The market's 'tone'  persisted being defensive for quite awhile, as the S&P (SPX) constructed essentially a structural 'double-top' over these last few weeks. In our view there's consistently been little potential upside for the 'super-cap' or FANG-type stocks, while smaller stocks more or less defensively languished.

Greatest risk has been described as the prospect of precautionary selling for the most part in the biggest winners of this year's ('post-Inger Bottom') upside, as most gains for such stocks this year were generated primarily not just from the initial romp off the March 23rd low, but thereafter. As reminder, we noted:

Because so many managers very-much hesitated embracing the upside for a couple months, you ended up with what I described as an internal correction for the majority of smaller (or mundane) stocks from mid-Summer forward and the late-concentration into the super-caps assisted masking that correction.

It matters here, because as I mentioned last week yet-again, you could go so far as 'crashing' the super-caps, as investors pull sales they might have done in 2021, into late 2020, in-order to avoid 'possibly' higher capital gains taxes in the new tax year (and that depends on politics). Along the way the prospects for the majority of smaller-caps was more or less eroding.

What this means for the bigger-picture is interesting, because COVID or not, a shakeout now or in late 2020 overall (for whatever reason especially if capital gains are taken sooner rather than later), and even with the concern of market plays about a Biden victory (increasingly likely if the President keeps playing down COVID risks, perhaps just because he was 'saved').. well enough decline essentially clears a path for upside if stocks have been beaten down by then. History suggests though, a difficulty in winning, when promising higher taxes.

(Of course the politics are chaotic and there is no winning posture that really is certain here, though we all know what the polls say. I'm looking a bit more forward, of course, to suggest a decent year later in 2021, as obviously the Election itself will have an impact on whether or not the early precautionary tax-related selling persists beyond a preliminary effort to distribute that I've thought underway for awhile now.)

All of this, by the way, has nothing to do with the 'Crash of 1987' Anniversary, which just happens to be today. I remember my forewarning of that, oddly as not where I usually was, but on an FNN affiliate in San Jose. After than 'brief' calamity I called it a generational buying opportunity, and it was. Now there's a different structure, different world, excessive (dangerous in a sense) focus on ETF's, and prospect of a 'bear bond market' as the economy recovers.

So maybe an 'event' or post-Election market purge here (allowing for rebound intraweek and more dependent on Stimulus or not, more than the Debate), in a sense contributes to 'global synchronized economic resurgence' looming in 2021, with decks cleared. There's too much controversy to define it closer.

But of course it's still a bit early to have confidence in global resurgence (we can't know the pace of mass produced vaccines, we can't know precisely how the rest of the world resolves, and we can't know how China plays by rules as this evolves). By the way that's tougher, if not impossible, without reasonable resolution to the pandemic. As we're not there yet, and even rapid testing and opening things up won't embolden many people to mingle and really engage in commerce as normal. It will take a vaccine as is simply not available, but for which people have confidence in on top of it, to get things percolating at a level to justify meaningfully higher equity valuations.

So in the meantime this is more than frustration with early vaccines, it's more than frustration with the slowpoke speed of safe 'antibody therapeutics' being tested fully, much less available, and it's more than frustration with politics as the posturing by both sides (and the allegations and innuendos) aren't exactly taking the high roads. I doubt this will change, and suspect the coming WSJ article (following the NY Post's.. same ownership) will only aggravate 'angst'.

It seems that most people either voted or know their voting prospects by now, it also seems that the risk might not even be just the Election, but the possible slow process of tallying the outcome, and who knows, maybe even beyond is adjudication (if you recall Bush/Gore, we've been there before).

So I don't think the market likes this uncertainty, but this time one has to throw in COVID, on the rise almost everywhere in the world (just facts, not politics, on this topic), the situation with China (almost in the background), and realize the combination invites a 'stay-away' from excessive risk mode, more than full out bear mode. When the S&P set-up to tank in 1987 and again in 2000, I had a phrase commonly used then: 'stay short or stay out'. So why not this year?

The difference here is pretty clear: the broad market only 'appears' to be high, but it's dominated in the cap-weighted Indexes, like the S&P. So yes a serious correction risks has been there since early September, the S&P has not made meaningfully higher highs (as I forewarned it would likely not achieve) and the run-of-the-mine stock has eroded.

There is not enough motivation in Washington to bridge the gap toward what, at least in the interim can be a solution, and that's financing people's survival as they await 'at least' an 'antibody therapeutic' to help buy more time for the whole of society, not just the stock market. And by the way, revelation that at least a majority of people recovered from COVID, do not have protective levels of antibodies for very long (2-3 months as I read in a Medscape summary). It is deductive reasoning, but I suspect that's why we hear little about 'human plasma' now, since apparently the belief it that only the lab-made antibodies will have sufficient (perhaps more uniform) protective capabilities for longer.

Executive summary:

• S&P retreating from high-levels, with sensitivity to Stimulus news.

• Debate coming-up which now has the Election Commission rules slightly changed, they will cut-off each opponents mic during their 2 minute talk at the outset, and we'll see how that sits with President Trump (no reaction yet).

• While I believe I'm centrist and see aspects of both sides that have some appeal, the President is not helping himself by bludgeoning Dr. Fauci with a pretty rough comment today, what Fauci said on '60 Minutes' last night was entirely correct.

• Fauci's view (as modified) is that we open society by being responsible, not by throwing caution to the wind, the President's base is his base and they may agree with him (many, especially women with children, likely will not).

• Plus I suspect what he said today sounded a lot like 'giving up' the fight against COVID, my political views aren't relevant, it just sounded like that, just because he got the Regeneron (REGN) does not resolve COVID for others.

• As I hear from members in states heavily impacted, there's certainly no 'rounding the corner', but maybe extending the travel, perhaps why more Republicans aren't particularly thrilled with either candidate just now.

• What does this mean for markets, well you know the history, you know the perception that the market wants Trump (at least for the economy).

• But you also know that there's a view that Biden would be better for small business, and that either one would pursue some restraints on monopoly powers that some technology giants have gained, so it's hard to sort-out.

• Long-term risks by debt-incurring stem-the-tide moves persist, but a view also persists that to do otherwise is a worse prospect, a longer period of economic suppression.

• If that's the case (no Stimulus), and overt desperation expands, it can be reflected in uncontrolled chaos beyond anything previously seen, so that is a concern at the immediate moment that transcends both candidates.

• Yes S&P responds positively or negatively (at least briefly) to a deal that goes forward on Stimulus, but doesn't get carried away as for big stocks it probably becomes a 'sell the news' scenario, worse if it's 'no deal'.

In-sum: clearly this market dislikes uncertainty, but one has to throw in COVID, as it's on the rise almost everywhere in the world (just the facts, not politics on this topic, whatever anyone says in most metro areas the situation is darker at best, and the unbridled encouragement of less socially responsible stances is a possible gasoline-on-fire situation). The case is not for lockdown but socially responsible behavior, which will help the population get to the next phase.