E Market Briefing For Tuesday, Sept. 22

Technical correction progression keeps formerly 'hot stocks in cold storage' for at least now. Rebounds will occur of course, just as expected late Monday or during part of Tuesday's session. On Monday notably a number of specialized stocks slid a bit on light volume (normally a bullish factor), then rallied on higher volume (also favorable). There is a log of 'fog' in terms of the chaos that can be looming due to uncertainties, of course much of it political, but some of it is financial as well as expanding COVID.  

Everyone is trying to read the tea leaves of this market, whereas nothing really shifted a great deal. The Fed backdrop is not the kind that drives inflation, which will occur in all likelihood -not because of Fed policies at this point- but because economic health rebounding 'after' we get through the pandemic will really usher-in better times. We'll hear about this concern from Chairman Powell in Tuesday's Congressional Hearing

Statistics on the economy aren't as negative as many continue saying, though varies depending on sectors. The threat to withhold funding to New York or other designated cites is not the way to handle it but makes a point, and it's one that enhances discord rather than promotes harmony, but there is nothing about this year that's sanguine.

  (All these countries fear growth inhibited by a series of 2nd COVID waves unfolding.)  

Executive summary:

  • Bearish crowds versus 'buy-the-dips' is a bit of a superficial argument, there's lots more at-stake, and this was NOT any new decline, but a projected resumption as the temporary congestion zone we discussed last week broke-down 'on cue'.
  • Besides indicating the 'S&P overshoot' blow-off top a month ago, we assessed all this as a probably short-term and then intermediate term 'A-B-C', in theory this 3rd leg down projected after Quarterly Expiration (with intraweek rebound) might in a better time (or if we get a quick therapeutic resolution to COVID) complete the dip,
  • Problem here becomes judicial and political, with so much swirling, while broader market continues to reflect gradual improvement of value at expense of big-cap.
  • As this goes lower we become more constructive towards some stocks, but more so the undervalued and under-the-radar stocks, for a number of reasons.
  • One of those is that 'if' investors fear higher Capital Gains taxes next year, they're likely tempted to take gains in some of the huge gainers this year, rather than the usual approach of nursing gains into the next tax year (hence not due until 2022).
  • We are in a highly volatile Election season, and that's the backdrop to this, and of course how that goes will impact the perception about possible tax impacts too.
  • Against this backdrop, you will still have the Fed backdrop underpinning the future but it's the uncertainly of leadership (super-caps) that inhibits those stocks.
  • Hence investors (I warned of this months ago) have been more likely to 'harvest' gains in the super-caps, and less so in specialty stocks with wouldn't have a huge tax liability anyway if sold, hence this supports the value/growth vs. super-caps.
  • Tuesday Fed Chairman Powell will talk at the House Financial Subcommittee and really say nothing surprising, mentioning the 'highly uncertain' prospects for now, the improvement we're seeing to a degree, and the underlying economic damage, so it's sort of a reality check and in-and-of-itself shouldn't make many waves.
  • However this supports the idea of a 'stimulus package, but I expected the market break and believe it was technical and unrelated to another stimulus package, at the same time that certainly there shouldn't be a defensive for the correction as it unfolds, although we believe Sec'y. Mnuchin (on the panel tomorrow) will probably press more 'for' a bipartisan deal, and Democrats look 'odd' if they don't concur.
  • We're going to hear from the Fed Chairman 3 times this week, and that means 3 sessions of being reminded about the uncertainties, which is a market 'true-tell''.
  • Also we continue to avoid banks for normal reasons, although now you can add a bit of concern regarding regulatory 'heaviness' if their is a 'regime' change.
  • Plus apparently not 'only' bitcoin has been used by the 'underground economy' or drug dealers, but a series of reports of 'money laundering' through banks by the North Koreans has surfaced, as far as the financial press, they say banks like JP Morgan (JPM) called this to regulators attention, whether they originally discovered it may never be known, however it's just more layers of disinterest in bank stocks. 
  • S&P (SPX) is now down 10% from the peak you have technical benchmarks I've noted as guidelines (for intraweek rebounds efforts), and we'll keep an eye on those.

