37 Minutes
That's how long I sat at my desk this morning before I typed anything. Equity index futures markets are trading decisively lower, but do seem to have rallied well off of the overnight lows while I did nothing. Maybe I shouldn't move at all.
No, I don't believe in superstition. Not much. I played ice hockey from high school through college and then in men's recreational leagues through age 38. More dislocated shoulders and broken ribs than you would believe if I told you. Team won? Scored a goal? Decent plus/minus? Just played relatively well? I wore the same tee shirt under my pads for almost every game played over approximately 23 years until it literally fell apart. Only changed shirts if I played poorly, and then it would not take much to change it back. Superstition? Don't believe in it.
Fact is that there are a bevy of reasons for this week's negative market behavior. I wrote to you on Thursday that traders would likely try to rally the markets ahead of the big tech (and tech-related) earnings releases. They did try, and for a while there all was well, especially after President Trump mentioned the size of a potential stimulus package that would magically materialize once he is re-elected next week. Keyword-reading algorithms picked up on this and markets accelerated to the upside.
Then something ugly happened that gave me the "queezies" going into Thursday night's Super Bowl of earnings. The very same algorithms (an assumption on my part, but it's not like I haven't been around the block a couple times) that ramped the indices higher turned around and took profits, picking off traders with slightly slower (or maybe outdated) algorithmic models.
The selling continued and became severe over the final 10 to 15 minutes of the regular session. It was then that I realized that earnings beats might not be good enough. "They" had schooled those less-sophisticated humans once again. As for those earnings reports? They were mostly very good. The guidance? Not really bad at all, unless not offered, as in the case of Apple (AAPL) . Just not overwhelmingly good on every level. Sold.
Of Course
Of course, the action that I just described is what occurs at a very granular level that likely goes unnoticed by investors who just might do something else occupationally. For those who spend their productive hours splitting atoms or lugging around 80-pound bags of cement, what you saw at day's end was a market that displayed some decent strength across most levels. Nine of 11 sectors traded higher. The Dow Industrials were a little sluggish, but everything else looked pretty good, from smaller to mid-caps, to the Transports, to the Nasdaq indices.
Breadth was excellent, but.... and this is the giveaway.. but aggregate trading volume tailed off significantly from Wednesday's terrific equity beatdown to Thursday's "not quite all the way back" day. Not quite all the way back to Wednesday's highs, not quite all the way back to the 50-day simple moving average (SMA), and miles away from where we went out last Friday. Ahh, the good old days. Back when the spread of this awful virus was worsening, but not quite like this, back when we could at least pretend that our elected officials might compromise for the good of the citizenry, and back when electoral risk seemed just plain less risky (or maybe just more distant).
A good day, but not quite all the way back. Kind of a microcosm of what we saw in third-quarter GDP. A very good quarter, but not quite all the way back.
Now, what does the spread of this awful virus do to what was supposed to be continued strength through the fourth quarter, in terms of both corporate performance and overall economic activity?
On GDP
Hey, let's not knock the third quarter. The economy is light years ahead of what most of us even imagined possible just a few months ago. What is at stake is the momentum, which has been excellent. While too many remain unemployed, and there is undoubtedly a broad uncertainty if not despair spreading across households and businesses that just cannot do "work from home" and still provide, regional economies have reopened quickly enough and fully enough to allow for a significant quarterly rebound.
Bright spots were seen in personal consumption for both durable goods and services, as well as in gross private domestic investment in new equipment and across the residential space. Then again, folks in trouble, and even businesses in trouble, were lent a helping hand through rapid and effective policy implementation. That was "yesterday's roast beef."
The tremendous third-quarter economic performance leaves the U.S. economy a rough 3.5% smaller than it was pre-pandemic. To get not just back to where the economy was, but back on (Trump years) trend, the fourth quarter will need to show annualized quarter-over-quarter growth of 4.5%, and then repeat that trick consistently for maybe eight or nine quarters in a row. What do you think? Yeah, me neither, with or without either of our two leading presidential candidates or no matter how the legislature lines up. There has been a (semi) permanent mark made on U.S. and global economies. Entire occupations have evolved, there will be no return to an old normal. Oh, FYI... the government in France just reduced that nation's estimate for full-year 2020 GDP here on Friday morning.
Know the difference
Zero Dark Thirty Mindset. Game plan. What do I think as we head into this Friday before Election Day trading session as Europe partially shuts down again, and as the virus spreads rapidly across the U.S.? I think the U.S. dollar once again threatens to become too strong. This will make it hard for West Texas Intermediate (WTI) crude to hold onto that $36 handle. The stars are aligned for another risk-off day to end a risk-off week.
As an equity trader, I head into this day with two themes in my mind. One, respect your panic points. Never allow a loss of greater than 8% on any position unless it happens overnight on gap lower. You can't help those. Usually, though, traders move panic points higher as stocks move higher, sort of a mental trailing stop. This is how professionals minimize losses, or even book profits when something they own takes a dive.
Two, be afraid to purchase new names where the trader has no prior history. I mean, you do what you want to. This is what works for me. That does not mean that I will be afraid to deploy any capital at all. I will feel free to add... to investments, but not to trades. Your job, if you play this sport for a living, is to know the difference.
What About Those Big Tech Names?
1) Twitter (TWTR) is lower after missing user growth expectations. I would not buy these shares, not just based on this metric, but based upon what is the expected electoral outcome next week. Does anyone really enjoy Twitter? Will any casual user even log on, if say on Jan. 20 someone new takes the oath of office? If I owned this one, I would sell it ahead of the election.
2) Facebook (FB) appears to have navigated the ad boycott (oh, yeah, forgot about that) quite well; however, user growth does appear to be wavering in North America. Hard pass on FB today.
3) Alphabet (GOOGL) crushed it, returning to revenue growth for the quarter reported. I should be long this name. I have not been. Today is not the day to chase the one of these names swimming upstream. Perhaps on some other, sunnier day.
4) Apple will show weakness today as iPhone sales missed estimates and demand slowed severely in the China region. No forecast is either a bad omen, or a perfect set-up. 5G-inspired Super Cycle? Can't count it out. Neither will the market. I will almost certainly add to this position this afternoon.
5) My favorite, Amazon (AMZN) , put together a simply fabulous quarter. The stock is trading lower for two reasons. Covid-related expenses are guided much higher than they were six months ago. This could pressure margins, despite robust (but maybe below whisper numbers) revenue guidance for the fourth quarter. I would like to add to his name, but not here. The stock still trades too far above net basis for me, and I am not sure how much capital I want to allocate to any one name. I am not even close to thinking about making a sale.
Economics (All Times Eastern)
08:30 - Personal Income (Sep): Expecting 0.4% m/m, Last -2.7% m/m.
08:30 - Consumer Spending (Sep): Expecting 1.0% m/m, Last 1.0% m/m.
08:30 - PCE Price Index (Sep): Expecting 1.5% y/y, Last 1.4% y/y.
08:30 - Core PCE Price Index (Sep): Expecting 1.7% y/y, Last 1.6% y/y.
08:30 - Employment Cost index (Q3): Expecting 0.6% q.q, Last 0.5% q/q.
09:45 - Chicago PMI (Oct): Expecting 58.7, Last 62.4.
10:00 - U of M Consumer Sentiment (Oct-F): Flashed 81.2.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 211.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (ABBV) (2.77), (CVX) (-.24), (CL) (.70), (XOM) (-.24), (HON) (1.49), (LHX) (2.74)
After the Close: (BCC) (1.69)
