Our apologies for not publishing yesterday, we had a power outage and it took quite a long time to get back up and running yesterday. Anyway, our feeling is that the only thing that will really be remembered from the VP debate Wednesday was the fly in Vice President Pence’s hair. So we doubt it will have a compelling impact on the outcome of the election. In other words, it the VP debate will have the same impact it usually does...zilch.
This week’s rally has been a nice one...but a little uneven. The three days that the market has rallied has come on very, very, very low volume...less than 2.9bn shares on all three days...while the one day when the market fell, the volume was almost 20% higher. However, the breadth has been quite good. It was 6 to 1 positive yesterday on the S&P 500...and 4.4 to 1 positive on the NYSE Composite. No, those aren’t blow-out numbers, but they’ve been consistently good more recently...which is not something we saw on the “up days” in September. (We’d also note that the advance/decline line is still well below its January all-time highs...and even below its August highs...but its trajectory has been improving over the past two weeks.)
More importantly, the SMH semiconductor ETF has had another good week so far, so unless it rolls-over is a significant way today, this is going to be a bullish development. The SMH closed right at its all-time highs from early September last night. To be honest, we actually wouldn’t be surprised if it...and the rest of the stock market pulled back a little bit today. Yes, we see that the futures are trading higher in pre-market trading, but with the group up over 10% over the last eleven trading days...and up 8 out of those past 11 trading days (with one of them down only slightly)...it could easily take a “breather” today before the market closes.
This means that next week should be a very important week for the chip stocks...AND the broad market over all. In other words, we expect a bit of a “breather” soon...either today or early next week (or both). However, if any pull-back is mild...and is followed by another bounce in the semis to a meaningfully “higher-high” on the SMH, it should be quite bullish for the stock market between now and the election. Of course, a lot of this will likely depend on whether Congress gets a fiscal deal done...but if the semis continue to rally in an important way, it will be bullish for stocks between now and Election Day. (We’d also note that earnings season begins next week, so that should have an impact on things as well.)
Yes, we could get a quick “sell the news” reaction to a fiscal deal agreement...and if that turns into a serious decline, all bets are off...and our cautious stance will remain intact. However, if a “sell the news” reaction is short-lived, it will be quite bullish. So again, next week’s action should be particularly important.
Don’t get us wrong, there are still a lot of reasons to question the rally of the past two weeks. The stock market is still very, very expensive...another wave of the coronavirus is very likely...(so another “wave” will negatively impact 2021 estimates)...the uncertainty surrounding the election is still with us...U.S./China tensions continue to increase...and Tom Brady seems to have made a mental mistake last night. However, even though the stock market “should not” rally much further...that does not mean it won’t continue to rise over the coming weeks.
Therefore, if the semis continue to rise (whether immediately...or after a breather)...especially if it coincides with a further rally in the Russell 2000 small cap index...it’s going to signal that the broad market has some more compelling upside potential left in it...before investors wake up to the fact that the underlying fundamentals don’t justify its current level (much less a higher one)...and that the fundamental backdrop in 2021 is unlikely to justify it either.
We’ll have more on the Russell 2000...and the potential change in our near-term posture to a more bullish one...in our weekend piece.
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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