Morning Comment: What is SAP telling us?

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Well, we have just over a week to go before the election. Of course, that doesn’t mean that we’ll get rid of one of the “uncertainties” in the market place...because the Presidential election AND/OR several of the Senate elections could easily be contested. Either way, based on what we’ve seen over the weekend and this morning, there will still be some considerable uncertainties surrounding a 2nd wave (or 3rd wave...depending on how you count them) of Covid-19 hitting many parts of the northern hemisphere.

We all know that the treatments for Covid-19 are a zillion times better than they were in the spring, so the death rates will be much, much smaller. We also know that the lock-downs are likely to be less stringent than they were last spring. However, given the level of the U.S. stock market right now, those assumptions are already priced-in...and then some!

We’re definitely seeing a preview this morning of what this healthcare crisis could have on the markets as we move into the colder months. The futures are trading lower on the news of a big spike in Covid cases around the world (with the U.S. seeing almost 90k infections for the second straight day)...and renewed lock-downs in more and more countries (like Italy now). However, probably a bigger story this morning is the negative news out of Germany’s SAP...which is down 20% after they cut their full year revenue estimates and said a fresh wave of lock-downs would hurt demand through the first half of next year.

Needless to say, the potential of this kind of development is something we’ve been harping on for MONTHS...and now we’re beginning to see it in real life (rather than just in speculative terms). To think that SAP is only going to be one of a small number of companies who cut their guidance for Q4 and the first half of this year is crazy. Therefore, as the “E” part of the “P/E ratio” falls, it’s going to make this already very expensive stock market an even more expensive one.

Yes, markets can stay expensive for a long time...but investors need to realize that when the market is expensive, the risk/reward situation shifts...and investors need to plan their future moves more carefully. In other words, when markets get expensive, investors need to put a plan in place IN ADVANCE...for what they will do if/when the market turns down in a meaningful way at some point in the future.

As we mentioned over the weekend, if you take-out 2016, you have to go all the way back to 1988 to find a time when the stock market did not rally over the last seven days before the Presidential Election. However we also said that this year has obviously not been a normal year, so that anything could happen this week. The futures are trading 1% lower as we write (much to President Trump’s chagrin) maybe this year will be the second time in a row where we see an exception to the rule. However, the news out of Germany’s software giant led us to notice that Germany’s stock market is getting close to a key support level.

To be more specific, Germany’s DAX...which is down 2.5% on this getting close to testing its 200 DMA once again. This moving average has provided solid support since early June, so any meaningful break below that line will be a negative development on a technical basis. The key word in that last sentence is “meaningful” it did break slightly below that line a couple of times in June, but was able to regain it rather quickly. However, if we DO get a “meaningful” break below that moving average, it’s going to be doubly important because that kind of move would ALSO take the DAX below the “neck-line” of a “head & shoulders” pattern for the index.......As always, we have to wait for any break to actually take place before we raise any kind of warning flag, but there is no question that the Germany stock market is sitting at a key technical juncture. (First chart below.)

With the U.S. election just over a week away, you’d think we’d be concentrating on the U.S. stock market this morning. However, since we’ve talked a lot about U.S. market recently...and will certainly talk about it a lot more over the rest of this week...we’re actually going to finish today by talking about another foreign stock market this morning. Despite the fact that we keep hearing positive economic news out of China recently, their stock market has been under some pressure over the past couple of weeks. It has not been a major decline by any means, but the decline has taken the Shanghai Index down near the 3,200 level...which had provided solid support over the past four months......The 3,200 level provided that strong support on two occasions in both June and September, so if it breaks below that level (which would also take it below its trend-line from March), it would be quite negative for China’s stock market on a technical basis. (Second chart below.)

We raise this issue with China because we know that China can fudge their official numbers...and thus their economy might not be rebounding to the degree they’re claiming. More importantly, China can frequently be an important indicator for global growth. (Even though they are pushing hard to create domestic demand, their economy is still very dependent on exports.) Therefore, if the Chinese stock market starts to breakdown in a more significant manner, it could/should be telling us that a second/third wave of the coronavirus IS having a detrimental impact on global growth...just like SAP seems to be telling us this morning.

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Oct 26, 2020 — 9:10 AM
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