Whatever Monday was, for traders and investors, it felt more like a scrimmage than a game that might count in the standings. Now, don't get me wrong. Your trades do count. Your P/L stands where it stands. The market had an artificial feel to it though. Chasing hopes or anything that could result in a headline in regards to a potential agreement between the administration and House Democrats. Even as the two sides, at least in dollar terms, do seem close, the Senate Republicans do not. Perhaps, markets either consciously or subconsciously choose to overlook this probable (or improbable) disconnect. The madness of it all. The madness of the fall season.
What to make of Tuesday's behavior. There was clearly some positivity. Five day losing streaks came to an end for both the Nasdaq Composite as well as the Nasdaq 100. Interestingly, though the S&P 500 did not have the long losing streak, due to a close on Friday that placed that index up fractionally, or basically "unchanged." The commonality that I have noticed across our larger cap, and broadest indices has been weakness late in the session. Three days now.
Sell programs have hit equity markets the hardest over the final hour or two for three consecutive sessions starting on Thursday, and have ended closing at or close to the very bottom of that day's range on all three days. Check this out.
For the purpose of illustration, I have switched over from my usual charting style (candlesticks) to an "open, high, low, close" (OHLC) style. As readers will note, the tick mark on the right notes the close. Only difference on Tuesday would be that even though that mark was still close to the session's low, at least on this occasion... it also holds a higher location than the day's open (to the left), as well as the prior day's (Monday's) close.
My thinking, as a trader, is that Tuesday's "Inside Day" is more important right now than direction. Sure, ending a losing streak is nice, but really... what a flavorless, insipid kind of day. Inside days are usually indicative of a winding down of volatility. Well, put/call ratios had calmed down a bit last week, but have actually started to show some life again. I think, at least in this case, at least this "Inside Day" was a simple product of indecision. Managers just don't know, and how could they?
Bad habits are hard to break. So are good habits, which is why we develop them over time and perfect them to the best of our abilities as we grow older. What we know is that the fiscal support/stimulus story will dominate the headlines. We also know that there is electoral risk. The market appears comfortable, or at least can find reason for temporary comfort in a clear victory. Blue wave? Status quo? ( I don't think anyone sees a red wave.) Markets see positive outcomes in both. The risk is in a contested or if not a contested, then a prolonged, unpredictable outcome. After having priced this risk out of the markets, some polls (especially in swing states) are really starting to show a significant narrowing of the challenger's lead. This as the money (in gambling markets) has started to swing toward the incumbent (though not quite decisively) as well. I would not go so far as to say that the challenger is no longer the favorite, but that recent news events are certainly not a positive for that campaign and answering the questions raised around these events can not be avoided for two weeks. There is a debate on Thursday. The market is being forced to adjust for renewed potential uncertainty.
Price discovery is a door that swings two ways. Closing at or close to the lows of the day, is a bad habit. A bad habit that needs to break. Is Wednesday that day? Smell that? Me neither. Nothing.
Of course, a positive headline on a stimulus deal could change market posturing, but so could further spread of the SARS-CoV-2 virus and not in a good way. The Republic of Ireland now becomes the first European nation to go into something close to a full lockdown for a second time in an attempt to slow the spread of this virus. That news comes after a number of steps to mitigate have also been taken in many EU nations as well as the UK. This also comes as many, even the majority of states in the U.S. show unacceptably high rates of spread.
The point here would be not to read too much into most of what happened on Monday, at least during the regular session. Breadth across New York Stock Exchange listed names was especially positive. Breadth across Nasdaq-listed equities more mildly so, as well. Yet, trading volume declined on Tuesday from Monday at both exchanges.
Looking at aggregate trading volume through the lens of index constituency rather than by home market residency, a tale does emerge to be told. Trading volume declined day over day in aggregate for members of the S&P 500, but not the Nasdaq Composite. Yet, the drop off in value was apparent for the Nasdaq 100, which strips out the Financial sector.
Stay with me here. We're thinking out loud. The SPDR Financial Select Sector ETF (XLF) gained 0.8% on the day, led by a 1.6% gain made by the KBW Bank Index, and even larger gains made by the KBW Regional Banking Index (+2.1%).
This is really a bond market story. Remember, we here in the equity markets are really just the tail. Debt markets are the dog. We may wag back and forth, sometimes wildly... but the dog takes us where the dog wants to go. In response to hopes for stimulus, which would in theory create both economic growth as well as inflation, but in reality create at least more supply at the long end of the yield curve, pressure has been placed on (pricing) that long end of the curve. You can see this activity in markets for US 10 year notes and 30 year bonds. In fact, the U.S. Treasury will take $22 billion worth of 20 year paper to auction this afternoon.
Net Interest Margin
What you need to understand is this. Banks, no matter how well they trade (for themselves), are valued as if net interest margin were the only way they could turn a profit. When 10 year note yields do this...
... the spread between short-term yields (three month) and long-term yields (same ten year) does this... as long as the central bank anchors the short end.
Then banks can finally get through resistance, technically...
Note the underperformance over the summer of the entire group despite the trajectory of the three month/10 year spread. This is due to risks around potential delinquencies across the economy on many levels. To get banking stocks past that red line (200 day SMA), fiscal stimulus that keeps some folks from going bankrupt and others from losing positions, wages or benefits would be needed. Immediately.
On That Note
There is good news. Stimulus talks are continuing beyond the deadline imposed by Speaker Pelosi over the weekend. More good news. President Trump indicates that the administration is willing to spend even more than the net $2.2 trillion that House Democrats are asking for. There is bad news. The two sides remain apart on how to target this large deal, and probably who will get the credit if it passes, and blame shall it not pass. Actually, finding blame will not be difficult.
The Republican majority in the Senate has not been very enthusiastic to say the least about putting together another massive fiscal package. Senate Republicans would rather target a much smaller package ($500 billion or so) aimed at households and small businesses. That smaller package will likely see a vote on the Senate floor as soon as today. The trick, if there is to be one, will be getting the Senate in line with the administration and the House once those two finally agree to something firm. While getting this done ahead of the election would provide a narrative for both sides once the spin machine gets cranked up, this can be done in the "lame duck" legislative period as well, Post November 3rd, pre-January 20th.
For Those About To Rock...
... We salute you. (AC/DC 1981)
Okay, gang... for those playing along on the Netflix (NFLX) short that we discussed at Real Money on Monday morning, we have a big winner on our hands. Speaking just for me, (and some people from Tennessee) my net basis is an even $340. I designed a safety valve for risk averse investors that I did not spend for myself. If an investor did go that route, net basis would be reduced to $317.
Despite a $460 price target, I have already covered 40% of the short. With the stock trading in the low $490's overnight, I needed to bank something. I do not trust the stock and for me this is just a trade, not an investment. I have decided to go for my target on the balance, but with a short leash. Should overnight support hold, my panic point becomes an even $500. The stock ticks there, I ring the register. I say thank you, and I take my football all the way to the house. Rock on.
Economics (All Times Eastern)
10:30 - Oil Inventories (Weekly): Last -3.818M.
10:30 - Gasoline Stocks (Weekly): Last -1.626M.
13:00 - Twenty Year Bond Auction: $22B.
The Fed (All Times Eastern)
08:50 - Speaker: Reserve Board Gov. Lael Brainard.
10:00 - Speaker: Cleveland Fed Pres. Loretta Mester.
14:00 - Beige Book.
Today's Earnings Highlights (Consensus EPS Expectations)