The Clock
So many of us have always watched the clock. What clock? Any clock. The one on the wall. The one on our wrist. The one on our smartphone. Our school days, our workdays.. they take so long. The weekends go by seemingly in a shot. As an elementary schooler back in the day, the nuns taught us not to watch the clock. It became a matter of discipline. Later on, in professional life, the clock became discipline itself. The buildup towards the opening bell. The European close. Margin calls. Market on close imbalances, Company repurchase safe harbor guidelines, and of course... the overbearing change in pace going into the all-important closing auction.
For weeks, traders have scoured the marketplace for a sell signal, after the obvious buy signals emitted by our broadest equity indices both got that confirmation back in very early April. There have been stutter steps here and there, but in each case, something was missing that left the powerful uptrend in place.
Tuesday's market action certainly puts this confidence to the test. The obvious reason would be serious selling pressure, almost all of it late in the day, that came on heavy trading volume. All eleven S&P sectors closed in the red. Leadership melted away. That trading volume itself paints a decisively negative picture in terms of breadth. Losers trounced winners. Declining volume trounced advancing volume.
Taking another look at the clock on the wall. Is it time to go now? I'll be quite honest. While not completely exiting anything on my book on Tuesday, I did shave quite a few positions. Not through conviction, but simply because an aggressive six-week rebound in equity prices, and especially six consecutive winning sessions for the Nasdaq Composite, left me, along with many traders, something that needed protection. I have no doubt that profit taking was at least a component of Tuesday's 45 minutes in the barrel. Fine. but again, is it time to go now?
What Changed?
This was indeed no surprise. Twenty-four hours ago, right here in this column, we discussed the risk to the financial markets posed by some of the higher-profile doctors from the administration's coronavirus task force as they testified before various members of the U.S. Senate, even if virtual. (Where was Dr. Birx? I trust her most of all.)
These are scientists. Financial markets are, or should be, off of their collective radar. While each of these agency heading doctors, was asked key questions, especially on the expansion of testing for the virus and for the related antibodies, markets have always keyed in on Dr. Anthony Fauci, if not for anything else, but for his "matter of fact" delivery in answering most questions.
We all know that several U.S. states have started to reopen economically ahead of satisfying guidelines for reaching that point that have been provided by this task force. Fauci stated plainly on states or regions trying to get back to normal: "disregard the checkpoints that we put in our guidelines about when it is safe to proceed in pulling back on mitigation, I feel if that occurs, you will trigger an outbreak that you might not be able to control." While Fauci did offer what I took as a somewhat optimistic view on the rapid development of a vaccine, or of vaccines, he also did suggest that perhaps the number of deaths associated with this virus is "likely higher than that number."
I thought the markets took the hearing well, and were indeed managing to trade sideways for hours upon the completion of the session. Then came news that local leaders in Los Angeles County, California were seriously considering extending "stay at home" orders well into this summer. The county has continued to see increasing numbers of both infections and related deaths, and markets noticed this headline. While many regions continue to struggle, Los Angeles County has a population of roughly 10 million individuals, and contains the nation's second-most populous city. There is no rapid, or "V-shaped" recovery without the participation of such a large population.
While Daunting...
This news was not what actually opened the gates for increased liquidation on an institutional level on Tuesday. For many, it was the fiscal situation. The whole ball of wax. First came news that Treasury had spent $979.71 billion (a record) for the month of April 2020, versus a monthly average of $384 billion over the prior year. Revenue landed at just $241.86 billion after the decision was made to postpone 2019 Tax Day from April 15 out into July. There is no doubt that a monthly deficit of $737.85 billion caught Wall Street's attention.
Maybe all by itself, traders could have ignored this news for a little while. But it came just ahead of the release by House Democrats of a new fiscal package bill that would cost the nation roughly an additional $3 trillion, or just about doubling what the government had already spent on this crisis.
Is it too much? Is it not enough? Is it too political? There's plenty of "good" in the bill, including funds for food assistance, broadband access, and the U.S. Postal Service, and of course, testing. There are also large outlays for state and local governments, which will be a point of contention, as will a potential repeal of the $10,000 cap on SALT deductions, which was part of the tax law changes that were made in 2017.
While I think all involved understood that this bill is a starting point, meant to open negotiations, the immediate and negative response from the other side is what I think algorithmic traders picked up on -- and that set off the race to the exits as markets tried to close. I am not going to get political here as I traditionally see good and bad in everything. What I do see right now is an elevated potential for wildly volatile markets as these coming negotiations will create increased headline risk, and could do so on a daily basis for an extended period.
While these negotiations probably will not even begin in earnest for a number of weeks, the House votes on the bill this Friday. One other thing. The longer the economy remains closed, the greater the wave of coming defaults. How to balance that with the guidelines provided by the already mentioned public health officials, I do not know.
