As If...
All alone. Walking along a quiet beach. Admiring the beauty of the scene. So different from reality. Who among us does not love someone, or something? The sun has already started to rise. ( I am in my office.) Just a hint of orange glimmering off of the deep sea shade of blackish blue. The air? Pungent, the scent of salt clearing out the senses. The birds were busy doing their own thing. What do birds do? They do bird stuff.
The attention then drew to the waves. The walker had noticed that on the days when the waves were the most interesting, they crested at higher levels. They seemed more beautiful. They also seemed to pull way back into the ocean before cresting once again. Other days, the ocean appeared still, sometimes for weeks at a time. No ebb. No flow.
This is where we leave the wondrous picture of a quiet shoreline, and head in our minds into the concrete jungle of New York City. Not this New York City. The one we remember. The home of hustle and bustle. The financial markets. Sometimes beautiful. Sometimes violent. Ebb and flow. Undertow? Riptide? There will always be risk. So it is that we shall begin.
Highly Organized
There is no doubt in my mind that at this point, at least some institutional portfolio managers have moved toward greater cash creation over the past trading session. What I see as interesting in Wednesday's price action is this. The S&P 500 not only gave up 1.75%, but did so on significantly increased trading volume in aggregate across the constituent components of the index. We have already warned of heightened volatility risk. Is this the sell signal? Well, it is what we look for. Let's move on.
What weighed so heavily upon our broadest of large-cap indices? Energy, Financials, Industrials... in that order. The unloved. In other words, the three sectors that led the way down for the day are also the three worst performers for the year at this point. Oh, and all three are highly reliant upon economic growth. Retailers also traded deep into the hole, as did the small-caps. Hmm.
Now, it's not as if the Nasdaq Composite completely escaped the Wednesday carnage. The Composite surrendered 1.55%, while the Nasdaq 100 gave up "just" 1.23%. Back to trading volume... the number of shares changing hands increased greatly for New York Stock Exchange-listed equities, up 17% from Tuesday's aggregation. This, while... wait for it... trading volume for Nasdaq-listed equities actually declined (still elevated relative to recent trends) on Wednesday from Tuesday.
This is important. Why? Breadth was overwhelmingly negative up in midtown as well as downtown. That's true. What I see is an S&P 500 that gave up the 20-day simple moving average on Wednesday, led lower by those names that have underperformed all year.
Perhaps there is a signal there that these industry groups had gone as far as they can on policy. A ceiling on what certain groups can do without an underlying economy. Then, we'll find a floor eventually on how far these same groups can fall given the support of said policy initiatives. Makes sense.
For the Nasdaq, the action does not confirm for me a sell signal, even though this is where the profits are for portfolio managers. That is (might be) interesting. Biotechs and Pharma easily out-performed broader markets on Wednesday, while both software and semiconductor names, as groups, at least performed with the market.
Of course, this could all change in the blink of an eye, or on one headline, but the leaders for the most part are still leading, and there is clearly less aggression on behalf of professionals to take these profits where they are than there is to rid their books of what has not been working of late.
No, this is not continued rotation, at least not in aggregate. These managers are not stepping up to buy what has worked, but they are not yet screaming for the exits. For the old economy, the rest of this week is crucial. For the leaders, they could still end up following. Does that seem right? I have doubts. Maybe for these groups, there will still be a narrowing toward higher quality, but for those at that elite level, perhaps this is ebb and flow. Serious ebb and flow. Riptide.
Fault Lines
The financial media was quick to lay blame for Wednesday's version of this week's selloff on Fed Chair Jerome Powell, who really only spoke the truth as he sees it. Was Powell supposed to sound optimistic, or cautious and pragmatic? I like pragmatic.
Of course, Powell is concerned about lasting damage to national productivity. Of course an uncertain pathway forward is still "subject to significant downside risk." We all see this, unless economic activity can return in earnest, and the only way to do that is to make the world safe for folks, and folks of all stripes to resume more normal social behaviors. How to do that ahead of a successful vaccine for the virus that causes Covid-19? Nobody knows. Scary? Yes.
A Fed survey shows that 40% of households making less than $40,000 in income have lost a job during this crisis. Powell acknowledges this, and appears ready to do what the Fed can to get or keep the ball rolling. Powell understands that additional policy measures will be required above and beyond what the central bank and Treasury Department have already done. Really not much of a stretch given that the House of Representatives appears ready to vote on a large fiscal package bill by this Friday. Doing more has risks. Doing less has more.
