"The Moment we believe that success is determined by an ingrained level of ability as opposed to resilience and hard work, we will be brittle in the face of adversity"
-- Joshua Waitzkin
... Let's get down to business. In the face of adversity. Wednesday was downright ugly for equity markets. Through three days, this week is already downright ugly.
Third-quarter earnings season is for the most part, going quite well. A higher percentage of large-caps are beating expectations than investors have become accustomed to, and the size of those beats are larger than investors are used to. The third quarter is obviously not our problem. The fourth quarter? 2021? Life as we know it? Now, these are different questions.
We have many hurdles, or obstacles in our path. Corporate execution, at the moment, is not one of them.
Every business needs a market. Every market balances demand versus supply. I speak not of inventories, but refer to supplies of such intangibles as time, effort, and of course human as well as non-human resources. What plagues the marketplace, is a nasty mix of fear and uncertainty.
Well placed fear? Possibly. Times are always uncertain. That much we understand. Is it different this time? It always is. I have written many times that the virus is still in charge, and will be until it is not. I nailed that one. I also wrote just a few weeks ago, confirming for myself that technically, the equity market's uptrend was in good shape. Hmm. Hammer meets thumb.
Appears to me that some grit and determination will serve at least this investor/trader/economist better than any ingrained level of ability. Joshua Waitzkin is a former chess champion, for those unaware. The quote above is one I fall back on, when every once in a while I need a good kick in the tail. Remember, everybody at this level is smart. Hard work has always, and will always be what differentiates. We are all capable of outworking "the other guy."
The Ugly Stick
You may or may not know the numbers. Equity markets opened lower, creating a gap that could work in their short-term favor. We'll see. The Dow Jones Industrial Average gave up 3.43%, a fourth consecutive red candle for the blue-chip index. Readers can now see that index closing at not only the lows of the session, but giving up everything gained since very early August.
Both the S&P 500 (-3.53%), and the Nasdaq Composite (-3.73%) underperformed for the day, however, both (especially the Nasdaq Composite) are in better shape, technically at this moment in time than are those Industrials. Still all three major large-cap indices have surrendered their respective 50-day simple moving averages with only a minor skirmish, and the Dow in particular appears likely to test its own 200-day SMA.
Small-cap to mid-cap equities were also severely beaten, but less so than broader markets were on Wednesday. More specialized large-cap indices, such as the Dow Transports and the Nasdaq 100, were hit even harder than were the headline indices. What does that suggest to me?
For one, fourth-quarter estimates for almost all publicly traded corporations will have to be reworked should regional U.S. economies reach a point where partial shutdowns become necessary. Second, there has to be an urgency in this regard concerning multi-nationals now that these economic shutdowns are rapidly becoming reality across Europe. This creates a demand problem. Could create a currency exchange rate problem. As supply chains run more through Asia than through Europe, the supply side, at least for now, could largely remain intact.
This means that the sneakers, mobile devices and widgets (yes, widgets) will probably be manufactured, but transporting them could be a costly issue, and selling as many of them as projected will be more difficult.
The virus? Very. At this moment, I speak only of financial markets. France President Emmanuel Macron addressed that nation on Wednesday. France has become a recent epicenter of viral spread, and now has the fifth most confirmed cases of Covid-19 on the planet, behind the U.S., India, Brazil and Russia. France will shut non-essential retailers, as well as all restaurants and bars starting this Friday with the intent to keep these businesses closed through the month of November. Germany will go into a semi-similar lockdown that starts on Monday.
The fear is spreading in North America. That these markets are closing and that such measures will come under consideration in the U.S. regionally as a vast majority of U.S. states are currently seeing unacceptable spread ahead of the winter season. So, how frightening is this to the investor class? We have two ways to measure fear statistically. We have the Volatility Index, known as the VIX.
The VIX closed at its highest level since mid-June on Wednesday. We also have a number of put/call ratios that we look at. Readers will note that the CBOE Options Total Put/Call Ratio reached 1.11 on Wednesday. This was the second time this week that this ratio, which includes both indices and equities options, hit that spot, but note that this spot is the highest that this ratio has been since May.
We are seeing a profound technical/statistical expression of fear. This has manifested into overt risk-off behavior, as losers beat winners at the New York Stock Exchange by almost 11 to 1, and at the Nasdaq Market Site by more than 6 to 1. This came on greatly increased aggregate trading volume at both exchanges.
In plain speak, they ran for the exits on Wednesday, and by "they" I mean the professionals. Wednesday was a day of, and this week so far has been a period of, intense institutional distribution.
Can Markets Rebound On Thursday?
Oh, they can try. In fact, I think it's likely that there is an attempt.
I think that the lack of fiscal stimulus is at least short-term priced out at this point. Obviously if in a few months, Congress still can not get their act together, then that would create another pain trade.
There is at this point, however, increasing uncertainty over next week's national election. Some polls show a narrowing of former Vice President Biden's lead both nationally and across the "swing" states over the past week as news stories (which I will not get into in this column) have painted the challenger in a negative light. This may or may not be compounded by the fact that the incumbent, perhaps motivated by being behind, is clearly outworking the apparent leader despite also being far behind as far as fund raising is concerned.
Did the market fear the idea of a "blue" sweep? Some aspects for sure, but short-term there were expectations of an even larger fiscal package early on in 2021. It is also quite obvious that the marketplace does not fear a split legislature. What markets very likely do fear is an election week instead of an election day, or an election so close where neither side concedes gracefully. Now, we're talking trouble. Food for thought.
Has anyone considered the possibility of President Trump's re-election, but a blue sweep of only the House and the Senate? This, though unlikely, would be the path toward the most aggressive fiscal stimulus package possible. Deficit spending has been the one thing that both this president and his opponents have always agreed upon.
That is all conjecture. For today.
The markets will try to rally today ahead of this afternoon's Super Bowl of tech or tech related earnings. After the closing bell, we'll hear from Apple (AAPL) , but with the iPhone 12 release pushed into the current quarter. We'll hear from Facebook (FB) and Alphabet (GOOGL) , currently under pressure from antitrust authorities. Then, we hear from the granddaddy of them all -- Amazon (AMZN) .
Of course this all comes after this morning's Q3 GDP report. Good luck.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 787K.
08:30 - Continuing Jobless Claims (Weekly): Last 8.373M.
08:30 - GDP Growth (Q3-adv): Expecting +34.5% q/q, Last -31.4% q/q SAAR.
10:00 - Pending Home Sales (Sep): Expecting 3.7% m/m, Last 8.8% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +49B cf.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
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