Chairman Powell’s comment yesterday that the Fed will “slow their bond buying program as the markets improve” knocked the stock market down mid-morning. On Monday, the Fed’s announcement that they are going to buy individual corporate bonds as part of their newest QE program gave investors the feeling that the Fed was going to keep the pedal to the metal even if things calmed down going forward. So yesterday’s comment from Mr. Powell seemed to throw some water on that thought. However, the decline was a short-lived one...and the S&P 500 was able to recover 2/3 of what it gave back in the morning by the close...and finished almost 2% higher for the day. The rally came on excellent breadth (13 to 1 positive on the S&P 500), but the volume was on the tepid side.
There is no question that this week’s action has been very good so far, but it’s not enough to declare that the “critical juncture” we’ve been talking about recently is going to resolve itself to the upside. This is not a concern because we’ve been expecting that it will take a couple of weeks before we’d know how this situation is going to resolve itself. We’re still going to have to see either a meaningful move above the early June highs of 3232 on the S&P...OR a meaningful drop below its 200 DMA (near 3000) before we get any definitive resolution to this “critical juncture” in the stock market.
Of course, the much better-than-expected month-over-month retail sales number had a hand in yesterday’s rally...as did the news that the Trump administration is going to propose a $1 trillion infrastructure plan. More importantly, the fact that the year-over-year retail sales numbers were down significantly...& the fact that the House Democrats will never give the President a victory on the infrastructure issue during an election year...did not stem the tide of the enthusiasm surrounding these developments.
Between the recent employment report and this retail sales number, investors have got to be wondering what in the world economists are looking at when making their estimates now-a-days. Yes, these are unusual times (to say the least), so it’s definitely going to be tougher for these experts to make their estimates, but to miss by THAT much is remarkable.......Anyway, we have highlighted the Citi Economic Surprise Index many times over the years...in order to give investors an idea of what is going on in the economy when this index has shifted direction in a meaningful way.
However, we have also noted in the past that when it reaches an extreme level (in either direction), it’s usually a sign that it is going to reverse in a material way before long. Similarly, when it reaches an extreme to the upside (like it is now), it is frequently followed by a decline in the stock market...as the last three times this index has risen above 60, it has been followed by declines in the S&P of 6%, 10% and 18% respectively......Having said this, if you go back further, a decline in the market is not always take place when extremes are reached, so we don’t want to raise a warning flag due to this development by any means. We’re just saying that when the Citi Surprise index gets to an extreme, it is frequently a contrarian indicator, so investors need to be careful about extrapolating its recent moves out too far into the future now that it has reached a record high. (Besides, its an index of economic data, it’s an index of the EXPECTATIONS of that data.) (First chart below.)
A lot of attention has been paid to the retail sector for a long time now. In recent years, this focus has been due to the major transition away from bricks-and-mortar retailing towards online retailing. More recently, the focus had surrounding around the coronavirus and the lock-down of the economy that has gone with it. Either way, the real issue has really has to due with the fact that the action in the traditional retail stocks is no longer a good indicator of the strength of the consumer. Therefore, the XRT retail ETF is no longer an important indicator for us.
Instead, we have been watching the XLY consumer discretionary ETF for signals about consumer strength...and just like the broad indexes that we discussed over the weekend, the XLY now is just as critical juncture. It is testing its all-time highs from February, so if it can break above its all-time highs, it’s going to be a very bullish development for the sector...and could/should indicate that the consumer is going to continue to make a strong come-back. If, however, it fails at these levels and rolls over in a significant way, it’s going to indicate that the XLY has made an important “double-top”...which would be quite bearish for the group.......Again, given how important the consumer is to our economy, the action in the XLY should be something investor pay close attention to over the coming days and weeks. (Second chart below.)
Finally, we’d just like to mention that we thought it is fabulous that the U.S. Open tennis tournament is going to be played at its usual time this year. There will be no fans, but it will still be great to watch it on TV. The French Open has been postponed until September, so that major championship tournament will be played before the year is out as well.
Of course, Wimbledon has been completely cancelled. It’s the sport’s crown jewel, but it makes total sense that it is not being played this year......Believe it or not, Wimbledon had an insurance policy that included getting paid if the tournament had to be cancelled due to a pandemic. That policy will reimburse them for the entire event!
Our guess is that if they played Wimbledon with no fans, they would not be able to collect on that policy. The other tournaments are just trying to make at least SOME money...through TV rights. (A better way to describe it would probably be to say that they can at least try to recover some of the losses they would otherwise have incurred.) Either way, anything Wimbledon would make by having the tournament with no fans would PALE in comparison to what they would give-up by turning down their insurance policy payment............The British love their traditions, but their famed tennis tournament is still a business!
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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