For the first time in the history of Major League Baseball, a team has come back from a 0-3 deficit to win their League’s Championship and move-on to the World Series. That’s right, the LA Dodgers were able to come a three-game deficit over the past several days to win the ALCS and earn the right to face the Tampa Bay Rays in this year’s World Series!!!...........Wait a minute. That’s wrong. It is not the first time this has happened. The first time was in 2004...when the Red Sox did it to the Yankees. Our apologies for mis-speaking on that one. 😊
Anyway, the futures are trading higher again this morning...and the hopes of a fiscal stimulus plan from Congress and a rise in the size of the Fed’s balance sheet are getting most of the credit for that move. However, we think the bounce has more to do with the market recovering most of what it lost late in the day on Friday...due to the expiration that took place that day. (The 48 hour threat from Pelosi...which is now just 24 hours...makes it sounds like they’re not very close on a deal. And the Fed’s balance sheet didn’t really rise all that much. Just because it rose the most in many weeks...does not mean it increased in a meaningful way. It didn’t.)
In other words, sometimes (actually, many times) the market’s short-term moves are determined by simple supply/demand...and has little to do with compelling fundamental factors. Given how unsure people are about the impact a second wave of the coronavirus will have on the fundamentals over the next six months, it’s not a big surprise that traders are focusing more on the action within the stock market than those fundamental factors.
Last week’s action...when the stock market saw a decent “breather” mid-week, the “internals” of the stock market were quite impressive. As we mentioned on Friday and over the weekend, the negative breadth was quite benign on Tuesday & Wednesday...and it was actually positive on Thursday. Also, volume was VERY low on those “down days”...so it shows that the selling intensity was very low........On top of this, two areas that we said would be very important before last week’s “breather” began (the semis and the small-caps) both saw TINY declines last week. (The Russell 2000 small cap index fell only 0.23%...and the SMH dropped just 0.10%!)
We’d also note that the DXY dollar index is rather weak this morning...and it is testing its 50 DMA. As much as we’ll be watching that level today and through the rest of this week, the more important level is just below the 50 DMA...at 93. That was the October lows, so a break below that level would give the greenback a “lower-high/lower-low” sequence........This would only be a minor “lower-high/low” sequence, so we don’t mean to say that this would be a major technical development. However, given how strong the inverse correlation between the dollar and the stock market has been since the spring, a break below that 93 level should still give the stock market a further boost over the near-term (the next two weeks).
We must admit, we have a lot more confidence about our bullish stance for this week...than we do for the entire two weeks we have left before the election. In a year full of surprises (on so many different fronts), we could easily get one more (or even many more) “October surprises” before Election Day. However, the action in the broad market last week...and the action in the two groups in the stock market we have been focusing on (chips, small-caps)...and the action in the dollar...tells us that the line of least resistance should remain higher for the near-term. (Chart attached below.)
We still remain concerned about how the market will hold-up after the election...and (especially) in 2021...because we strongly believe that the stock market well ahead of its underlying fundamentals. So we reserve the right to change our mind if the facts change over the next two weeks. However, either way, we think that longer-term investors should use any further rally towards the September all-time highs to raise some cash and adjust their portfolios so that they are more defensive in nature. The recent strong performance in the consumer staples and utilities should be a yellow flag for investors about the intermediate-to-long term prospects for stocks. We think moving into some of those staples (especially ones that pay a good dividend) will be a good idea.
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Matthew J. Maley
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.