Santoli’s Wednesday market notes: Stocks go through a repricing as investors back off from equity risk

Published Wed, Oct 6 20211:27 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. Confusion prevails over conviction in a market suffering slippery technical footing and a staticky news feed, but also far along in repricing toward a global economic soft patch and lower investor expectations. Another twitchy, indecisive session in the zone of the recent lows and the 4,300 level of the S & P 500 (the +15% YTD threshold). Are we doing this again, oscillating around the 100-day average after a failed bounce and a thick fog of policy uncertainties (election then, fiscal/debt ceiling/Fed outlook now)? Granted, last year the election was a clear, defined pivot event, the correction was already deeper and the recovery cycle less mature, but worth keeping in mind. Given that in corrective phases the market trades even more on short-term technicals, lots of attention on levels where rallies might logically be sold – the high 4,300s up to 4,430 or so – and downside targets where traction might be found near 4,200 (near July lows). Options flow and positioning work are very prominent these days and essentially suggest an unsettled tape with downside risk into next Friday's options expiration. This would fit with the broader seasonal pattern of weak first-half of October and better tendencies for stocks later in the month. Big driver of the confusion (aside from the stock-price action itself) is the blend of slowdown realities (Atlanta GDPNow down to 1.3% for the third quarter, earnings estimates coming off the boil, global energy stresses restraining recoveries) and the solid domestic trends (Covid cases falling hard, reopening dynamics reengaged, consumer spending power intact). Megacap tech today trying to feed off the restored calm in Treasury yields and still-oversold conditions to act as support for the tape, taking up some slack from pressured banks, industrials, consumer-cyclicals. Similar theme of messy rotation. Energy prices getting a bit unstable from overbought conditions. Natural gas is the new lumber, it seems, the stunning chart almost everyone was obsessed with for a while. We await the possible reports of a hedge fund being taken out (or others having made a mint) on this move, often a part of the denouement of such thrilling market stories. Energy prices at new highs absolutely a drag on business activity/consumer psychology mostly in Europe and elsewhere, but question is when all that is fully discounted. U.S. consumers can handle much higher energy prices and did a bit over a decade ago. Big give-back day for oil and gas stocks. Do we need a fuller flush of downside investor surrender, liquidation, spike in fear, new high in Volatility Index to set a more reliable low? Maybe. Things have remained orderly and unbothered, though one reason for the relative lethargy in VIX is the rotation – lower correlations among sectors suppresses index-level vol. On the notion of an expectations reset, we saw a plunge in investment-advisor bullishness this week and the narrowest bull-bear spread since April 2020, even more cautious than in last fall's correction. Ultimately this sets up a good contrarian bullish signal for the market, but it surely can go lower first. To recap things from a wider angle: Massive 100% rally off the March 2020 low, a 20% YTD gain through August and record stock-fund inflows in the first half of 2021 sent public equity allocations to record highs. Once the easy dip-buying maneuver failed in recent weeks, investors recognize they don't "need" any more equity risk. So we're repricing stocks, rebuilding the possibility for upside earnings surprises, resetting valuations a bit. Not a terrible thing unless the market sniffs out "slowdown + Fed policy mistake" as a high probability. Not clearly there yet and might well not get there. Market breadth is strongly negative on NYSE, 1:6 up:down volume, more evenly split on Nasdaq. Equal-weight S & P lagging the main index. As noted, VIX seems to be underplaying the market choppiness, perhaps due to pre-hedging all September, perhaps because we haven't made serious lower lows in a bit and possible because correlations among sectors hasn't surged to reflect a "get me out of everything."

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, on Monday, Aug. 23, 2021.

Michael Nagle | Bloomberg | Getty Images

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics.

Confusion prevails over conviction in a market suffering slippery technical footing and a staticky news feed, but also far along in repricing toward a global economic soft patch and lower investor expectations.