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By Pete Biebel, Senior Vice President

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I suspect that not very many people care too much about what I have to say about the stock market this week.  Sadly, that may be true a lot of the time, but this week in particular the country has new concerns and worries that have suddenly compounded the dislocations caused by the COVID contagion.  It’s not so much the weekend’s demonstrations themselves that are a concern, it’s that they have so often escalated into mob events that spawn vandalism, arson and looting.  So, the yin and yang of the stock market is now a much lower priority for most folks.  Besides, we’ve seen that the market has been able to rally in the face of worsening news.  The month of May made a significant addition to the market’s April gain.  The major averages have now recovered most of the February/March losses.

Since the March lows, the averages have moseyed higher with barely a hitch in their giddy-up.  The early days of the rally and the quick rebound from the March lows were widely expected; after all, the market was coming out of an extremely oversold condition.  The largess from Congress and the Fed to revitalize the economy and stabilize markets helped to spur the averages even higher.  In late-April and early-May, strength in the stocks of companies in the internet streaming, social networking and online shopping categories carried the rally even further.  The most favorable characteristic of the rally is that it never really threatened a reversal.

As the rally continued, I doubted its ability to climb much higher.  In mid-April, I thought the 2800 level of SPX was a perfectly good spot for the rebound to run out of gas and roll over.  Nope.  Then the rally stalled several times in the low-to-mid-2900s.  Surely, that must be the best we should expect.  Nope.  When trading resumed last Tuesday, the accumulation of hopeful news over the holiday weekend culminated in a gap-up opening that pushed SPX above the 3000 level and its 200-day moving average.  The lesson is that the uptrend will persist until it doesn’t.  I should believe in the rally until proven otherwise.  Innocent until proven guilty.

For the week, the Dow Jones Industrial Average (DJIA) advanced 3.75%, increasing its gain over the past five weeks to 6.76%.  The S&P 500 Index (SPX) was a step behind, gaining just 3.01% for the week, but lifting its 5-week gain to 7.32%.  The NASDAQ Composite Index (COMP), which has been the rally leader, was up a mere 1.77% for the week, but its 5-week gain now stands at nearly 10%.  That was pretty much the theme for market action last week.  The leading stocks, sectors and indices all took a relative breather; they did just enough to get on base, while the lagging stocks, sectors and indices hit it out of the park.  The Financials, Real Estate and Utilities sectors, which were all near the bottom of the 5-week performance line-up a week ago, vaulted to near the top of the weekly return list last week with gains of 5 ½% to 7%.

Two months ago, I would have given the market only about a 5% chance of rebounding as far as it has.  Yet, even with no known COVID vaccine and only a very limited re-opening of businesses across the country, the stock market has gazed into the future and deemed that we’ll be back to business as usual in no time.  Like passengers on a train that has suddenly slowed, we’re all hoping that the gradual re-openings across the country will help our economy begin to chug ahead again.  In this metaphor, the stock market is the Bar Car.  The reactions of the revelers there have a tendency to exaggerate any changes in the prevailing mood.  At present, they seem to be gleefully and optimistically peering through a telescope, looking at the long stretch of track on the other side of the ravine where the train will surely pick up speed.  “Woo hoo!  Full speed ahead.”  But their longer-term focus may be overlooking some nearer-term threats.  How well the economy can cross the ravine that lies ahead will determine whether the next few months will bring substantial improvement or a train wreck.

The problem with train wrecks is that they happen very suddenly.  As was the case in mid-February, there are currently no technical signs of danger.  In February, the market was certainly overvalued fundamentally, and sentiment indicators were flashing a warning, but the market chugged ahead.  When the wheels started coming off in late-February, there was very little time to react before substantial damage ensued.  We now find ourselves in a situation with similar preconditions.

The current fundamental overvaluation and the overly bullish put/call ratio are not yet enough evidence to have any conviction that the rally is near an end.  While those factors might be enough justification for some to reduce equity exposure a bit, the uptrend is still intact.  If SPX can push to near 3100 or beyond, this week or next, the rally could continue to avoid any pangs of guilt.  The first sign of trouble would be if that index fell much below the 2900 level; that would be grounds for reasonable doubt.  The key level for SPX appears to be in the 2775 – 2800 range, but that’s about 8% below last Friday’s close.  That’s the area of the May lows and the 50-day moving average.  Regardless of what circumstances might cause a break below that level, it would likely be followed by an acceleration lower.

The list of earnings reports this week is much shorter than that of recent weeks and includes very few big-name companies.  On the other hand, the list of economic reports is quite lengthy and is loaded with high profile reports late in the week.

Date Report Previous Consensus
Monday 6/1/2020 U.S. Manufacturing PMI, May 39.8 40.0
  Construction Spending, April, M/M +0.9% -6.0%
  ISM Manufacturing Index, May 41.5 43.7
Tuesday 6/2/2020 Motor Vehicle Sales, May, SAAR 8.6mm 11.0mm
Wednesday 6/3/2020 ADP Employment Report, May -20,236K -9,500K
  U.S. Services PMI, May 36.9 37.4
  Factory Orders, April, M/M -10.4% -14.2%
  Durable Goods Orders, April, M/M -17.2%  
  Durable Goods Orders, ex-Transportation, M/M -7.4%  
  ISM Non-Manufacturing Index, May 41.8 44.5
Thursday 6/4/2020 Trade Deficit, April $44.4B $49.1B
  Initial Jobless Claims 2,123K 1,800K
Friday 6/5/2020 Non-Farm Payrolls, May -20.537K -8,000K
  Private Payroll Employment, May -19,557K -7,650K
  Unemployment Rate, May 14.7% 19.6%
       
       

 

Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.

June 1, 2020 |