By Pete Biebel, Senior Vice PresidentPrint This Post
From late-September through early October, the market seemed to be viewing any and all news with rose-colored glasses. The COVID numbers were climbing, but not so bad. The stimulus bill was stalled in Congress, but passage was expected any day. And, money had resumed flowing into the strong momentum stocks. The broad averages were able to recover nearly all of the losses that they suffered through the first few weeks of September.
But then the lights went out; the brightness faded. A germ of pessimism began to infect the market a few weeks ago and the disease spread. That blight intensified last week.
Last week, everything was down. U.S. stocks had their worst week in months. The S&P 500 Index (SPX) fell just over 5%; the NASDAQ Composite Index (COMP) lost 5 ½% and the Dow Jones Industrial Average (DJIA) dropped 6 ½%. European stock markets suffered even larger losses. Prices for precious metals and most base metals were also lower on the week. Even bonds and other fixed-income products lost ground.
For the second consecutive week, the major averages saw their highs of the week in the early minutes on Monday. Stocks gapped lower that morning due to the rapidly widening contagion and the rapidly narrowing hopes for Congressional action. The averages also gapped lower on Wednesday’s and Friday’s openings. Wednesday’s rout was triggered by steep losses in overseas markets in response to accelerating COVID infections and threats of lockdowns. On Friday, it was largely a result of negative responses to earnings announcements from several of the mega-cap tech companies.
Some aspects of the selling were reminiscent of market action last March. It wasn’t just that there was a rush of liquidations across asset classes, there was also a sense of the mechanical, forced-selling that characterized mid-March activity. That was the only other time this year with a week in which everything was down. Seeing the averages break key levels can trigger technical selling. When stop-loss orders begin to be hit, it often fuels more stop-loss selling. When volatility spikes up, risk parity funds become forced sellers.
There were already signs that the blight was spreading in the prior week, but there hadn’t yet been any technical damage. In last week’s article I suggested, “If COMP and/or SPX take out last week’s lows, it will also mean that the index has broken its 50-day and could lead to an acceleration in the downtrend.” About 45 minutes into Monday’s session, SPX fell below both the prior week’s low and its 50-day average. That failure apparently prompted technical selling and the averages cascaded lower. When the market attempted to rebound on Tuesday, the rally repeatedly stalled at the 50-day average of SPX. COMP fell below its 50-day average just briefly on Monday and wavered just above it on Tuesday, but COMP tanked below its 50-day Wednesday morning and remained well below it for the rest of the week.
There were a couple bright spots amidst the gloom. The averages enjoyed an illuminating rebound midday on Thursday following news that the Fed was easing terms on its Main Street Lending program. On Friday afternoon, as the averages were making new lows for the week late in the session, a last-hour buying spurt, perhaps spurred by short-covering, enabled stocks to rally into the close, recovering a big chunk of the day’s losses.
So, the issue for this week is whether last week’s technical damage will lead to follow-through selling in the days ahead. SPX ended last week just a bit below 3270. The key levels below the market to watch this week are the September low near 3209 and the 200-day moving average just below 3130. SPX hasn’t violated its 200-day average since climbing back above it in late-May.
This week, if there’s a bright spot related to the election, it may be that it will bring an end to the to the non-stop, mud-slinging political ads that seemed to have been overwhelmingly more numerous this time around. Here in St. Louis, we’re pummeled with ads from candidates in both Missouri and Illinois. I’m sure it’s the same in other border cities around the country. On Saturday, during coverage of a college football game in Michigan, I even got to see an ad for a Michigan candidate. Apparently, all the local spots had been bought up by the time the candidate’s team came ad-shopping and he was forced to pay up for a national ad! A CNBC piece in early-October estimated that total ad spending for the 2020 election was expected to reach $11 billion.
The outcome of the election, of course, is the wildcard for markets this week. It is generally believed that a contested election would be bad news for the market. The jury is still out on how the market is likely to react to a clear winner either way. We should expect to see big volatility on the index futures on election night and follow-on volatility Wednesday morning. Keep an eye on those key SPX levels noted above.
The flood of earnings reports last week will diminish to a relative trickle this week. Still the reports have the potential to roil up eddies of volatility in individual names through the week. The list includes fewer big tech names and more consumer staple, industrial and healthcare companies.
While the election results will likely dominate market activity early in the week, the economic report calendar has a number of items in the second half of the week that that could be significant catalysts. On Wednesday, the ADP number and the ISM Services report are big. Thursday brings the Jobless Claims and the Fed statement, and Non-Farm Payrolls will be reported on Friday.
|Monday 11/2/2020||PMI Manufacturing, October||53.1||53.3|
|ISM Manufacturing Index, October||55.4||55.7|
|Construction Spending, September, M/M||+1.4%||+0.9%|
|Tuesday 11/3/2020||Motor Vehicle Sales, October, Annual Rate||16.3mm||16.5mm|
|Factory Orders, September, M/M||+0.7%||+0.6%|
|Wednesday 10/4/2020||ADP Employment Report, October||+749K||+595K|
|International Trade, Trade Deficit, September||$67.1B||$65.1B|
|PMI Composite, October||54.3||55.0|
|ISM Services Index, October||57.8||57.7|
|Thursday 11/5/2020||Initial Jobless Claims.||751K||745K|
|Non-Farm Productivity, Q3, Annual Rate||+0.5%||+0.1%|
|Unit Labor Costs, Q3, Annual Rate||+9.0%||-10.4%|
|FOMC Policy Announcement and Press Conference|
|Non-Farm Payrolls, October||+661K||+600K|
|Unemployment Rate, October||7.9%||7.7%|
|Wholesale Inventories, September, M/M||+0.4%||+0.1%|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.