"And I Ran
I Ran So Far Away
I Just Ran
I Ran All Night And Day
I Couldn't Get Away"
-- Flock of Seagulls (1982, Score/Maudsley/Score/Reynolds)
Did You Run?
So many did. Hard to believe that the same action that just broadly pummeled equity markets on Thursday actually tried to put together a mini-rally over the final 25 minutes or so of the regular session. Remember that euphoric, if now seemingly ridiculous rally that we all enjoyed on Wednesday, and I tried to describe in detail just 24 hours ago? At that point, the macro did not matter, or at least not overwhelmingly so. What did matter, at least to keyword-reading, point-of-execution algorithms, was the letter sent from the Centers for Disease Control and Prevention (CDC) to the state governors to at least be prepared to warehouse a vaccine in the fight against Covid-19 by Nov. 1.
What changed? So little, yet so much.
As green as Wednesday was, Thursday was red, only redder, far redder. Suddenly, Initial Jobless Claims that only seemed to improve because of a change made to the seasonal adjustment did matter. In fact, the number grew slightly if backed out of the adjustment altogether. Are seasonal adjustments even relevant during a pandemic? Of course not. How about we just get rid of them forever, and we just understand that not all months or seasons are equal for all regions. We are adult enough to do that. Right?
The real kick in the tail for labor markets was the increase in Pandemic Unemployment Assistance reported by those who are not eligible for outright unemployment benefits, such as freelancers, the self-employed and gig workers. All told, the number of folks in need of government help actually increased. That hurt. The nasty trade balance might not matter much until the pandemic wanes, and the devalued U.S. dollar could help there, but statistically that July print will impact third-quarter GDP. There was certainly an algorithmic response. Not to mention broad portfolio distribution. Very broad.
The Ugly Stick
Once I had to crush a python's skull with an axe handle in defense of another human being. That's what I think of when I think of "the ugly stick." I had not seen it in a while. Hidden in its closet. Dark. Quiet.
Equity markets found one reason or another to rally almost every day. Some of the warning signs were there. The VIX started to rally alongside stocks, which makes little sense. Trading volumes, at least in options markets, started to price in uncertainty regarding potential electoral results, or worse, a contested outcome at the polls in November. The Treasury yield curve, after appearing to have been released from where it had been, once again started to contract. "They" (hate those guys) first took profits where profits were the largest. Then they hit everything that moved.
Losers beat winners at 11 Wall Street by more than 4 to 1. Declining volume beat advancing volume by almost 3 to 1. New highs did beat new lows at the New York Stock Exchange. Guess that happens even on a down day when that down day begins at a mountain top, which is amazing because up at Times Square, somehow new lows outnumbered new highs. Don't know how "they" managed that one. Back to the Nasdaq Market Site, virtually.. after first "virtually' paying our respects to Father Duffy. Losers beat winners uptown again by more than 4 to 1, while advancing volume beat declining volume like a drum (3.4 to 1).
Perhaps the most important factoid taken away from Thursday's action was the trading volume. Already elevated day over day for a number of sessions going in the other direction, trading volume increased at the NYSE by 13% Thursday over Wednesday, while volume increased 10.7% day over day at the Nasdaq. So, the drubbing is meaningful.
Now, we have questions. I did warn readers in Thursday morning's Market Recon that the Nasdaq Composite could suffer a 10.4% correction that day and still not penetrate its own 50-day simple moving average. Well, the Composite did give up 4.96% (the Nasdaq 100 surrendered 5.23%). At closing prices, the Nasdaq Composite could still give up another 5.4%, and successfully defend the 50-day line. Does that mean even after a day where (using Select Sector SPDR ETFs as proxies) the Information Technology sector took a 5.7% beating that the Nasdaq is still broadly overpriced?
Could be. I would not bet the farm against tech, though, and I am not. I was active at the end of the regular session on Thursday. Not that I tried to call a bottom or anything, but as readers well know, I move in increments. Baby steps. Personally, I initiated long positions in Apple (AAPL) , which was down 8%, and in Tesla (TSLA) , which was down 9%. I had been short that name earlier this week (covering way too early) and have now flipped. I added to my Amazon (AMZN) long, down almost 5%, even though doing so increased my net basis. I also tried to add to my Nvidia (NVDA) long, down 9%, but swung and missed like an amateur. I am fine if these names come in further. The idea is to build an investment. Should they suddenly revert to trend and take off from here, all I have are trades.
The thing investors want to know is really so simple, yet so difficult to answer. Ahead of this Jobs Day, which ironically enough comes ahead of Labor Day, is this going to be the second day of what has become a series of two- to three-day selling events? Is this the start of "a" rotation, or is this the start of "THE" rotation? Hmm.
The answers are complex. Are newer traders yet rattled? Where are those who bought shares on margin forced out? We really don't know yet. There may have been some of that sort of impact on Thursday, but that was gravy, maybe some potatoes. There's some meat on the plate, too.
There is no doubt in my mind that there was at least an algorithmic overreaction to comments made by Dr. Anthony Fauci when he stated on CNN, "It is conceivable that you could have it (a vaccine) by October, though I don't think that that's likely." Fauci seemed to think November of December more likely than the date published in the CDC letter. Then again, I think that letter, which was really part of setting up a sufficient infrastructure for storage and distribution, was seen as more than it was.
On that note, Pfizer (PFE) announced on Thursday that final-phase clinical testing for the company's first Covid-19 vaccine candidate, in collaboration with BioNTech (BNTX) , could be completed as soon as October. Pfizer CEO Albert Bourla said on Thursday that should the results look positive the company would seek immediate regulatory approval in the U.S. and around the world.
Does this potentially signal the beginning of the end of the "work remotely" trade? Not in the least. Large corporations have noticed both a reduced need for a costly physical footprint as well as an increase in both employee productivity as well as availability. This trade does not fade completely. However, it does mean that market behavior, be the trend up or down, will need to broaden as human interaction at some point begins a process of normalization.
The greatest threat to the economy and the marketplace is going to be the risk around the success of these initial vaccine candidates and the threat of a contested electoral outcome. That's still out a couple months. Congress could help now, but appears to think it politically advantageous to disagree. For the three-day weekend, it's about the August employment surveys. Risk on? Risk off? Rotation.
August Employment Situation (08:30 ET)
Non-Farm Payrolls: Last 1.763M.
Unemployment Rate: Last 10.2%.
Underemployment Rate: Last 16.5%.
Participation Rate: Last 61.4%.
Average Hourly Earnings: Last +4.8% y/y.
Average Weekly Hours: Last 34.5.
Other Economics (All Times Eastern)
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 180.
The Fed (All Times Eastern)
No Public Appearances Scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
There are no significant quarterly earnings results scheduled.