Though every financial website posted Jerome Powell's picture on their main page, there was enough negativity passed around in financial circles, and by well known minds that Wall Streeters actually listen to. First, Stanley Druckenmiller, who spoke on Tuesday evening, said this: "The risk-reward for equities is maybe as bad as I've seen it in my career." Druckenmiller may not like equities here, but he did make positive mention of Amazon (AMZN) , which maybe I mention only because I too like that name.
Moving into Wednesday morning, David Tepper appeared on CNBC, and did not exactly sound like a bucket of good cheer. Tepper referred to this equity market as "one of the most overvalued" that he's seen. Tepper did allow that perhaps the lows had been put in on March 23, given the aggressive policy response, but that the presidential election, potential for a changed environment for corporate tax rates and growing tension between the U.S. and China could all become market considerations above and beyond dealing with the pandemic.
Oh, and about the U.S. and China... nothing to see there. Just accusations over suspected hacking of researchers working on vaccines and treatments for the coronavirus, and threats of decreasing cross-border investment. Otherwise, quiet. Like the beach. At least everyone who did speak on interest rates appeared repulsed by the idea of taking nominal short-term rates into negative territory. We have that to hang our hats on.
What Matters
By all accounts, the Trump administration appears set to name former GlaxoSmithKline (GSK) executive Moncef Slaoui to lead what has become known as "Operation Warp Speed." This program, which is already up and running, is operating semi-independently from the coronavirus task force led by Vice President Pence. We are told that the administration's goal of having 300 million doses of an effective vaccine distributed to Americans by year's end is unrealistic. At least, that is what the scientists who do this sort of thing tend to agree on.
That does not mean that the goals should not be set aggressively. Should the administration wait patiently? Any of you ever been a 17-year-old kid trying to do things you never thought you could do before? Everybody thinks they were the tough guy in high school. One day you get off of a bus, and everyone around you was the tough guy in high school... and they're tougher than you are, unless someone gets you fired up and switches on the "I can, so therefore I will" beast that lives inside each and every one of us. You really can't, unless you think you can. Always helps to have someone pressuring you to exceed your abilities. Always.
So, a vaccine czar. I don't know that much about Slaoui, but having an organizer, or an aggregator does seem like an excellent idea. As Dr. Anthony Fauci has said, this is about shots on goal. As someone who was once the worst college hockey player in the country, I really like that thought. It actually comforts me. I like the idea of Moderna (MRNA) , Johnson & Johnson (JNJ) , Pfizer (PFE) , Novavax (NVAX) , Inovio (INO) , Sanofi (SNY) and others all shooting on one goalie simultaneously. Someone is going to tip the biscuit through the five-hole.
By the way, Sanofi CEO Paul Hudson has said that the U.S. will get first dibs on accessing that firm's vaccine candidate as the U.S. had helped with funding the effort. This comment apparently has met with some dissatisfaction from inside the French government. More to follow on that story should Sanofi, who is collaborating with GlaxoSmithKline and Translate Bio (TBIO) on the project, actually place that first successful shot in the basket.
This Week's Trading Notes
While that glorious day still seems too far in the future to get excited about, and that means that economic activity just cannot move toward what the new normal will look like until then, we will have to deal with the growing legions of the unemployed... much sooner, as in this morning. Another three to four million jobs lost, or at least successful filings, would not surprise a single U.S. economist.
I did make that move on Walmart (WMT) late in the Wednesday session. Just 1/8 of a position, as I had indicated. Unhedged due to small size. Entry point of $123.50. We'll see. I will not add more than another 1/8 ahead of earnings.
The Datadog (DDOG) trade has worked its magic. Did not go long anything on the call side as the underlying shares once again ran away from me. Did manage to get short the $60 puts expiring this Friday for $0.50. Last sale? $0.10. Will cover this position ahead of expiration should the underlying shares sell off prior, or the last sale (for these puts) moves down to a nickel, as there would be little left to gain at that point.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 3.169M.
08:30 - Import Prices (Apr): Expecting -3.1% m/m, Last -2.3% m/m.
08:30 - Export Prices (Apr): Expecting -2.2% m/m, Last -1.6% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +109B cf.
The Fed (All Times Eastern)
18:00 - Speaker: Dallas Fed Pres. Robert Kaplan.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (BABA) (6.04), (AGN) (3.80)
After the Close: (AMAT) (0.90)
