What to think? Sunday night was a little bit rough over here. My neighborhood experienced a power outage that shortened my weekend cram session, and produced what kind of turned into an unwelcome sort of block party. In the age of Covid. They (average people) seemed to think congregating in the street with no masks and making noise all night was a great idea. I get it. It was a little hot and humid. I guess that moved people outdoors. I mean if it is going to be hot and sticky anyway. Still, I would think more folks might be worried about getting the necessary rest on a Sunday night in preparation for the week ahead than apparently they do themselves.
Spent some time thinking about our world (the financial marketplace) prior to the lights going dark. Just what does the recent action mean to us... to the investor who takes on the task of money management for him or herself? What does this all mean to the professional seriously charged and taking the responsibility personally to protect those who do seek such guidance. People joke in both jest and anger, but I do know good and honest managers.
Both the S&P 500 and the Nasdaq Composite put in two consecutive "down" days to end the week. The S&P 500 really just moved sideways for the week, and on incredibly light trading volume. On such volume, is the action even meaningful? While hardly cause for alarm in itself, there is cause for alarm all about. This may signify a clear lack of interest in adding to equity positions at current levels. Makes sense for now. With a fiscal future clearly uncertain, the U.S. president taking a clear stand against drug prices, the relationship between the U.S. and China increasingly unraveling, and the virus still in control of human interaction (mostly)... These stories are risks to economic growth playing out in real-time at the headline level. It is even more than that though.
Just as clearly as a lack of desire to move more funds, at least in size into "old economy" plays, has been at least some willingness to take profits ahead of, and in response to earnings for the kind of names sporting the largest year to date, or March to date runs. In other words, there is less willingness to dance with who brung ya.
Horse Of A Different Color
While there was a move by at least some professional managers out of technology, and seemingly out of semiconductors, keep in mind that this industry specific performance was somewhat skewed by money fleeing Intel (INTC) in order to chase Advanced Micro Devices (AMD) . This shows up only as a minus for the Dow Industrials. Trading volume across the Nasdaq was also thin, showing at least some lack of conviction.
What has changed significantly has been the value of the U.S. dollar relative to peer currencies. The US dollar index has now (through the zero dark hours) moved below the 94 level on euro strength. A weaker dollar should be good for stocks, no? I mean this should be inflationary, and outside of spots, prices have remained somewhat stable. Not true for gold. Not true for silver. Not really true for oil, which is why the Energy sector, which has been a blemish on the marketplace easily took the prize last week. Not really true for long dated U.S. Treasuries.
This you would think might hurt the banks, but that group had a nice week, even if having an awful year so far. Take note of at least one oddity, The small caps. As a group truly reliant upon economic growth, but also in these times, fiscal support, the Russell 2000 gave up 0.4% for the week, while the S&P 500 gained 0.5%, both largely representative of similar groups of securities. What if markets are not necessarily pricing in future consumer level inflation, but simply pricing out, given the macro-economic landscape coupled with large scale budgetary concerns, the certainty of a medium to long term continuance of a deflationary/disinflationary environment that has existed really since the last financial crisis?
While a weaker dollar would be good for evening up negative trade imbalances, and that would in theory benefit multinational U.S. corporations where exporting goods, and parts of goods that wind up in finished products, many of these multinationals import goods and these parts. Even if the pandemic has taught these firms a harsh lesson, there has not been enough time, nor has the public health crisis eased to the point where shortening supply lines has become real-time realistic. A weaker dollar, while such firms import parts and production, could be a net negative impact on operating margin for such firms. Could this condition persist? A weaker dollar also draws capital investment elsewhere, where perhaps relative conditions might be improving more quickly.
Check This Out
Most of you read Helene Meisler's column at "Top Stocks" on Sunday night. Interesting to say the least. Helene notes how even with the pressure experienced late last week, the Invesco Nasdaq QQQ ETF (QQQ) had managed on Friday to rebound off of a trend line at the day's early lows that has been in place since April. Helene cites the possibility of some follow through on that rebound early this week, as this has been the pattern, especially when coupled with elevated put/call ratios which was the case going into the weekend. While Helene used the ETF and the headline CBOE Options Total put/call ratio, I wanted to try out her charts on some of my own charts and see what I could see. By the way, Helene is someone I read regularly. Someone I know I can learn from.
As my readers know, I like to break down put/call ratios into option type. The CBOE Options Equity (only) Put/Call Ratio went out on Friday almost precisely at it's own 200 day SMA, and as Helene noted, the highest level in more than a month's time.
Readers will also note that this is the seventh time since the March market meltdown that this ratio has met or exceeded that technical level. The ratio in all that time has never held that red line for very long. In addition, the trend line that Helene noticed for the QQQ ETF roughly translates to a trendline that I drew on this chart of the Nasdaq Composite. The line I speak of is purple. I know, the chart is crowded. It kind of has to be.
Now, take a look at this green line just beneath the purple line. That's the 30 day SMA for the Composite. Yes, I have often written that the 50 day and 200 day SMAs are the most important simple moving averages when following mass behavior made by portfolio managers. That's not because portfolio managers love those lines, but because their risk managers watch them very closely. The fact is that even though not a highly focused upon moving average... somebody's algorithms are, in this thin trading volume environment, being written to target that line for purchase. It would be very likely that this has been picked up on and is being copied by competitors. This makes the 30 day SMA, at least for the Nasdaq Composite, a very dangerous line for the short to medium-term. Thin line between love and hate.
That is until there is fiscal news, a Fed surprise later this week, a change in geopolitical focus, a change in the trajectory of either viral infection, or in the pace of medical response capabilities. Oh, on that note, more than a third of the S&P 500 reports their numbers this week. Just sayin'.
Speaking Of Earnings
Just a bit of a check-up on earnings season, according to FactSet, 28% of the S&P 500 has now reported, and a rough 81% have beaten low bars for these expectations while 71% have beaten consensus for revenue. Going forward, and sticking with the data released by FactSet, the blended average (results & expectations) is for S&P 500 second quarter earnings "growth" of -42.4% on revenue "growth" of -10.1%. Expectations for the full year have actually improved over the past week or so from -21.1% to -20.7% for earnings and from -3.7% to -3.6% for revenue. Actual growth is not expected to return in earnest at either the top or bottom line for our broadest large cap equity index in aggregate until Q1 2021.
On that, we certainly saw a willingness to take profits following pretty decent quarters reported by Microsoft (MSFT) , as well as Tesla (TSLA) . This recent action also comes ahead of this week's expected releases to be posted by Amazon (AMZN) , Alphabet (GOOGL) , and Apple (AAPL) . As someone who has traded Amazon while maintaining a core long position, I am thinking that this could finally be a chance to add to the core. Even a face-ripping selloff would not scare me off of that name. Apple, though? That one is interesting. While already short puts expiring this Friday, I have no equity position. Those puts are already nicely profitable on their own, and to be honest, when I wrote of a firm that could be hurt by a weaker dollar, I was thinking of Apple. I may just get out of the way of those puts. You just never know. Still have a few days to go.
Economics (All Times Eastern)
08:30 - Durable Goods Orders (June): Expecting 6.9% m/m, Last 15.8% m/m.
08:30 - ex-Transportation (June): Expecting 3.5% m/m, Last 4.0% m/m.
08:30 - ex-Defense (June): Last 15.5% m/m.
08:30 - Core Capital Goods (June): Last 2.3% m/m.
10:00 - Dallas Fed Manufacturing Index (July): Last -6.1.
The Fed (All Times Eastern)
Federal Reserve Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)