Interpreting Monday's action depends on how one reads the markets, or for those reliant upon others, on whom they read.
On the one hand (we may need a few hands here), equity markets took a terrific beating as investors (and their algorithms) worried openly about rising Covid infection rates across Europe that could create a second economic shutdown/slowdown.
Then there was some nasty looking news across the European banking sector.
Domestically, the passing of Justice Ruth Bader Ginsburg has taken the uncertainty that many already felt moving toward November's national election to the next level. While rushing/delaying the push to replace RBG on the Supreme Court might have been used as a bargaining chip that could have perhaps brought two sides together (this would have been my approach) in an effort to get fiscal help to the public sooner, neither side can help themselves. Both (yes, both) now take positions driven by politics that appear to have been espoused by their political opponents just four short years ago in an almost similar situation. Do they misunderstand the oath?
So, just what happened on Monday? Investors must be cognizant that with nerves fraying in Europe that "they" (here we go again) flocked into the U.S. dollar, and into U..S Treasury debt securities. This "safe haven" value put the hurt on quite a few asset classes that happen to be priced in U.S. dollars. Down went gold, silver, oil, copper, agricultural commodities, and yes, equities. Risk-off. But equities rallied hard into the close, led by the technology sector. Most of the above mentioned commodities have at least stabilized overnight as have not only European equity markets, but the euro and the pound as well.
Interestingly, while the U.S. dollar index remains stuck at elevated levels, that late rally (really began around 14:45 ET) that seemed so energetic has cooled overnight. Tuesday will be a whole new ball game. Remember this: Human traders and investors used to run this ball game. They had feelings, they could at times spread emotions such as anger, fear or even panic among themselves. They had day-to-day memory.
Way back when I was the head trading assistant for a major investment bank on the NYSE floor, we held a morning meeting at the World Trade Center (yes, I still have my WTC ID card) every day at 6 a.m. It was like being in a locker room before a big game. We would get each other as fired up as we could and then head over to the exchange as a team. It was a sport, and we would strategize. There is none of that now.
Algorithms have no emotion, will not get fired up, and will not panic. They don't break for lunch, and they don't need to use the restrooms. They don't care what happened yesterday (nor tomorrow). They just execute, and do it quickly. Profit is the game, and getting there a microsecond ahead of someone else's algorithm is the easiest way to profit. Market direction matters less than speed. Direction only matters to investors.
When Apple and Microsoft (MSFT) went positive for the day, I knew we kind of had them. We would win. We would beat the algos, at least this day.
Breadth for Monday was absolutely awful. Breadth also does not really tell the story. Losers beat winners at the NYSE by more than 5 to 1. At the Nasdaq Market Site by more than 4 to 1. Declining volume overwhelmed advancing volume at both exchanges, with that decisiveness rather extreme at the NYSE. Trading volume in aggregate was lower on Monday for both NYSE and Nasdaq listed securities from Friday, but Friday was a "quad witch" expiration event so it is discounted. Monday's volume was higher than Thursday's volume. That means that the distribution does indeed count, and that some folks were indeed "shaken out."
While Monday's beatdown was especially harsh on sectors and industries most reliant upon social interaction and a successful reopening of the economy, the flow of capital moved back toward what has done better during times that economic activity has been suppressed either through mandate or natural fear.
Mid-cap and small-cap stocks were taken out to the woodshed. The Energy (no OPEC+), Materials (commodities), and Industrials (transports) all had a rough go of it on Monday, while Information Technology finished as the only sector in the green.
What led tech? Hardware, meaning Apple, and Roku (ROKU) , after the latter appears to be making fast progress in expanding its offerings. Software stocks were also very strong, while the semiconductors lagged within the sector. I thought it interesting, borrowing from the Communications Services sector that the Dow Jones U.S. Internet Index closed -0.86% despite a key component, Netflix (NFLX) running 3.7% for the day.
I also think it key to point out that while on Monday, with all of the headline level indices closing at the top of their daily range, that the Nasdaq Composite nearly closed unchanged, and the Nasdaq 100 (which excludes financial stocks) actually did close green.
