September 4, 2020

Fake Blues

Total nonfarm payroll employment rose by 1.37 million in August, and the Unemployment Rate declined to 8.4 percent    -U.S. Bureau of Labor

The market was overbought, the market was overbought. There I said it twice, and guess what, it’s still overbought. But as I’ve drawn attention to before, the recent sharp declines in the broad indexes was at the hands of the same handful of stocks that rose to unsustainable, but not totally unreasonable, levels. And while this week’s decline was widely felt, sectors such as Financial and Industrials held in with less than a 5% overall decline. But it is my opinion that the decline in technology stocks is more of a liquidation from profit taking than selling outright, which is suggested by a favorable options environment. By the end of it all of the other headwinds that are endlessly talked about, such a Covid and Unemployment were met with the monthly release of the Employment situation, which was a pleasant surprise. Enough for the pundits to applaud the still rising rate of employment or simply another opportunity to turn to the blues, and why not, it sells better. Lucky for us, in the long run, the markets will continue to not care.

The Markets

The decline felt this week were the same names, Apple (AAPL) NVidia (NVDA) Salesforce (CRM) that all dropped over 10%, more than the indexes they’re represented in. And with the exception of some buying in the Financial sector, and a meager decline in US Treasury rates, the overall decline began after the week opening the new month with some impressive gains. This means that the weekly decline is barely 2% overall and some better behavior of the indexes coming into today’s close, suggests to me the markets are as much of playground as they are an opportunity to take profits and losses. All accounts did see the increase in some new cash this week that comes with two strategies. The first is to protect the portfolios which have had a good performance over the last few months, and the second is to have some liquidity on hand for new buys. With continuing challenges coming from the media and the nearing of the elections, in my opinion, potential for opportunities, especially global ones, is still open.

The Economy

Nothing more can be said about today’s Unemployment data than there continues to be some growth in employment and therefore in consumer spending. However, it’s worth noting that any conversations between the houses in Washington is currently inert and without the confirmation of stimulus when needed, the consumer may have a job, but going out and spending is another matter. Likewise, while there are many openings for the potential miscalculation in who is actually working, there are still nearly 3.4 workers who have permanently lost their jobs, a level not experienced since 2013. Additional conflicts in some of the week’s economic data came from the ISM Indexes for both the Manufacturing and NON- Manufacturing sectors of the economy. The former came in higher 56.0 (over 50 suggests expansion) but a decline in the latter to 56.8 from 67.7 in July. Still in expansion territory, but definitely slowing down.

External Events

Last March it was our Hedge Fund heroes telling us the world was coming to an end. Then our Algochums tried to back them up until they found better playmates in the sandbox with the Pindudes, and it was a marriage made in heaven. Now we’re witnessing a divorce. First, the SEC is investigating free broker Robinhood for possibly supplying the Algochums with retail trading data to intensify the outcome. This could be an interesting development since the Pindudes is no small army and this week was the first opportunity in a while to test the potential of profiting from a down market. My thoughts are this isn’t likely, and when the dust settles, they will likely go back looking for cheap stocks with cheap fundamentals and cheap prices or expensive stocks, with ridiculous fundamentals and cheap prices. On the election front,  campaigning is momentum in the press as each side blames the other for the chaos best presented by competing media narratives. For the markets, it’s possible if this week’s decline gains any momentum of its own, the narrative will probably pick up on it as well. But as the title of this piece suggests, the social mood of the public is at worst and best, uncertain. And its uncertainty that should be a reasonable fuel for even slowing economic growth and should some pickup in consumer behavior materialize then the markets too will respond favorably. In the meantime, with little news coming from outside of the United States, should there be any reasonableness to the campaigning dialogue, the impact of the election outcome could be less dynamic than expected. Therefore, for now the uncertainty calls for patience, and a good temporary remedy for uncertainty is distraction. Have a peaceful Labor Day weekend.

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