Sapped Rally

Sapped rally.  Stocks sold off yesterday as investors realized that elections are a week away and the world is still facing a pandemic.  Markets were forced to digest a large plate of hard-to-digest headlines from the weekend.

 

N O T E W O R T H Y

 

These aren’t the droids you’re looking for…  As if under the influence of some Jedi mind trick (nerdy Star Wars reference), stocks have largely been avoiding, if not completely ignoring the challenges at hand… until yesterday morning… snap. Let’s start from the top.  German software maker SAP lowered its forward guidance, attributing the slowdown to COVID-related pullbacks in purchases.  The jury is still out amongst the experts on what the real reason is, but the judge (that being the market) decided to indict the company, which sold off by -23.66% in yesterday’s session.  In fact, traders sold off the entire software sector along with SAP. The CEO of one the company’s principal competitors, Salesforce.com, quickly took to the airways to say that SAP’s failures were attributed to the company’s management and that the industry had strong forward prospects.  Many of the software/tech heavyweights will have their chance to weigh in on the matter over the next few sessions in their earnings releases beginning with software giant Microsoft after today’s close. While we are on the topic of earnings, we are in the thick of earnings season right now, and the results are not-surprisingly, surprisingly good.  The ambiguity of that last statement was kind-of a joke as my regular readers know that I often talk about how companies intentionally set themselves up to beat estimates, often by lowering expectations. Even though the practice is common, many companies are still unable to make the mark, so an earnings miss is pretty bad. Out of the 140 or so S&P500 companies that have announced Q3 earnings to date, only 16% have missed estimates, which means that earnings have been strong.  That may not be good enough for the market, as it has been largely unchanged since earnings season began – until yesterday.  On to the other news of the day.  Elections are a week away and the markets appear to be approaching it with two narratives.  Biden will most likely win, which will be good for the market, if he doesn’t and Trump wins, it will also be good for the market.  Two opposing, but equally bullish narratives. Yesterday, though it is nothing new, markets began to contemplate a third narrative: a close and contested election result. While that is not necessarily bad for the economy, markets don’t like unknowns and not knowing who the next president will be could certainly cause some volatility.  It appears that narrative number three caused some investors to take some money off the table… just in case.  What about a stimulus plan?  The few holdouts pretty much had their tickets punched yesterday as the Senate decided to recess after confirming Amy Coney Barrett on to the Supreme Court, slimming, if not eliminating any chance of a pre-election stimulus deal.  Finally, there is the pandemic… which last I checked, was still a thing.  Political agendas from all sides have pushed forward so many conflicting narratives, that it is difficult for many folks to accurately assess the actual situation.  But the numbers don’t lie and the world is still very much in the midst of a pandemic, which seemed to weigh heavily on the market as well yesterday.  Yesterday, the market was given a stiff reality check which caused many investors to put their money on the sidelines.  The VIX volatility index rose above 30 for the first time since early September indicating that we can expect bigger daily moves in both directions over the next 30 days. That shouldn’t surprise you, but what might is that VIX put to call volume ratio has spiked… which can be viewed as bullish for stocks.  Yesterday’s market move was discomforting but should not be astonishing, given the market’s rise over the past six months and challenges that still, very much remain.

 

THE MARKETS

 

Stocks sold off yesterday in the largest drop in over 6 weeks.  The session experienced a confluence of bad news related to earnings, spikes in COVID cases, the increased potential for a contested election, and the eroding prospect of an imminent stimulus package.  The S&P500 fell by -1.86%, the Dow Jones Industrial Average dropped by -2.29%, the Russell 2000 Index sold off by -2.15%, and the Nasdaq Composite Index erased -1.64%.  Bonds rose and 10-year treasury yields gave up -4 basis points to 0.80%.  Crude oil dropped another -3.24% on lower expected demand, bringing with it the energy sector, which fell by -3.47%.

 

NXT UP

 

– Durable Goods Orders (Sept) are expected to have grown by +0.5%, equal to last month’s growth.

– FHFA House Price Index (Aug) may have risen by +0.7% compared to the prior rise of +1.0%.

– Conference Board Consumer Confidence (Oct) is expected to have risen to 102.0 from 101.8.

– Richmond Fed Manufacturing Index (Oct) is expected to have dropped to 18 from 21.

– This morning Stanley Black & Decker, Ares Capital, 3M, AMD, Caterpillar, Pfizer, Lab Corp, Merck, Harley-Davidson, Roper Technologies, Raytheon, JetBlue, Sherwin-Williams, Corning, and Cummins all beat estimates, while Eli Lilli missed. After the bell releases are expected from Fiserv, Edison International, Enphase Energy, Varian, FireEye, ONEOK, Masimo, Microsoft, First Solar, Fortive, and Akamai.

 

daily chartbook 2020-10-27