Buy the rumor...buy the news? That's what this holiday shortened work week has felt like through its first two days. All on very solid market internals. All on wildly elevated trading volume that would normally be somewhat subdued by the oddity that is this annual occurrence. This annual condition would be one where there markets close for one mid-week day (Thursday), followed by a half day on Friday. Traditionally that half day has been used over the years by senior traders to, if they can... take an extra day off to create a four day weekend, or if in the mood to show off their families in pre-Covid times, bring their children to work. Either way, not a lot of work got done on Friday, and if decisions had to be made, they would likely be made by those who might not quite be exactly qualified to make them.
As I may have mentioned, and not just due to Covid, times have changed. Volumes have not dried up. Beyond the impacts of the pandemic, the political environment and its impact on potential policy have taken center stage. In addition, program trading, and then high speed algorithms have taken control over the point of sale away from human traders. There are just fewer human traders than there used to be, and thus.... less of a withering impact on trading volumes due to holidays. Algorithms don't need time off, and certainly don't have families. Just a mission focused on making a (very) quick profit, and competitors that are doing the exact same thing.
Bang the Drum
On Monday, managers bought up equity markets, not to mention crude oil (while selling the U.S. dollar) as much on the rumor that President-Elect Joe Biden would nominate Former Fed Chair Janet Yellen to his cabinet as Secretary of the Treasury, as much as on the rumor that President Trump would, while not conceding prior to running his campaign's challenges through to their completion in various state courts, would start the process of easing a transfer of power to the Biden team. By late Monday, both of these rumors were to become news events, and managers would continue to pile into equities, taking the Dow Jones Industrials above the statistically insignificant, but psychologically impressive 30,000 level for the first time ever.
I had hopped on my spin bike mid-afternoon as I am apt to do on days where I feel well enough. Of course, I have a smart TV on the left, playing the spin class at very low volume, and on the right, depending on the time slot, whichever financial media program I consider the best available so I can keep an eye on the the tape (traders always watch the tape), and hop right back into my office if the need arises. In the era of Covid, the distance between "the office" and "the gym" is measured in feet, not hours. I kept seeing the word "rotation" scroll past, and truly had to laugh out loud. We really have to educate so many people charged with bringing financial news to the public. We'll do this slowly for the new kids. If the S&P 500 moves 1.5% higher, while the Nasdaq Composite increased by 1.3%, this does not make a rotation out of growth into value. If 10 of 11 sectors move north, even if led by "old economy" industry groups, that does not make a "rotation". When I "rotate" I sell something to buy something.
If this all happens while the Transports move 2.3% higher, and while indices more focused on small to mid-caps tack on anywhere from 1.7% to 2.5%, and it all takes place on much higher trading volume, and on dominant market breadth... what this means is that capital is coming off of the sidelines aggressively. Professional managers are committing unused capital across the marketplace more focused on what had been most depressed throughout the pandemic economy. No rotation. Nothing even close. Simply an overt broadening of the rally, better referred to as a mild rebalancing of what has become the "barbell approach", than a "rotation." Oh, and the "barbell approach" for those wondering, but afraid to ask... has become a fancy term for being diversified in exposure to multiple outcomes while remaining careful. In other words, not too much different from what you have always done.
What Puts a Stop to All This?
Over the medium to longer term? Negative news that prolongs the availability of safe and effective vaccines to the public beyond late winter/early spring, or for those eligible to be dosed at the earliest out into calendar year 2021. Other than that, something that throws the transition of power back into an elevated condition of uncertainty, or appears to offset expectations of a split legislature.
For the short term... just look at all of the macro listed below. Due to the holiday, there will be more headline level macro-economic data released than one could possibly shake a stick at. Why shake a stick? Why not? Any other questions? From Durable Goods (Core Capital Goods) Orders to Jobless Claims to Consumer level inflation to Personal Income/Spending, and then finally... oil inventories followed the FOMC Minutes, heads will spin and algos will whirl. Despite an absence of much of an earnings calendar, there is certainly enough for those out hunting for prey or trading mindlessly through the use of algorithms to latch on to, and they will.
What they do, I just don't know yet to be honest. There will certainly be some managers looking to book some profits ahead of a faux four day weekend. There will also be some purely algorithmic traders that will try to force overshoot in the hopes that market inefficiencies might be created that can then be taken advantage of on Friday. In short, Wednesday might get a little sloppy.
