Great Expectations

Last Week’s Trade:

The COVID-19 rally remains intact after a solid stock market performance last week. Though software names attracted modest sell interest on Friday, the fact of the matter is that leadership has broadened – potentially allowing for a more sustainable move higher by the broader market in coming weeks.

For example, solar names like First Solar (FSLR) jumped 22.47% on Friday and in the process provided lift for the sector. Financials and Insurers also had a solid week, for a change. Retailors, which have been one of the worst performing sectors of the S&P 500 this Covid-19 rally, also provided some sponsorship in the form of Lululemon and Costco for the weekly trade higher.
Last week’s equity market trading reflected outperformance to the upside by the Dow Industrials (+3.80%) relative to the Nasdaq (+2.47%) and the S&P 500 (+2.45%). Had it not been for the swoon of software names on the Nasdaq on Friday, that might not have been the case. That weakness showcased by the software sector was highlighted by the likes of Datadog (DDOG), which shed 14.73 points, or 16.36% on Friday. Other notable software names that got hit on Friday were Fastly (FLSY), and Coupa Software (COUP).

On Friday, the Nasdaq shed 0.87%, while the Dow Industrials gained a marginal 0.17%, and the S&P 500 closed out the session nearly flat (+0.05%). Given that volume accompanied Friday’s Nasdaq pull back, a distribution day was registered. Interestingly, the Russell was the best performing index on Friday, gaining 1.59%. That gain by the Russell is an indication that there still remains an appetite for risk on the part of investors. The poor relative performance by the Nasdaq on the same day that the Russell outperformed to the upside was, as discussed above, due largely to the software swoon that materialized on Friday.

US equity markets remain in a confirmed uptrend as we open for trading today. It is likely that the rotation out of software names that occurred on Friday will continue today. The question is, does that rotation out of software that materialized last week necessarily indicate that the COVID-19 rally will falter? I do not think so. Actually, I think that the broadening of the sectors and stocks participating in last week’s leg of the rally should portend additional and broader gains for equity markets in coming weeks.


Those gains will be further buttressed by President Trump’s extension of the unemployment benefits this weekend – a feat that Congress could not seem to get accomplished. Included in President Trump’s executive order was deferred payroll taxes for some Americans.

As the Nasdaq chart below indicates, Friday’s close at 11,010.98 left it well above both its 200 DMA and its 50 DMA, and only 1% off its all-time high. If weakness does materialize this week, I suspect it will be well contained, due in large part, to a rising tide (momentum), better than expected Q2 earnings, the extension of unemployment benefits, and gradually improving–though uneven–economic data.

The S&P 500 is in similarly good shape–well above both its 200 DMA and its 50 DMA, and only off 1% from its 52-week high. It has the added benefit of being less extended relative to the Nasdaq and less dependent on fewer names to keep its rally intact.

I believe that if we do see broader weakness in equity markets this week, the Dow’s attempt to deliver on a golden cross (50 DMA upward through 200 DMA) will be aborted. However, in the event the rally stays in-tact, that golden cross should provide for another leg up in prices and I expect that the Dow will continue to gain ground on the Nasdaq as a result.

There are plenty of hazards in front of us as we move deeper into this year’s second half other than presidential elections. For example:

  • What is the fate of Chinese-based stock listings on US stock exchanges given the backdrop of worsening relations between the United States and China?
  • How will that narrative inform any additional listings from China here in the United States?
  • How will US/China relations be impacted by the deteriorating situation on the ground in Hong Kong?
  • What does the future of relations with China look like for the United States after the visit by a Trump cabinet member to Taiwan this weekend – the highest ranking US representative to visit the island since 1979?
  • How will the presidential elections shake out?
  • How will those elections impact congressional, senate, and local elections?
  • I find it remarkable that though Joe Biden has been reluctant to leave his home to campaign, he is apparently ahead of President Trump in many polls. What is that telling us?

Last week’s Economic Calendar highlights:

All five of the most significant economic data releases last week reflected measured improvement over previous readings.

July ISM Mfg. Index: 54.2 vs 52.6
June International Trade: $-50.7 vs $-54.6
Weekly Jobless Claims: 1,186 K vs 1,435 K
July Employment Report M/M: 1,763,000 vs 4,791,000
Unemployment Rate: 10.2% vs 11.1%

This week’s Economic Calendar highlights:

Tuesday: The Producer Price Index – Final Demand (PPI-FD) data for July is released at 8:30. Econoday consensus for the topline reading on a month-over-month basis is 0.3%. June’s reading was -0.2%. Year-over-year, the reading reflects a complete lack of pricing power. In fact is, producer prices have actually slipped into negative territory. July’s reading is expected to come in at -0.6%, slightly more constructive than June’s -0.8%. Less food and energy on a year-over-year basis, the reading is expected to be flat: 0.0%.

Wednesday: July’s Consumer Price Index (CPI) is released at 8:30 by the Bureau of Labor Statistics. Econoday consensus is calling for a month-over-month reading of 0.3% versus June’s month-over-month reading of 0.6%. The year-over-year comparison, however, reflects the opposite dynamic. June’s reading was 0.6% and July’s reading is expected to be 0.8%. Less food and energy, on a year-over-year basis, consensus is calling for a reading of 1.1%.  The EIA Petroleum Status Report is scheduled for release at 10:30. Last week’s reading was modestly mixed. Crude inventories shrank by 7.4M barrels. Gasoline and distillate inventories rose by 0.4M and 1.6M barrels respectively. Though there are not consensus notes on this weekly reading, my sense is that we are in a fairly tight band and that this week’s inventory release should reflect relative stability between supply and demand with little price volatility.

Thursday: Weekly Jobless Claims for the week ending 8/8 are due out at 8:30. Last week’s release reflected New Claims – Level at 1,186K, a drop of 249K. Consensus for this week is 1,160K. The 4-week Moving Average – Level currently stands at 1,338K.

Friday: Retail Sales for July are released at 8:30. Month-over-month, Econoday consensus is 1.8%. That reflects expectations that are calling for a relatively large slip from June’s reading of  7.5%. Less autos and gas, the reading for July is expected to be 1.0%. Industrial Production data for July is released at 9:15. Production on a month-over-month basis was 5.4% in June. In July it is expected to slip to 3.0%. Manufacturing is also expected to slip from June’s 7.2% reading to 3.0%.

Flickr photo: by Port of San Diego

Kenny’s Commentary subscribers receive the note in their inbox Monday’s before the US markets open plus full economic calendar, media, charts, Mark Sutin’s Insights, Tortoise Advisors strategies, and Sam Stovall’s analysis: Subscribe