Fourth and ten. Late in the game. Deep in our own end. No choice but to punt the ball and play some defense. So we thought.
Stimulus. Really? Shall I call it by what it really is: support. The idea of the proposal that those in the House of Representatives are working on, the Heroes Act, or what most would see as a Cares Act II, is what is driving financial markets, and has been. The very idea of a second significant round of aid to American businesses (employers) and households was viewed as such a sure thing that markets actually priced it in over the summer.
Assets, stocks in particular, simply roared to levels not quite understood by financial historians not trained or experienced in policy and or economics. Once the economy did start to act better than projected more quickly than expected, politics entered into the arena, and crushed what had been a few months earlier a spirit of compromise in the face of crisis.
This was not really a "V" shape, nor a "K" shaped recovery. I told you months ago, that without a vaccine in place, the economic recovery would look like a reverse square root symbol. It starts with what looks like a "V" and then without artificial support, moves sideways prior to reaching pre-pandemic levels. Not difficult to understand. Obviously too difficult for many who must bear the mantle of leadership, however. Such is life. So, without agreement, we would have to punt the ball.
This means that several pounds of flesh that had been priced into the markets would have to be priced out. Just one thing, though. A defensive player ran into the punter. Yellow flag. On the other end of the field a cover man ran into the returner. Yellow flag. What now? Offsetting penalties. In other words, replay the down. A new chance.
Suddenly, both sides realize that they have played politics and the people had noticed. Suddenly, they would try once again to compromise... and keep on trying. Not those two from Tuesday night. Thankfully. Instead, the Speaker of the House and the Treasury Secretary, political opponents for sure, but opponents that have a history of being able to work together.
The sun shines? Not yet, but I'm saying "There's a chance."
Chutes and Ladders
The bell was about to ring on Wednesday evening. It had been a day, it really had. More than that, it had been a really rough month tacked onto a really great quarter. The close would be a mess. There are certain funds, many of them pension funds, that rebalance quarterly, others that do so monthly. Depending on their individual mandates, they would collide on that closing bell. Full-time traders surely noticed the wild moves made by the major indices over the final 90 seconds or so on Wednesday. That's what you get.
You also got an S&P 500 that returned 8.5% for the quarter despite giving up 3.9% for the month. The Nasdaq Composite posted a quarterly gain of 11%, despite decreasing by 4.9% in September. September on average is our worst month of the year. Phew. Glad that's over. Or is it?
Though a positive month on average, our most volatile individual months have always come in October. Not too many folks reading this morning missive remember 1929, but there are still a few of us around who worked these markets in 1987. Then, the mini-crash of October 1989. That one landed on Friday the 13th no less, and the airlines (then junk bonds, now layoffs) were a central theme. Sound familiar? Probably not if you do something else occupationally. If you wore a colored jacket and waved paper in the air for a living, you'll never forget.
In short, September put a garden variety (never thought I'd use that silly phrase) correction on our equity marketplace, as the U.S. dollar stabilized around support (even rebounded a bit), 10-year Treasury yields moved sideways for the most part, and commodities showed some volatility. The point is that even though this correction may, and I use the word "may" rather loosely, have been routine in size, it did happen rather quickly. Likely a result of modern methods used for price discovery now that thoughtfully putting buyers and sellers together at a centralized point of sale for a block trade is considered antiquated (because it is slower and not always profitable), and forcing electronic overshoot in both directions has become all the rage (because the trades happen in microseconds and it is nearly impossible now for natural buyers and natural sellers to meet each other without intervention in the right place and right time in order to put a sizable trade to the tape).
The question one must ask is can we have a normal October? With the election one month away. With the viral transmission still running at unacceptably high levels. With the economy starting to move sideways a bit too early. With a public still visibly upset over a number of social, structural, or yes, political issues. I don't know.
I do know that you and I will tape down our gear, buckle our chinstraps, make sure we have enough clean water (and socks) for a few days, and we will move forward.
TWTWTWoW? Sure. "That was the way they went on Wednesday."
Futures got hot ahead of the opening bell on Wednesday morning. Treasury Secretary Steven Mnuchin was optimistic. I think. Mnuchin spoke of being in daily contact with Speaker Nancy Pelosi. The spirit of compromise was in the air? Who knows, but that spirit was not quite dead it seemed. After all.
Markets rejoiced. Actually keyword-reading algorithms rejoiced and markets followed, but why split hairs. Our P/L (profit/loss) ratios sure liked what Mnuchin said.
With less than two hours to go, someone (Senate Majority Leader Mitch McConnell) would pour some sour milk on our Cheerios. McConnell did not do or say anything that was not true. He bluntly said that both sides were still far apart on a price tag for a support bill. Markets sold off from where they were, again with hair-trigger algorithms leading the way. Instead this time, traders bought the dip with about 40 minutes of pay left in the period. There would be news, and Wall Street was sniffing it out.
