The beat goes on. So they say. What can "they" say with any certainty? Trading volume slanted decidedly toward a positive sentiment on Wednesday that accelerated into the closing bell. Still, that trading volume tapered off significantly from Tuesday's give-back, that itself was built on Monday's rally. Hmm. Wednesday's optimism was led by the REITs, and the Utilities. One would think that posture to be defensive, but also by Energy, which is anything but. That particular slice of investment might be the result of mixing a dash of hope with a touch of speculation and then blended with the remainder of some shorts that had held out and then at last... felt the squeeze.
It's important to keep in mind that even though Tuesday felt like a selloff because such a large increase across the major indices had been unwound by closing time, in reality advancing volume had decisively beaten declining volume at both of New York's primary equity exchanges and has now done so every single day this week (fingers crossed). That leaves investors/traders with a serious question going into a long weekend.
You must ask yourself... no, let me fix that. I don't tell you what to do, I tell you what I'm doing or thinking about and then everyone decides for themselves. What we should ask ourselves is this. Do we take profits going into a three-day weekend (four days in some countries), or do we let it ride, given where we are technically? Speaking as an individual with something to protect, I would like to say that the 24/7 news cycle is just loaded with headline risk, and three/four days is a heck of a long time in the year 2020.
My instinct would be to take some profits, at least enough to reduce risk for anything where I was unwilling to go the expense of adding protection. That said, I think it imperative that investors even more than traders understand and implement strategies meant to hedge larger exposures -- or at least know how to and implement actions taken to erode net basis on portfolio longs.
In order to assess current levels of risk, one must understand causation for recent support in price discovery. Just what has driven equity markets higher of late, beyond weakness at the long end of the Treasury yield curve, which is itself, but a symptom?
1) Dr. Anthony Fauci, now a far larger celebrity than any of those clowns in Hollywood, the good doctor on Wednesday suggested that the numbers (Covid-19 related deaths) could be less than first projected. Very positive, no doubt. The risk there would be that this also suggests that the virus and data related to the virus are still in charge. That's dangerous.
2) Russia / OPEC, The cartel plus all allied oil producers will hold a meeting via teleconference Thursday morning in order to discuss cuts to be made to output. Rumors abound that though Russia may be willing to reduce production, there may not be broad agreement on this issue, and in order to get there, global producers may require U.S. participation in any cutbacks to be made. The alternative for the U.S., in this time of very little demand for fossil fuels, would be the implementation of a schedule of (probably very large) tariffs in order to drive whatever domestic demand that does exist internally.
3) Senator Bernie Sanders, The openly progressive U.S. senator has ended his campaign for the presidency, virtually handing the Democratic nomination for the position to former Vice President Joe Biden. While Biden is not seen as destructive to markets as Sanders might have been, Sanders has maintained that he intends to remain on ballots in order to amass delegates as well as influence as the party platform develops into the election in November. Not sure how much of a driver this has been for the recent market strength. That said, this input is certainly not a negative.
4) Short Squeeze. Thought we were done with this on Monday or Tuesday morning. Surprise. Though some short positions must be running far lower, investors must understand that many portfolio managers do not cover these positions gracefully, and are instead compelled to act by risk managers -- and this often happens at precisely the wrong time, as "worst-case" parameters set by employers are reached. Key to note is that often a portfolio manager's resistance level is a risk manager's panic point. Know what I mean? They look at the same charts, but see the same levels very differently based on the nature of their roles within the firm.
Not so hard to understand. We still live in an economy that within six weeks has gone from quite robust to near complete demand destruction that will at least in the short term bear an unemployment rate of something approaching 15%. Maybe higher. That's my own guess, based on the nearly 10M actual human beings (not just a number) who filed first-time jobless claims over the past two weeks. This number will grow this morning. The contraction in the size of the U.S. economy, annualized, could run as far as -25%, or -35%, depending on who you read. Then, one must consider that this economy is but one economy residing within a larger ecosystem suffering the very same symptoms. Not pretty at all.
The problem from an economic point of view becomes one of duration, as well as adaptation. The hoped for V-shaped recovery likely becomes more and more drawn out, as a nation waits for mass testing for the virus, so that business can slowly re-open incrementally. In order to get this done, there will have to be broad trust placed in the efficacy of any treatment(s) used to mitigate the negative impacts of this virus once an individual is infected. How long does this take? Full recovery could take as long as it takes to bring a worthy vaccine into mass production and then broad distribution. 2021?
At that point, less businesses will re-open than were shut down, with a much larger supply side in regards to the labor force. In other words, the U.S. economy will have to be rebuilt rather than turned on. Get it?
The positives? There are two that stick out. One, a large infrastructure-based stimulus package would indeed drive demand for employment. Two, and this should be more lasting in impact, would be the need for (all) nations to become more self-reliant.
