Uncertainty. "They" say that markets don't like uncertainty. Over the years, I have often responded that times have always been uncertain. That's the truth. What's the truth, Sarge? Both statements. Times have always been uncertain, otherwise there would never be any losers. It's also true that markets dislike uncertainty, especially uncertainty that seems to get murkier almost daily. These unknowables invite risk-off behavior. I don't mean to scare you. and I am sure that most readers understand this concept well enough. The point is that should one be either early to the dance, or late, one still has to dance. When algorithms get into a mode where preservation of capital is paramount, it is the skinny that survive. The narrowest book. The most cash even if short-term. The physical over the paper. In assets, not just in precision metals.
So, one question then, smart guy... are we there yet? On Friday, the major indices all turned for the better early in the afternoon. Trading volume was enormous, as the bi-product of a quadruple witching expiration event. Still, the S&P 500 and Nasdaq Composite both put a third consecutive negative day (at the headline level) to the tape, while those two indices as well as the Dow Jones Industrial Average have all posted three consecutive losing weeks. It is enough to make seasoned professionals ponder whether or not the worm has indeed turned. The worm? Yes, the trend. Are equity markets now in a downward trend as opposed to a pressured upward trend? The Nasdaq Composite closed, at least clinically in a textbook correction, 10.6% off of the high set on September 2nd. The swoon in June (see what I did there?) for the Nasdaq Composite only amounted to 5.7% before the index got back in gear for comparison's sake. The S&P 500 has done marginally better so far. The broadest of large cap indices is now 7.4% off of the September 2nd top. The S&P 500 took an 8.2% beating in June before support arrived.
Different This Time
What's different this time? Let me count the ways. First and foremost, as we have stated here time and time again... The virus is still in charge. One would have to be a fool not to notice the rising rates of infection across Europe, an area that had seemingly made it past the worst of this pandemic. Daily confirmed cases are rising in the UK, across Germany, France and Spain. Even Italy. Parts of Europe experience the environmental impacts of Meteorological Autumn earlier than parts of the U.S. Is this our very short-term future. It's not like we have not been warned. What would a second wave of socio-economic shutdowns do to Western Europe? To global GDPs? To the United States?
What uncertainty around the path of the virus does is create uncertainty across many levels. The Federal Reserve has flat out shown us that they must respond to the virus, and has been clear that they have little faith (which is understandable) in their own ability to produce inflation or growth. One certainty is that the Fed can not do this alone, and that is precisely where Congress has left them. Increased fiscal support would go a long way at this time. Unfortunately, at this time, both sides see advantage in not helping the other.
Identify
We Understand the environment so that we might Identify both threats and opportunities. We can do this, because we never get too high, nor too low. We are adjustable. We become whatever we need to be whenever we need to be it. In short, we Adapt. We adapt in order to Overcome. There is no other way. Remain set in stone and one will perish. This goes for life, not just about financial well-being. Understand that the first battle is rising to the challenge. All are capable of meeting the day, not one of us does this alone. The threats are many right now, even if the virus gives us a break or the vaccines coming are both effective and safe.
This is September. Next month is October. These are the most dangerous months of the year... in normal years. This is no normal year. We stand just six weeks from a national election that will produce a bitter outcome. Half of a nation will cry foul in six weeks. Seems inevitable. The economy has suffered and continues to suffer the negative impacts of a socially distancing pandemic at a point in history where human labor is becoming increasingly replaceable. Something "they" call progress. Could be like dry leaves in a barrel. Jobless claims, both new and continuing remain stubbornly elevated. Delinquencies are rising among homeowners and rent-payers. Retail Sales continue to rebound, but show signs of slowing dramatically. The same goes for Industrial Production. The problem that many of our favorite stocks that have performed so well for so long is simple. You can make the best widgets in the world. Just have to hope that the firm that uses widgets to make gadgets can still sell gadgets. What if nobody buys new gadgets?
