Stocks are set to start the week on a downbeat note as market participants grow nervous over negative headlines. The rise in Covid-19 cases is attracting the most attention, but many people are resistant to further restrictions and that is helping to prevent a more negative economic response.
The presidential election is growing more contentious as the accuracy of polling is hotly debated. The main concern at this point about the election is whether there will be a clear winner. Eventually it will matter who won, but in the short term the major market concern is whether there will be a winner on election night and who controls the Senate.
The stimulus negotiations continue to drag out and it appears increasingly unlikely that anything will be done before the election. Market players are worried about sitting on the sidelines or being bearish when the news eventually hits, but they are growing weary of the endless headlines and political games.
Earnings season peaks this week and will be especially tricky given the macro news backdrop. Microsoft (MSFT) reports Tuesday night and Alphabet (GOOGL) , Amazon (AMZN) , Apple (AAPL) , Facebook (FB) , Starbucks (SBUX) and Twitter (TWTR) report after the close Thursday. There are hundreds of other reports hitting as well so there will be plenty of focus on individual stocks.
Overall the indices remain in good shape. The S&P 500 is holding its 50-day simple moving average as it has pulled back on lighter volume for two weeks now. Small-caps IWM are showing very good relative strength and are close to filling the gap that was created back in February when the Covid crisis exploded.
There has been quite a bit of rotational action under the surface recently, which has hurt the FATMAAN names and some of the big-cap momentum plays, though value names, financials and small-caps have seen inflows. The stock picking has become narrower and there have not been as many pockets of strong momentum, but the action mainly has been healthy consolidation rather than correlated selling.
The market has done a good job of shaking off the negative headlines but the stories about Covid cases, stimulus and the election are hurting sentiment and it is becoming more difficult to shake them off. We will see what the mood is as big-name earnings reports hit, but it may be tough for them to produce sustained upside movement with the big-picture worries building.
My game plan is to manage positions closely, watch for signs of more correlated selling and stay focused on finding some good charts. This is a much tougher environment than it was a few weeks ago but it is still holding where it needs to for now.