Friday, a minority of Nasdaq stocks pushed it further upward on extreme speculation while the Dow and the S&P-500 remain range bound. S&P made another failed attempt at closing above December’s close. Momentum was mostly to the downside as the broader market continues to retest the March lows. Technically, the S&P-500 has support at 21 & 50-Exponential Moving Averages and about 6% lower from Friday’s close is the broadly recognized 200-Simple Moving Average. The number of securities on the NYSE did improve last week from <24% to >32%. Though, since the June high, improvements have not lasted.
Last week there was rotation away from technology. If this persists, it would indicate a break from the dominant trend for the year. Last Monday’s CA announcement of renewed shutdown disrupted the upside move, but it did not generate follow through at the close. The QQQ has maintained its trend above 15-EMA since moving above June 10th resistance. The two key supports seem to be AMZN and TSLA. A trend failure in these stocks could be an early warning of a broader correction.
Last week, JNJ and ABT execs forecast improving outlooks. The healthcare XLV broke through the June 16 resistance. NFLX’s miss on subscribers caused concerns about the persistence of tech’s strength closing down 16% from Monday’s high. TSLA’s intraday 18% decline on Monday should not be taken lightly. AMZN closed down 11% from Monday’s high and, unlike TSLA, did not have a positive close all week.
The major banks reported better earnings than expected though the earnings were from the prop desk trading. This distracted from the massive loan loss reserves being set aside. The end of PPP or its likely delayed re-authorization is expected to find banks finally reporting actual loan payments in arrears or full default.
Small-cap companies are expected to post year-over-year earnings declines of approximately 90 percent, reports Reuters. Companies report their second-quarter results over the next several weeks, compared to a 67 percent hit for mid-caps and 44 percent for large-caps, according to Jefferies.
That would be the largest drop since the fourth quarter of 2008, data from S&P Dow Jones Indices showed. IJR and RSP have rallied nicely since the May low and now testing resistance. Tight stops are required to preserve gains when reality wakes the sleeping bear.
Home construction is providing positive economic impetus as inventory for sale is low. The combination of riots and stay-at-home orders has driven demand for suburbia while fear of infection has limited willingness to have an open house. Builders are benefiting which is good for employment. ITB and XHB broke out of a month long consolidation last week with a golden cross on their charts. The 50-200 crossover has preceded major gains both times since 2016.
ECB, BoE and BoJ have followed the Fed in reducing bond purchases in May and June. Domestically, various regional Fed Presidents have made speeches about Congressional need to do more fiscal support. As CARES and PPP expire this month along with renewed stay-at-home orders, the “V” recovery has “died on the vine.” Expect the new “V” to be volatility. Senator McConnell and members of the Administration are meeting today regarding an additional $1T “stimulus” bill – roughly ¼ that the House is proposing. The EU reached agreement for another round last night.
This article on the negative impact of increasing government debt in spite of low rates suggests we should be very concerned about lack of restraint on borrowing by our government. Low rates make sense when the government, business or a household is refinancing to lower carry costs. Borrowing just because rates are low is a detriment for future growth hurting employment and lowering GDP.
Consumer confidence is essential about jobs and re-opening the economy for growth to resume. Current signs are not encouraging.
Smaller business operators do not have the same ability to access survival funds from various government sources. BlackRock’s CEO Fink forecasts an uneven recovery and describes our current market as “bipolar.” S&P earnings are expected to average -43.2%. None of the 11 Sectors expect to have revenues or earnings higher than the 2nd quarter of ‘19 which was 75% lower than Q2 of ‘18. All Sectors are expected to be lower than 2019 through year end. Investors face conflicting pressures of staying invested or implementing defense for the next major market decline.
We recommend read The (Mis)Behavior of Markets by Benoit Mandlebrot for a laymen’s explanation of the flaws in Harry Markowitz’s Modern Portfolio Theory and its broad application by financial advisors and websites in the common practice of using balanced portfolios.