To put it bluntly, that was really something. Twenty-four hours ago, with U.S. equity index futures showing anything from indifference to potential weakness ahead of Tuesday's regular trading session, we looked to a specific technical level, the 50 day SMA for the S&P 500 (3021) as possibly significant. Why? Going into Tuesday afternoon many professionals anticipated a wave of sell orders to hit these markets as most of Wall Street's most highly recognized brokers had projected a mandated allocation rebalancing that would amount to something ranging from a low of $35 billion to a high of $75 billion that would have to move from the equity space over to debt securities. You probably do not need a chart to know what happened. Hmm. So, what did happen? Could the pros really get it that wrong? Well, yes. That wrong, though? Probably not.
First off, support was realized well above that technical level even before the opening bell. This brought in an early algorithmic response. Nothing unusual there. We did mention in yesterday's Recon that perhaps some managers had received discretionary permission to act ahead of the event. There certainly has been some volatility across the space in recent days. Those individuals probably will not be granted this discretion in the future. There are probably at least some funds that chose to delay this selling, which could make the rest of the week a bit messy, but at least spreads out the pressure. What was really something though, and I just find fascinating is that once support had been established that traders had decided to buy the dip expected. In fact there was indeed enough buy interest to more than offset all of the "downside" pressure in aggregate. There will, it seems, always be at least some impulse across the management community to be in the right names at quarter' end. Once traders who had played Tuesday's close from the short side came to the understanding that this trade would not work, the squeeze was on. This is you see, 15 minutes prior to Tuesday's second bell, ahead of the fund mandated imbalance that had been repriced by what developed throughout the day.
This particular interest on the buy side is spent and will not be part of Wednesday morning's price discovery function.
The end result was an "up" day on slightly higher trading volume than we saw on Monday, but not the kind of volume, nor volatility that at least I had expected. That's a good thing. I run several net-long portfolios. I'll be wrong about expecting a "down" day everyday if it pays. Skill is good. Luck can be good. I'd prefer positive results created through skill. That said, I'll take luck on the days it chooses to smile upon me. Every single time.
The success of this past quarter from an equity trader's perspective can not be denied. As long as the same trader acknowledges Q1 performance as well. While the S&P 500 returned just less than 20% for these past three months, it was the Nasdaq Composite that led the way with upside performance of more than 30%. How important is it to understand trend and use this cognizance to recognize leadership? That's the whole game, kiddo. This is where my two sides come into conflict.
I have often written right here in this space, or spoken on national television of the "half-way back" economy, symbolized by a "reversed" square root symbol. This is precisely what we have seen to this point from the perspective of an economist. We'll know more about that after tomorrow (Thursday), when all of this week's employment related data has been published. That said, the numbers will be dated and probably less complete than we would prefer. While stock markets have certainly delivered that "vee" shaped recovery that only the most optimistic among us had hoped for, it has been difficult to be in all of the right spots all of the time. The stock market just turned in its best quarter since 1998, using the S&P 500 as a yardstick. For those still following the Dow Jones Industrials, this was the best quarter since 1987. (Remember when we thought that was tough?)
Personally, while focusing my equity allocation on leadership has provided for my family, I continue to tamp down potential portfolio volatility through the maintenance of elevated cash levels. Is that wrong? I don't care. Saved my tail earlier this year. As long as an investor is on track toward meeting time and/or price based objectives without violating one's own tolerance for risk, then one finds no other metrics necessary to measure success unless one is trying to sell something.
Social media does not seem to like the guy. He's scary. Dr. Anthony Fauci testified on Capitol Hill on Tuesday. He was blunt. He is almost always blunt. This is why I do like him. He gives it to you straight. Is he always right? Nobody is. The scientists got a lot very wrong early on in this pandemic. Very wrong. Then they started getting some things right. Who understands a novel virus the best? Only the victims, and this one presents (or doesn't even present) in so many variations. There was a learning curve. There still is, and still has to be.
On Tuesday, Fauci stated, "We're now having 40-plus thousand new cases a day. I would not be surprised if we go up to 100,000 a day if this does not turn around." He added, "I am very concerned because it could get very bad." We see the data from a number of highly populated states across the south and west. We see states in the northeast that thought maybe they were past the worst of the pandemic, now starting to take steps to protect themselves from the infection being imported from individuals fleeing the states where the rate of infection is quickly rising.
The need to halt the reopening of businesses, or to roll back businesses that had already been reopened has now been embraced by many governors, even those who thought at one time that they had reopened prudently. Restricting travel only slows economies further. This is where the half-way back model comes from. We still see folks ignoring social distancing guidelines. We still see, incredibly... people out and about without a mask, and I gather that this behavior will continue until individuals who do not understand the risk posed to their own families finally do.
Dr. Fauci was not the only one testifying on Capitol Hill on Tuesday. The nation's leadership on financial policy, both fiscal and monetary are by mandate required to update the House Financial Services Committee quarterly now, since the passage of the last fiscal support package in March. Treasury Secretary Steven Mnuchin came right to it: "We have a lot of important features that all come to an end in July." Mnuchin added in regards to additional support that the Trump administration would prefer that support "be targeted to certain industries that have been especially hard hit by the pandemic." Think the consumer has hung in there? An extra $600 a week for those on the sidelines goes a long way. A long way that is set to conclude later this month.
Fed Chair Jerome Powell sounded cautionary, which has been his way of late. Powell said, "We have entered an important new phase and have done so sooner than expected." (There's our "vee" shape.) Powell went on... "While this bounce back in economic activity is welcome, it also presents new challenges - notably, the need to keep the virus in check." (There's that half-way back model again.) Can debt replace revenue? Can debt replace cash flow? It can pull these measures forward. Can debt replace solvency? No.
Maybe You Noticed
That a team of economists at Goldman Sachs led by Jan Hatzius released an 11 page paper this week that attempts to link domestic economic performance with widespread mask usage until there is/are trusted vaccines or treatments that permit a return to what were once societal norms. To make a long story short, these economists make a case that a nationally mandated face mask wearing policy could possibly at least in part substitute for economic lockdowns across the states currently under attack by this virus. These Goldman economists see the potential for a 5% difference in GDP. The job you save could be your own. This is not rocket science. If the guy facing you wets his pants you don't get wet. If he has no pants you do. Understand?
Starts at 08:15 ET, and lasts just about 24 hours. Most important number of the week? Continuing Jobless Claims, but they all matter. Light volume? Traders on the beach? Not likely. Traders on the sofa? Maybe.
Economics (All Times Eastern)
08:15 - ADP Employment Report (June): Last -2.76M.
09:45 - Markit Manufacturing PMI (June-rev): Flashed 49.6.
10:00 - ISM Manufacturing Index (June): Expecting 49.1, Last 43.1.
10:30 - Oil Inventories (Weekly): Last +1.442M.
10:30 - Gasoline Stocks (Weekly): Last -1.673M.
The Fed (All Times Eastern)
10:00 - Speaker: Chicago Fed Pres. Charles Evans.
14:00 - FOMC Minutes.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (FIZZ) (.60)