What to watch now will be the action in between the 50-day and 200-day simple moving averages. That is where the Nasdaq Composite, Nasdaq 100, S&P 500, and Dow Jones Industrials all now live. Gravitational pull? It's a definite maybe.
Among narrower (Well the DJIA is pretty narrow), or should I say, less closely followed, but still important indices, the Dow Jones Transports remain well above both the 50-day and 200-day SMAs despite the Monday drubbing, the Russell 2000 (small-caps) appear ready for a test at the 200-day line very soon, and the S&P 400 (mid-caps) closed right on that line.
There is only one fact that truly needs to be understood. The virus is still in charge until it is not. The mantle of leadership is and should be a heavy responsibility to bear. The public has placed trust. One needs to understand the demands of both personal and professional honor prior to meeting this challenge.
Economic activity is truly at a point of dangerously slowing down. Vee? Super Vee? Reverse square root symbol. The blame game is one being intentionally played on both sides of the aisle. Delinquencies are going to rise through October as will unemployment. Unless there is an honest compromise at the legislative level. They make a mockery of my flag. A flag I have worn on my shoulders all my life. Both on fabric and skin. Should businesses and jobs that have hung in there all this time start disappearing again, that will be on Congress and Congress alone. Do your job.
Replace them all. We can.
Follow the Science?
How did I catch the Covid virus back in March? I have no idea. Actually, I have a few ideas, but I don't really know. I do know that it takes more than six months to recover, so don't catch this darned virus. Mask up, and stay distanced.
Apparently, those at the U.S. Centers for Disease Control and Prevention (CDC) don't really know all that much either. New guidelines? New guidelines removed. Close contact? Transmission through the air. Six feet? Maybe twenty-six feet. Nobody seems to know how or why this virus chooses certain victims or why there is an incredible variance in severity of symptoms, or why some recover in less than a month, while others deal with a post-Covid syndrome that lasts at least as long as the virus has now existed in this country.
Why do I mention this? Because we are repeatedly told to follow the science. Well, the science has not been consistent. In fact, in the beginning, the scientists told the public not to wear masks. Science on this matter has changed and / or reversed almost as quickly as has the news cycle. Not their fault. Not at all. This is a "novel" coronavirus. That said, there has not been a straight path to follow.
Powell and Mnuchin
Fed Chair Jerome Powell and Treasury Secretary Steven Mnuchin will testify before the House Financial Services Committee this morning. Both men will dance before the Senate Banking Committee again on Thursday. Powell testifies alone on Wednesday in front of a completely different House panel that oversees the federal response to the pandemic. In other words, kids, the algorithms that control price discovery could potentially run wild over the next three trading sessions.
Powell, on Monday, posted his prepared remarks for Tuesday. Two quotes shout volumes. First, "The path forward will depend on keeping the virus under control, and on policy actions taken at all levels of government." This is pretty much what we have been saying here in this column day after day. Second, on the Fed, Powell states that the central bank will "do what we can, for as long as it takes, to ensure that the recovery will be as strong as possible, and to limit lasting damage to the economy."
Tuesday is Tesla's (TSLA) much anticipated "Battery Day." What "incredible" announcements will be made? The market is looking for breakthrough technology, perhaps a one million mile battery. A battery that would require huge initial investment upfront, then expand margin later? That's what I look for. That's good for jobs right now.
The stock? TSLA ran ahead of the broader market on Monday, but is trading lower overnight.
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last -1.2% y/y.
10:00 - Existing Home Sales (Aug): Expecting 6M, Last 5.86M SAAR.
10:00 - Richmond Fed Manufacturing Index (Sept): Expecting 11, Last 18.
16:30 - API Oil Inventories (Weekly): Last -9.517M.
The Fed & The Treasury (All Times Eastern)
10:00 - Speaker: Chicago Fed Pres. Charles Evans.
10:30 - Speaker: Federal Reserve Chair Jerome Powell.
10:30 - Speaker: Treasury Department Sec. Steven Mnuchin.
12:00 - Speaker: Richmond Fed Pres.Thomas Barkin.
15:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.