COVID impacts:

  • The coronavirus remains the biggest impact and actually overrides considerations related to taxes and politics, as we go forward along the path to economic revival.
  • COVID-19 is not contracting, but expanding, in a number of states and countries, it is not a time to be sanguine, but more a time of 'resignation'...coping with COVID in-presumption that therapeutics not just vaccines, 'and' fast testing, is coming.
  • The market remains more vulnerable until some of this issues are resolved, and I noted the President actually said 'therapeutics may be more important than early vaccines', and I entirely agree, having said that for months.
  • Give us an effective therapeutic drug and people will open-up regardless of their belief or willingness to use a vaccine, at least they'll know there's something to fall back upon 'if' they get sick, or 'if' a vaccine provided only partial protection.
  • To this goal, aside saliva tests, the first (or best) to market with an antibody drug treatment will likely see appreciable share price appreciation, and possibly be the game-changer to change the public perception (and controversy) about COVID.
  • In the weekend report I suggested Sorrento Technologies (SRNE) would rebound after Quarterly Expiration, and emphasized that when it dipped into the high 8's earlier Monday, later it moved to the high 9's, lighter volume dips and higher volume lifts are perfectly acceptable bullish action, mark-'em down, then mark-'em up again,
  • A favorable risk-reward (from this level) write-up by Forbes also was helpful as it brings Sorrento more to public attention, though given it's often-high volume, one gets the feeling everyone is aware of it, even as burned-media avoids mentions,
  • CDC again revised the revised precautions on the CDC website (do they ponder at all before posting, this is serious stuff) and recanted the idea of greater than 6' danger of exposure, after the weekend post talked of COVID transmission risk from merely talking or singing...or breathing (always amazes me at the gym or so on, when I see people wearing masks but then lowering them to 'chat'...wrong.
  • About 20 states are seeing sustained increases in COVID cases, which impacts at least some earnings expectations, and impacts businesses (not just restaurants) impacted by a sober realization that emerging from this isn't a reality as yet,
  • Global worries about '2nd waves' are rising at a torrid pace, and are not political except primarily in the US, the UK considering another lock-down, Madrid, requests the Army move-in to help control the city, with governments alarmed at the relative pace of successful research as seasonal flu season is pending too.
  • Pressure is on for 'neutralizing antibodies' that will be needed, in-addition to, or instead of, vaccines (as described before), to that end has Lilly (LLY) partnered with Amgen(AMGN) for capacity (mixed early-symptomatic results do far), and Sorrento now has to recruit for its Phase 1 trial in the U.S. (and sign-up hospitalized patients).
  • By the way one reason specialty pharma may do better than big-pharma even in the COVID saga at this stage, is that the big ones are pricey, the vaccines or drugs aren't showing magnificent results at least so far, and there is also concern a new regime in Washington might weigh more heavily on drug profit margins and try to circumvent pharmacy benefit manager middlemen. All speculative but moves for big drug stocks have been seen, other than where a new breakthrough occurs.

In-sum: so we're not there yet, whether related to overall completion of the technical correction we forecast a month ago from the S&P 'overshoot' above the 'rising top' at the time, and we certainly don't have definitive positive vaccine or therapeutic news. On top of that we have growing uncertainties in the judicial and political realm. These determinations can have profound impact on the future, and on taxes and markets. In a sense 'preemption' of part of that has contributed to a bit of the super-cap selling. 

 While really early to make macro projections for the Senior Indexes, though that likely is something we intend doing from a coming trough in S&P, keeping in mind while it's largely a technical issue (S&P 3100 or Nasdaq 9500 or just under respectively being their 200-Day Moving Averages and in theory a 'measure' after a rebound, nothing is inscribed about achieving any particular downside level, we're open-minded on that).

Bottom-line: technical evolution continues. Meanwhile there's a little detail of roiling politics, which now in the wake of a SCOTUS vacancy, creates yet-another level of political confrontation.. and rekindles market overtones for several reasons related to the direction of society, although for markets the key aspect might be taxation.   

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