By Pete Biebel, Senior Vice PresidentPrint This Post
Following up on last week’s article, “I Don’t Need No Doctor,” another double-negative song title not only seemed like a good fit for this week’s missive, but also seems appropriate in light of what the markets will be contending with over the next several weeks. Not that there wasn’t plenty to see last week.
After another big gap-up opening last Monday, the averages undulated in a northerly direction for most of the week. Monday’s big opening failed to spur much of any follow-through rally later that day. Trading was likewise lackadaisical on Tuesday perhaps in anticipation of potential volatility following the first of the presidential debates that evening. Wednesday brought an almost-all-day rally that lifted the averages to very near what would become their highs of the week. While it’s hard to believe that there was anything about the debate that put traders into a buying mood, the most likely catalyst behind Wednesday’s action was news that Treasury Secretary Mnuchin and House Speaker Pelosi had an “extensive conversation” in an effort to negotiate an agreeable package for a new stimulus bill. The Wednesday rally also got a boost from the final report on second-quarter GDP, which showed a smaller decrease than either of the two prior reports.
Thursday morning’s Initial Unemployment Claims and Continuing Claims reports were both a little better than expected, and the averages enjoyed another gap-up opening. That early rally lifted the averages to slightly higher new highs for the week and back up to roughly their mid-September levels. Unfortunately, the gap-up opening again failed to produce any significant follow-through gains.
Just when we thought we’d seen it all, Friday morning brought news of positive COVID tests for President Trump, the First Lady and several other politicians. The reaction to the news in the pre-opening hours was a plunge in stock index futures prices to losses of roughly 1.5% to 2%. An hour before the opening, the negative mood was tempered somewhat when the Unemployment Rate update came in a couple ticks better than expected.
Through the day, analysts debated the potential implications of the news. Would the infection help or hurt the President’s chances for re-election? Would the news of spreading COVID cases among politicians and the White House staff help or hurt the progress toward a new stimulus package? Might it be a blessing in disguise in that it could increase nationwide compliance with requirements to wear masks and social distance?
As trading continued on Friday, the averages quickly recovered much of their early losses, but after the first hour of trading, a significant divergence developed in how the various sectors performed over the remainder of the session. The S&P Technology Sector Index gave back the morning rebound and ended near its low of the day with a loss of about 2.5%. The Healthcare sector lost about 1%. As a result of the weakness in those sectors, the NASDAQ Composite Index (COMP) fell 2.2% on Friday and reduced its net gain for the week to about 1.5%. The S&P 500 Index (SPX) suffered less damage, down 1% on Friday and up 1.5% for the week.
But Friday also saw less aggressive sectors like Real Estate and Utilities end the day with gains of well over 1%. The Industrials sector gained a little more than 1% on Friday while the Basic Materials and Financials sectors gained a bit less than 1%. As a result of the strength in those sectors, the Dow Jones Industrial Average (DJIA) lost just 0.5% on Friday and netted a gain of about 1.9% for the week.
The theory behind that divergence is that the odds of a Biden victory and a Democratic sweep had suddenly increased. And, therefore, in theory, the future is more likely to include Congressional action against some of the big tech companies along with Congressional action on healthcare reform. A democratic sweep might also accelerate passage of a major infrastructure spending bill, which, in theory, would benefit many industrial and materials companies.
Friday’s volatility and divergent sector action might be just a taste of what we could see over the next several weeks. We all know the election is just four weeks away; any big shift in the polling numbers is likely to spark a reaction, one way or the other, in the market. And, the market is still on stimulus bill-watch; the market is likely to like any progress on a bill and the bigger the bill the better. In addition, the market will be watching the suddenly increasing rate of new COVID infections, hoping for a decline, but preparing for the worse. Oh yeah… the new Earnings Season will begin to see the first significant early reports next week.
Last week I wrote that if COMP and SPX could. “climb back above their respective 50-day averages, it would be a shot in the arm for the market.” Both indices made an attempt to clear those averages by midweek but slumped back to those levels late in the week. So, the jury is still out. From a bullish perspective, the market’s mission this week is to climb back up to and see sustained trading above last week’s highs. That would put COMP and SPX more comfortably above their 50-days and for the second week.
Last week I also wrote that the most critical downside levels to watch for the major indices are their lows in the prior week. While last week’s gains provide a margin of breathing room above those lows, they will remain as critical levels to watch in the weeks ahead.
With a very light economic report calendar and with the new Earnings Season a week or more away, any catalysts for the market this week are more likely to come in the form of headlines on politics or the pandemic.
|Monday 10/5/2020||PMI Composite Flash, September||54.6||54.4|
|ISM Services Index, September||56.9||56.3|
|Tuesday 10/6/2020||Goods and Services Trade Deficit, August||$63.6B||$66.5B|
|JOLTS Job Openings, August||6.618mm||6.250mm|
|Wednesday 10/7/2020||FOMC Meeting Minutes|
|Thursday 10/8/2020||Initial Jobless Claims||837K||819K|
|Friday 10/9/2020||Wholesale Inventories, August, M/M||-0.3%||+0.5%|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.