What I See
Remember when we discussed "Inside Days" and what they mean technically? We see "Inside Days" as signals of trend continuance, and taking that tack has worked for us like a charm. Well, Tuesday was an "Outside Day," which could be seen as a signal of continuance, if we had not seen such a violent reversal. (Outside Day: Higher open than the day prior, lower close than the day prior, higher high and lower low than the day prior as well.) The problem, as I see it, is that for the Nasdaq Composite, our leader, the higher high was really in the same area code as what we saw on Monday, while the low actually allowed for the day's range to swallow the two days prior. See below.
Saving grace? The Composite's 20-day simple moving average remains underlying trend support, until it does not. For the S&P 500, this "Outside Day" actually envelops the three days prior.
Though trending in far more sideways fashion, the S&P 500 also still sits atop the 20-day SMA, though this line could be tested this morning. What I think has to be mentioned is that all of the sessions swallowed up by Tuesday's late sell-off were indeed "up days." This turns our "Outside Day" into an "Outside Reversal", which can often mean control of capital flows that determine trend has now changed. Does this mean that I no longer see a confirmed uptrend? Not yet, but I am thinking about it. We have all been on the lookout for a "reverse square root symbol" type pattern or a Nike (NKE) swoosh not just for the economic recover, but in financial market performance as well.
I think what I see is an almost certainty of increased volatility from here. What I would need to see to move to a decisively more defensive posture from here would be another day in close proximity to Tuesday, where stocks largely sold off on high volume. That would confirm that portfolio managers were moving toward cash creation.
A welcome stabilization today could assuage that feeling for now. It remains key to keep in the back of every mind, that a large fiscal spend will be interpreted by the algorithmic community as a net positive if it is believed possible, especially with the central bank plugging every liquidity hole that they can think of and providing necessary funding at almost no nominal expense.
Of course, there are longer-term risks to prolonged monetary and fiscal support. That may not be today's battle, but it is out there, lurking. Volatility is all I think I can promise right now. To me, that means traders need to understand more than ever their personal levels of risk tolerance. If you were terrified on March 23, and the policy makers saved your portfolio, there is no sin in taking a more-finessed approach ahead of a signaled increase in equity market volatility.
Dependable
As the New York metropolitan area worked its way through the darkest days of March, April and even into May, I found that as families struggled to find the essentials (including food) necessary to running a household, two e-commerce businesses really stepped up to the plate -- and even if deliveries were delayed, performed admirably. I speak of course of both Amazon (AMZN) and Walmart (WMT) .
Oh, the joy felt inside a home when a case of ConAgra's (CAG) Chef Boyardee Ravioli would appear on the doorstep, or a package containing paper towels or toilet paper. Amazon, with some problems, somehow kept up grocery deliveries from its Whole Foods Market division, while Walmart would on its website tell consumers that if a product could not be delivered, perhaps it was in stock at a local brick and mortar location.
Walmart reports next week. Expectations are for EPS of $1.12, which would be down small year over year on revenue of close to $130 billion. What will matter will be what management tells investors on how the firm will proceed in this coronavirus environment far more than performance that is already in the books.
You see what I see. A descending series of lower highs coupled with a rising series of higher lows. This signals a serious reduction in volatility that usually comes just ahead of an explosive move one way or the other. Does this mean that we have a winner on our hands? No. It does probably mean that we have an opportunity on our hands going into the quarterly release.
I'll tell you this. Walmart's e-commerce business has earned my respect. The store near us has been especially well run throughout this awful experience. Masks, social distancing and one-way aisles were the norms there, and politely enforced long before these behaviors were mandated by local leadership. This was the first store of any kind where I noticed plastic barriers placed in between consumers and cashiers at the point of sale.
I don't know which way the worm will turn for this stock next week, especially as I expect the broader marketplace to take on a more violent profile of its own. I do know that I will be angry with myself if I have to chase this stock in a week's time. I will purchase an entry-level sized (1/8 of intended size) position in Walmart at some point this week, and probably add if the shares come in, post-earnings. I will not add should the shares pop next week. That, my friends, is sometimes the narrow difference between what is an investment and what is a trade.
Economics (All Times Eastern)
08:30 - PPI (Apr): Expecting -0.3% y/y, Last 0.7% y/y.
08:30 - Core PPI (Apr): Expecting 0.9% y/y, Last 1.4% y/y.
10:30 - Oil Inventories (Weekly): Last +4.59M.
10:30 - Gasoline Stocks (Weekly): Last -3.158M.
13:00 - Thirty Year Bond Auction: $22B.
The Fed (All Times Eastern)
No Public appearances scheduled.