Under The Radar (Sort Of)
Both HP Inc (HPQ) and Dell Technologies (DELL) reported quarterly performance on Tuesday evening. What is and had been quite obvious is that as Americans have had to both work and learn from home where possible that demand for the personal computer has returned to levels long ago thought left behind. Both firms beat the street on both the top and bottom lines, while impressing at least mildly on margin.
The problem going forward appears to be the ability to meet new demand due to shortages of available supplies of processors across the semiconductor space. Is this surge in demand for home computing sustainable? Probably not at the pace witnessed in 2020, but as some folks will continue to work and learn from home for far longer than expected, my opinion is that there will be a replacement period as individuals who tried to build an office on the cheap come to realize that to do this more permanently, they will need better, or higher end equipment.
My guess is that most readers missed this one. On Tuesday, U.S. Air Force acquisition chief (the guy who spends the dough) William Rogers announced to the media that a third launch provider will not be required at this time for national security purposes. He did leave the door open just a crack however in mentioning that both the U.S. Air Force and U.S. Space Force 'are not done with innovation" where as this industry is concerned. This is good news for two firms... SpaceX, founded by Tesla (TSLA) CEO Elon Musk, and United Launch Alliance, which is a collaborative effort between Boeing (BA) and Lockheed Martin (LMT) .
These two operations had already won contracts to provide the Pentagon with launch services out into the year 2027. This is less than spectacular news for the likes of Northrop Grumman (NOC) , and Blue Origin, founded by Amazon (AMZN) CEO Jeff Bezos, after that operation had given the impression that it had a pathway toward certification with the DOD.
Steel stocks ran wild on Tuesday. GLJ Research upgraded U.S. Steel (X) , as well as Cleveland Cliffs (CLF) , a provider of iron ore pellets to the North American steel industry to "Buy" ratings from "Holds", citing rising steel prices as well as increased potential for fiscal support during a Biden administration. US Steel ran 23.3% for the day, while CLF tracked on a cool 9.3%.
Buy on this news? Go ahead, I'll wait here. My guess is that so much can go wrong before it goes right with this group. A weaker dollar will help, and rebar prices are on the rise, but my instinct is that that gap created for this stock on Tuesday will fill. Want a steel stock? My opinion is that Nucor (NUE) is not only better managed, but riding a more sustainable technical trendline, and pays shareholders a real dividend ($1.61 annual, yielding 2.85%) just to hang around. U.S. Steel pays shareholders $0.04. That's a penny four times a year. No thanks.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 742K.
08:30 - Continuing Jobless Claims (Weekly): Last 6.372M.
08:30 - Durable Goods Orders (Oct): Expecting 1.0% m/m, Last 1.9% m/m.
08:30 - ex-Transportation (Oct): Expecting 0.4% m/m, Last 0.8% m/m.
08:30 - ex-Defense (Oct): Expecting 0.8% m/m, Last 3.4% m/m.
08:30 - Core Capital Goods (Oct): Expecting 0.5% m/m, Last 1.0% m/m.
08:30 - GDP (Q3-2nd Est): Flashed 33.1% q/q SAAR.
08:30 - Wholesale Inventories (Oct-adv): Expecting 0.3% m/m, Last 0.4% m/m.
08:30 - Goods Trade Balance (Oct-adv): Expecting $-80.9B, Last $-79.37B.
08:30 - Personal Income (Oct): Expecting 0.1% m/m, Last 0.9% m/m.
08:30 - Consumer Spending (Oct): Expecting 0.4% m/m, Last 1.4% m/m.
08:30 - PCE Price Index (Oct): Expecting 1.3% y/y, Last 1.4% y/y.
08:30 - Core PCE Price Index (Oct): Expecting 1.4% y/y, Last 1.5% y/y.
10:00 - New Home Sales (Oct): Expecting 971K, Last 959K SAAR.
10:00 - U of M Consumer Sentiment (Nov-F): Flashed 77.0.
10:30 - Oil Inventories (Weekly): Last +768K.
10:30 - Gasoline Stocks (Weekly): Last +2.611M.
12:00 - Natural Gas Inventories (Weekly): Last +31B cf.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 231.
The Fed (All Times Eastern)
14:00 - FOMC Minutes.
Today's Earnings Highlights (Consensus EPS Expectations)