The Environment
Are equity markets oversold? Sorry to say, but I don't think so. Not yet. Perhaps this week. One does have to wonder if maybe the expectedly large quarterly pension fund rebalancing might have already started. Will being technically oversold even help if the news flow does not. Algorithms do respect technical analysis. For speed and forced overshoot, they will always rely on headlines.
I am sure that most market participants noticed the Barclays downgrade of the high flying mega-caps on Friday. Barclays wrote to clients that valuations had, or were reaching extreme levels not seen in 20 or so years. The mass downgrade targeted Apple (AAPL) , Microsoft (MSFT) , Amazon (AMZN) , Facebook (FB) , Netflix (NFLX) , and Alphabet (GOOGL) . All of the above gave up their technically important 50 day simple moving averages at some point last week. For those keeping track, both Nvidia (NVDA) and Tesla (TSLA) managed to finish the week above that key spot on their charts. Tesla holds the all-important "Battery Day" event this Tuesday (tomorrow) that investors have been pointing toward.
What did work? Nothing on Friday, but for the week there were parts of the market that succeeded, most noticeably small caps and the Transports. The Energy sector had a nice week, assisted by OPEC+, while Industrials and materials also shaded green. Then again, leadership among industrial type names did show a transportation inspired bias. The airlines, rails, and marine transport (thanks again to OPEC+) all out-performed as did aerospace and defense.
Beyond equities, spreads between short-term and long -term Treasury yields, have remained stable even if elevated from levels seen throughout the summer. The VIX sort of flat-lined last week, and perhaps notable, all three Put/Call ratios that I follow ended the week well above both their 50 day and 200 day SMAs, a sign of skittishness among portfolio managers. By the way, I have a rule that I have lived by for many years. This is not mine alone, I learned this one from the traders that taught me when I was a young pup. I never, ever take a loss of greater than 8% on a position unless it happens overnight. Down 8%, I make an exit. Oh, one more rule that might help those new to options trading. I know that I often reduce net basis on equity positions through writing both calls and puts. When we do not trust the markets, we only write covered calls, and we never write puts. That's an unintentional way to make 8% seem like child's play if in the wrong name.
The Notorious RBG
It seems wrong. Wrong to trivialize, or politicize the death of a human being. Unfortunately, this seems to be the path that must be travelled. Will the passing of Supreme Court Justice Ruth Bader Ginsburg, and the actions taken around the vacancy created on that court impact the outcome of the coming election? How about the financial markets? Maybe it's just one more uncertainty piled upon the incredible, tangled mess that has made the calendar year of 2020 one that will never be forgotten by those who lived through it.
President Trump has stated plans to nominate a candidate shortly, probably a woman, and probably this week. How this plays out I can not predict with any level of probability with the exception that it probably motivates those on both sides to both donate if in a position to do so, and vote on November 3rd. We offer the Ginsburg family our condolences, and pray for the repose of her soul, regardless of political affiliation. The fact is that her greatest professional impact upon this nation may still be in the future, and it might be measured in turnout.
Is TikTok a Go?
President Trump also said that he had agreed in concept to a deal where TikTok becomes (at least here) a U.S. domiciled company, perhaps based in Texas, that could employ up to 25K individuals. Known (or thought) to be involved in some way, are Oracle (ORCL) and Walmart (WMT) . The president said on Saturday, "I have given the deal my blessing, if they get it done that's okay too, if they don't, that's fine too." Probably one too many "too's" in the quotem, but I think we get the gist.
Economics (All Times Eastern)
No significant domestic macroeconomic data-points are scheduled for release.
The Fed (All Times Eastern)
10:00 - Speaker: Federal Reserve Chair Jerome Powell.
12:00 - Speaker: Reserve Board Gov. Lael Brainard.
18:00 - Speaker: Dallas Fed Pres. Robert Kaplan.
18:00 - Speaker: New York Fed Pres. John Williams.
Today's Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings are scheduled for release.
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