'I Don't Know'
"Everyone goes through changes
Looking to find the truth
Don't look to me for answers
Don't ask me, I don't know"
...... performed by Ozzy Osbourne, written by Brian Kelly McKnight (1980)
The Walk
As I make my way along the wooded trail, I spot two rabbits up ahead. As I near, the pair of hare (like what I did there?) become tense. I try to walk well around them to avoid steering them out any more than I already have. The one rabbit bolts deep into the forest. The other tries to hunker down deep into her shallow hole, motionless, hoping that I (the much larger animal perceived as a potential predator) fail to see her. Obviously, she is either engaged in the act of giving birth or protecting the newly born. She is willing to make a stand. Right here. Right now. Her mate? He seems far less invested in the safety of either his mate or whatever is beneath her in that rabbit hole.
Domestic equity markets rallied on Friday, at least at the headline level. That rally increased in intensity over the final two hours of the regular trading session. It was learned that congressional leaders would not head for home and would meet on Saturday. That was enough, at least in the moment.
Coming out of the weekend, we find a market confused. As late night melts into early morning, foreign equities look to be quite mixed in mid-Monday trade. U.S. equity index futures seem to be mixed as well, with investors more likely to bet on tech than anything else. This gap in allocated investment is a furthering of what happened here, albeit in slow motion, last week.
Big Tech led the way, and that was as much an Apple (AAPL) story as anything else. While semiconductor and software stocks truly had great weeks, it was the computer hardware (consumer electronics) industry that led the hottest sector, both for the day and for the week.
The Day
In all honesty, Friday was uglier under the surface than appears to the eye at first glance. Is this significant? Need I quote Ozzy? Is this when the less-committed rabbit looks to find a new path? Even a new partner?
The S&P 500 showed a 0.8% daily increase on Friday and a 1.7% rise for the week. New York Stock Exchange trading volume on Friday was notably higher than it had been on Thursday. Trading volume across S&P 500 member companies alone not only topped its own 50-day simple moving average (SMA) for the first time since June 30, but that volume also easily topped the June 30 total.
End of month? Sure. But... and this is key... June 30 was end of quarter and end of half as well as end of month. June 30 should be a much bigger deal than July 31, even if July 31 had weekly options expirations included in the volume-creation recipe.
Funny thing, but losers beat winners at the Big Board by almost 500 issues while declining volume beat advancing volume almost two to one. This occurred even with some very strong headline earnings propping up equities as well as what had looked like constructive rumors working their way through Washington.
Looks were just as deceiving up in midtown, even if just a tad less perceptible. The Nasdaq Composite paced the world of broad, large-cap equity indices with a 1.5% run on Friday and a 3.7% weekly performance. However, the interesting thing about the Nasdaq might be that away from the stocks of those names that can do well in any environment, breadth was also negative. Losers at the market site beat winners 2 to 1, while declining volume just barely edged advancing volume. That's significant, especially when investors give pause and think about how centralized that advancing volume was. Not just Apple, but Amazon (AMZN) , Facebook (FB) , Alphabet (GOOGL) , Microsoft (MSFT) , Advanced Micro Devices (AMD) and Nvidia (NVDA) were all hot traders for the week and for the day. Among those, only GOOGL was a drag on the aggregate.
Kicking Tires
Be this the furthest thing from strenuous analysis, I offer you this: There are enough managers out there who are ready to take to the woods with profits realized. Distribution is not at the point where we call a change in trend but is clearly elevated. Just what are managers thinking right now?
Some are in camp with that male rabbit, bent on personal survival. There are also enough managers out there thinking like that female rabbit. Terrified? Maybe, but committed to sustaining what has been created by staying the course, even if it means short-term danger. Put these managers together and we are left with Ozzy Osbourne. Don't ask me, I don't know.
But, Sarge, Help Us
You did ask me. That does not mean that I do know. It does mean that I will tell you what I think because I always do.