House Democrats had decided to put off a Wednesday evening vote on their own (net) $2.2 trillion support bill so that negotiations with the Trump administration could continue. How significant is this? Potentially huge.
For one legislative body to give up on the process and pass a bill that will not pass muster on the other side is but a ceremonial show of frustration. It accomplishes less than little. To hold off on such a procedure means that there is at least, among leaders, a chance that progress is being made.
I have repeatedly said that a support bill will have to cost around $2 trillion. Smarter people than I have said $1.9 trillion. Well, there is a market. The bid is $1.5 trillion, the ask? $2.2 trillion.
I know about 100 retired "auction market" NYSE specialists who could get these two sides together and put a nice-sized block trade on the tape. Make it happen.
What We Look For
Up days on big volume. Yeah, it is that simple. On Wednesday, trading volumes soared. Composite Nasdaq trading volume for Wednesday ran 26.2% higher than on Tuesday. Composite NYSE trading volume climbed 30.9%. Trading volumes in aggregate for constituent membership across the Dow Industrials, S&P 400, S&P 500, S&P 600, Nasdaq Composite, and Nasdaq 100 all moved well above their 50-day moving averages for trading volume as each and every one of those indices moved higher.
Correction over? Market back in "uptrend" mode? That's a definite maybe, given all of the overt risks that we have been discussing, but there is no doubt about the technicals. What we see before us is indeed constructive. Winners did not beat losers by all that much at either of New York's primary equity exchanges. That is true, but advancing volume crushed declining volume at both of those exchanges.
There had to be funds taken from somewhere. On Wednesday, two sectors went backwards. Energy stumbled around, and the Industrials had a rough day led lower by the Transports and Defense. One has to see the likelihood of a tougher environment ahead for high end defense spending. I love a good weapons system as much as anyone, but feeding and housing families is the priority right now. Keep your eyes on those 50-day SMAs for now. As usual, that's the key.
-- The Federal Reserve Bank on Wednesday, extended, at least until the end of the year, the ban on large U.S. banks repurchasing their own shares, while also extending the curb on dividend payments. JPMorgan Chase (JPM) , and Citigroup (C) kick off earnings season in earnest in less than two weeks, prior to the opening bell on Tuesday, Oct. 13.
-- Good news and bad news. Moderna (MRNA) , earlier this week reported that at least in Phase 1 trials, the firm's experimental mRNA-1273 vaccine candidate for the fight against Covid-19 can generate antibodies in elderly adults at levels comparable to those in younger folks. This has been a concern and is good news. The bad news is that the firm dosed (second of two) the 15,000th patient (of a 30,000 patient phase 3 trial) on Sept. 25. This means that according to the FDA's new guidelines, should all go well, Moderna could not apply for Emergency Use Authorization until Nov. 25. The FDA requires that at least 50% of trial subjects must be watched for two months after final dosage. This pushes out the potential earliest date for use of this vaccine by several weeks then had been hoped for. No word from Pfizer (PFE) , the other candidate seemingly closest to the finish line, on a potential date for such an application.
The deal will involve integrating Datadog's "big data" tools in such a way as to make them seamlessly available to those businesses already using the Azure platform. The setup will supposedly be automatic.
The chart? Breakout!!
Readers will quickly see the two things that I want them to see here. First, there is the almost perfect support that kicked in at the 38.2% Fibonacci retracement level based on the move from march through July. Then, there is the basing pattern that formed in between that July high and that Fib level that survived two tests, one in August, the other September. When a range develops at the top of a chart like this (for the new kids), we call this a period of consolidation.
Well, on Wednesday, DDOG smashed through the upper boundary of this range. What we need to see now, is a hold. The shares have to hold the pivot, which is placed almost precisely at the $99 level.
My target price of $120 is now implemented. My panic point moves up to $92 from $86. Rock on.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 870K.
08:30 - Continuing Jobless Claims (Weekly): Last 12.58M.
08:30 - Personal Income (February): Expecting -2.1% m/m, Last 0.4% m/m.
08:30 - Consumer Spending (February): Expecting 0.7% m/m, Last 1.9% m/m.
08:30 - PCE Price Index (February): Expecting 1.0% y/y, Last 1.0% y/y.
08:30 - Core PCE Price Index (February): Expecting 1.4% y/y, Last 1.3% y/y.
09:45 - Markit Manufacturing PMI (Sep-rev): Flashed 53.5..
10:00 - ISM Manufacturing Index (Sep): Expecting 56.1, Last 56.0.
10:00 - Construction Spending (Aug): Expecting 0.7% m/m, Last 0.1% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +66B cf.
The Fed (All Times Eastern)
11:00 - Speaker: New York Fed Pres. John Williams.
15:00 - Speaker: Reserve Board Gov. Michelle Bowman.