I really think that through the harsh lessons learned as this pandemic has developed, U.S. firms, in particular those having anything to do with the necessities of life or national defense, will have to re-domicile the manufacturing base back to the U.S. While this will pressure corporate margins, this would be a longer-term tailwind for the rebuilding of a domestic middle class, and probably (just my opinion) help close the gap in income distribution. Could this human tragedy result in a better-balanced U.S. economy? It certainly could.
For the very short-term, I do think jobless claims, OPEC+, and of course virus-related data will control the point of sale. I do see two things that have me thinking about the Information Technology sector, and even technology names that reside outside of the sector officially, such as communications stocks. Though stuck in the middle of the pack this week, the Technology Select Sector SPDR ETF (XLK) is the top dog (so to speak) year to date. Remember what I told you about this fund and it's battle at the 200-day SMA yesterday? Take a look 24 hours later.
Take a look? More like "take and hold"... well maybe. We'll see in a few hours. Equity index futures are giving back some ground as we approach morning. Let's pull up from 1,000 feet to 10,000 feet to view this more broadly.
Hmm. Same story for the tech-centric Nasdaq 100. That's interesting, but really the charts are similar because the components are similar. Let's go even higher and take in a satellite view...
Okay, now the tech-heavy, but not quite tech-centric Nasdaq Composite is not really so close to making a run at the 200-day line. But, wait... what is that I see all the way on the right? Let's zoom in. This could be important.
See that? That's called an "Inside Day." What's an "inside day"? Simple, the entire candle (lower high, higher low) fits inside the candle from the day prior. Rare? Not really. Meaningful? In a way. Traders and those who love to study thing like probabilities and statistics see inside candles as signals of continuation. Does it work every time? Of course not. This whole sport is about handicapping probabilities.
Now, recall that earlier this week, we called Monday a confirmation day that trend had indeed changed. We wavered a bit on Tuesday without losing our shirts and then Wednesday put Tuesday's highs back in our hip pockets. Trend? The trend has really been in place since March 23rd, we really just did not have what we look for in confirmation until earlier this week.
Based on what I see -- and I can be as wrong as anyone else, but like you, I actually bet my money on my interpretation -- . As readers likely know, my favorite chip names remain Nvidia (NVDA) and Advanced Micro Devices (AMD) . I also remain long Marvell Technology (MRVL) . All three have made significant technical progress this week. My absolute favorite tech remains Microsoft (MSFT) , while some of my other software longs, such as Adobe (ADBE) , and Salesforce (CRM) , still have some work to do.
That just got me thinking about Amazon (AMZN) . It's getting late. Let's take a quick look at that Sarge fave before we go.
One Last Thing
Readers will quickly see the earnings-inspired gap higher in early January that was set up by the "saucer with handle" pattern illustrated in orange. Now, I have not quite decided if what you see to the right is indeed, a "cup", a "cup with handle" or just mayhem, but something is going on. As the pandemic has out the whammy on society, folks have depended on Amazon, and Amazon's delivery has slowed to a crawl. forcing the firm to themselves depend on the likes of FedEx (FDX) , and United Parcel Service (UPS) more than ever.
Still, the demand for home delivery of internet-based retailing has now reached a level where it probably (just an opinion) never fully unwinds. Not only will there be ongoing latent fear of crowded places after what society is going through, but when supply chains start working properly again, it's more convenient and often less expensive than going to a brick and mortar store. In fact, the only thing getting off the couch and getting to a retail location has over e-commerce is speed (assuming what you need is in stock) -- and until the pandemic, that gap was narrowing. I do think that Amazon makes at least a run at the pre-pandemic highs, if not sooner, then later. I am positioned accordingly.
Oh, One Final Last Thing
Happen to notice that Disney+ "finally" hit 50 million paid subscribers on Wednesday, after the service rolled out availability in India just last week? India already comprises 8 million of those 50 million paid subs. For those looking back, Disney+ had just 28.6 million paid subscribers two months ago, and the Walt Disney Company (DIS) had forecast a range of 60 million to 90 million by the conclusion of fiscal year 2024.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 6.648M.
08:30 - Continuing Jobless Claims (Weekly): Last 3.029M.
08:30 - PPI (Mar): Expecting 0.5% y/y, Last 1.3% y/y.
08:30 - Core PPPI (Mar): Expecting 1.1% y/y, Last 1.4% y/y.
10:00 - U of M Consumer Sentiment (Apr-adv): Expecting 77, Last 89.1.
10:00 - Wholesale Inventories (Feb-rev): Flashed -0.5% m/m.
10:30 - Natural Gas Inventories (Weekly): Last -19B cf.
The Fed (All Times Eastern)
No public appearances scheduled for today.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (DAL) (-0.27)