Will I be wrong? At times. The trick, which is really a poor choice of verbiage, in trading any environment is more about knowing how to defend oneself than it is about winning percentage. I have no idea what my winning percentage is, nor do I care. That only mattered back when I worked for other people. Some of the best traders I have ever known had truly awful winning percentages. The key, or my key, to making a living is knowing how to manage net basis through the use of hedging strategies that erode rather than increase average net entry price and to never surrender. My panic points are anything but. Those are scheduled points of exit designed to minimize mistakes at points where successful price targets overwhelm them in dollar amounts. Your P/L (profit/loss) at the bottom is the only score that counts.
Bragging? That's not the intent. Several decades of being knocked down and getting back up? More like it. Maybe, just maybe, I can smooth out someone else's learning curve. Understand that no matter the situation, almost all the time there are steps that can be taken to increase potential for profitability or decrease inherent danger. Understand that it's more than OK to underperform to the upside as long as two conditions are met. One, you still need to put food on the table. Two, the strategies pursued that create upside underperformance need to also provide for less volatility when markets move south.
Remember the rules: Understand. Identify. Adapt. Overcome. Maintain. Get stuck anywhere along that path to 'Maintain"? Then take your time. Making money is never a reason to rush decision making when managing for you. It's far different when working for someone else or performing a service for a client. That said, when on your own, there is no net below. One must kill to eat. One must either hunt or gather to kill. Everyone needs to know how to hunt and gather.
Dog Days
August. Typically one of the slowest months of our trading year. Probably not this year. This is 2020, and yes, this time it is different. Second-quarter earnings have been much better than anticipated, all while still looking rather awful. About 63% of the S&P 500 has now reported. According to Factset, 84% have beaten consensus for earnings while 69% have even beaten expectations for revenue.
Wall Street in general has increased forward-looking estimates. Still, with FactSet, the blended mix of results and expectations for the S&P for the second quarter is now -35.7% year over year, up from -42.4% just one week ago. The community of analysts has broadly improved its views for full-year 2020 as well as for 2021. While stocks were on the rise last week, the 12-month forward-looking price-to-earnings (P/E) ratio for the S&P 500 actually declined from 22.2 to 22.0.
Cheap? No. The S&P 500 has traded at an average 17 times over the past five years. The new-ish optimism might be tested, and more quickly than most of us would like.
The public health crisis is not close to being under control. Dr. Deborah Birx, coordinator of the White House Coronavirus Task Force, warned over the weekend. that the virus is now "extraordinarily widespread." While negotiations will drag on this week, there has not yet been anything close to a meeting of the minds in Washington, D.C. The spread of this disease and the policy response is what matters to financial markets.
On the vaccine front, we all await results later this year from front-runners Moderna (MRNA) , AstraZeneca (AZN) and Pfizer (PFE) . The best we can hope is that one or more of these will show significant efficacy in preventing this infection, and that front-line health care workers as well as first responders can be inoculated as soon as late this year.
The rest of us will need to wait, but with every single vaccination the chances of increased infections rates decline. On that note, Russian health authorities appear ready to start with mass vaccinations as soon as this October. Have they cut corners? Again. Ozzy Osbourne. I do think, however, that if that vaccine is engineered in a similar way to one or more of ours that we will have a very large clinical trial to watch in real time.
Economics (All Times Eastern)
09:45 - Markit Manufacturing PMI (July-F): Flashed 51.3.
10:00 - Construction Spending (June): Expecting 1.1% m/m, Last -2.1% m/m.
10:00 - ISM Manufacturing Index (July): Expecting 53.6, Last 52.6.
The Fed (All Times Eastern)
No scheduled public appearances.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (CLX) (1.85), (CMS) (.43), (MPC) (-1.76), (MCK) (2.36), (TSN) (.90)
After the Close: (AIG) (.53), (EMN) (1.04), (KLAC) (2.43), (RNG) (.20), (TTWO) (1.60)
