the market, but there is a good argument that we see a bullish resolution as we move into the fourth quarter, with the laggards catching up rather than the leaders collapsing. The conditions for a strong fourth quarter are in place, and the poor breadth makes a positive outcome more likely because so many stocks have room to catch up.
A Favorite Gets a Boost
I wanted to note that TheFly is reporting that Barclays raised its price target on Xeris Biopharma (XERS), one of my favorite names, to $14 from $12. The firm says the stock has “a strong setup” for the third-quarter report, with its pipeline “gaining traction.” The analyst is confident in the trajectory for Recorlev and XP-8121 and thinks Xeris’ valuation “remains undemanding.”
At the time of publication, Rev Shark was long XERS.
