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Which Way Wednesday – More Stimulus Edition

Well, that was predictable.  

How predictable?  So predictable that I wrote on Sunday:

Remember, the 5% Rule™ is not TA, TA is nonsense, the 5% Rule™ is MATH!  Math is how we describe the universe – including the market universe.  The math of the 5% Rule™ tells us that 25% (3,562) is just the 20% line (3,420) with an overshoot but now the key is how much of a pullback do we get?  If the 20% line holds, then this could be bullish consolidation for a move up but, if it fails, then we can expect at least a 20% retrace of the 20% move up (-4%) and that would be 3,420-2,850 = 570 x 0.2 = 114.  So 3,420 – 114 = 3,306 – that's the pullback line we need to keep an eye on.  

As usual, the bounce is more predictable than the recovery but the bottom line is both parties are, once again, talking about stimulus because they know as well as I do that failing to hold 3,306 would take us down to the strong retrace line at 3,135 and that would be more than a 10% correction off the 3,588 high (3,229), which would set off all kinds of panicky indicators so GAME ON for more stimulus talks – even if it is the same BS they were arguing over in June and July with no resolution (they took August off to watch the country burn).  

So of course we're going to bounce off the line we predicted we'd bounce off.  The question is – how much?  Here's where the 5% Rule™ gets a little tricky because there's two zones we're looking at.  One is easy, that's simply the total drop from 3,600 (we give them the extra 12 points) to 3,300 and that's 300 points so we expect 60-point bounces to 3,360 (weak) and 3,420 (strong) and, since 3,420 is our 20% line – that's going to be a very serious win/lose line for the S&P 500.

The other calculation we can do is going to be more accurate and that's using our 5% lines from 2,850, which is the Must Hold line on the S&P 500 (the line below which we are no longer in a bull market) so 3,420 is the 20% line and 3,562 is the 25% line and we overshot that a little but we'll ignore that for the moment.  3,277 is the 15% line so that's the real zone the S&P is in at the moment, between the 15% and 25% lines so that's the range we need to pay attention to!  

Notice the 200-2 hour (what that chart's units are measuring) moving average is also coming up to meet the weak bounce line and almost right at our 3,306 prediction as well.  That means there is a lot of support there but it also means failing that will mean there isn't any further support until the 200-day moving average at 3,100 where it will meet our Strong Retrace line at 3,135 and, by the way, the 50-day moving average for the S&P 500 is 3,305.37 this morning – right on the money for our 3,306 prediction.  

That's why the 5% Rule™ is better than TA – TA only tells you what did happen after the fact, the 5% Rule™ tells you what the chart will look like well in advance (see: "Charts From the Future: 5% Rule Update" and "5% Rules! How Can We Be So Right?").

U.S. deficit rises amid COVID-19 but public concern about it falls | Pew  Research CenterAnd, of course, the 5% Rule™ doesn't tell us what's going to happen – it only tells us where the resistance points are – it's our Fundamental Analysis that tells us what is likely to happen and then we calculate the resistance points and THEN we run FA again to determine whether or not the resistance points are likely to be overwhelmed by the Fundamentals and THEN we have a prediction.  This is our key advantage over lazy TA people who don't do FA as well as Fundamentalists who don't take TA into account.  

So what is going to happen?  Well now it's Macro FA time and the big swing factor is stimulus.  The Republicans are willing to sign off on $1Tn and the Democrats want $3Tn but Trump doesn't want a $7Tn deficit for 2020 as it might make him look bad (ROFL!) or he may have to admit he hasn't really defeated the virus yet, which is kind of his whole re-election platform.

Of course the connundrum is that more stimulus weakens the Dollar which helps boost the market and, as we expected, the Dollar bottomed out last week and has bounced back a bit and $1Tn addtitional stimulus is baked in already and even a compromise of $2Tn is to be expected so we're not going to weaken the Dollar much more, pre-election, without a $3Tn stimulus bill so below $2Tn would actually be a disaster for Trump as it would not be enough to strengthen the economy nor would it be enough to weaken the Dollar.  

But Trump doesn't care about what's actually good for the economy, only what's going to get him re-elected in two months.  That means his best play is the Brexit play (also orchestrated by Russia to destroy an economy) in which NOTHING happens at all and all the fighting is a huge distraction that the British Conservatives (also backed by Russia) were able to play off in order to consolidate their power.  So it's more likely we don't get a stimulus deal pre-election or maybe an October surprise deal Trump can take credit for but, in the short-term, we are heading for virus spikes during back-to-school season and no proper stimulus so no, I don't see the market poppng back over 3,420.

If 3,420 (the 20% line) becomes the top of the pre-election range then 3,135 (the 10% line) is hopefully the bottom and that's the line where I'd expect the GOP to capitulate and pass some stimulus before we find ourselves on the way to a 20% market plunge right into the election.


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  1. Good Morning Everyone!!! Here is the link to today's webinar.

  2. Good Morning

  3. GM!  TRIL….hope you were in them.  Whilst they were covered with the Nov 10Cs, let it settle and then we will roll or figure out the next steps.

    CRBP – bummed that I did not short….Didn't think it would work in SS, but again, hindsight….

  4. Good Morning.

  5. Cases are picking up again in Western Europe and in some regions, there is a spike in hospitalization. Number of deaths are still low as it seems we now have better treatment options. And I assume that more young people are infected with schools opening. But the next couple of months could be telling – I suspect that confinement could be the cards again.

  6. Canada which flattened the curve like piss on a plate is now experiencing increasing case levels.

    in quebec where schools opened two weeks ago with no masks they have dozens of in school cases and as everywhere people under forty partying have lead to a resurgence right across the country. British colombia has already closed bars and banquet halls.

    As a result the govt is predicting slower growth in fourth quarter than third quarter.

  7. Good morning!

    Big recovery in the works, almost 3,400 already so all it well, I guess. 

    • The Nasdaq is rebounding 1.8% from yesterday's selloff where it entered correction territory. Conviction grew just ahead of trading and futures moved higher into the opening bell.
    • The Nasdaq 100 (NASDAQ:QQQ) is looking to successfully test its 50-day moving average. It closed barely above that level of $269.78 yesterday.

    • The S&P is up 1.3% and the Dow is gaining 1%.
    • The Fab 5 megacaps are higher. Apple is leading, up 3% after tumbling 16% from recent highs.
    • Technology (NYSEARCA:XLK) is the leading sector as hard-hit chip stocks like Nvidia rallying.
    • Tesla is up 6% following its biggest one-day percentage drop every.
    • Energy (NYSEARCA:XLE) is also rebounding as crude futures move higher following their plunge in the previous session, but is till the worst-performing sector.
    • All 11 sectors are in the green.
    • The market continues to experience "the liquidity-fundamental tug of war that will determine whether this is a temporary 'healthy pullback' or a more lasting market correction," Mohamed El-Erian tweets this morning.
    • Spot gold is climbing, up 0.7%
    • Back-to-school season has presented a challenge to retail analysts evaluating exactly what an out-of-the-ordinary year looks like for the usual stock suspects, especially as different regions face differing timelines and approaches to physical schooling.
    • In the case of softlines, that's led to some takes suggesting that less in-person schooling means a challenging time for apparel.
    • But CFRA says spending could hit record levels this year, citing National Retail Federation data.
    • It's looking at overall spending, and expecting more purchases of computers and electronics to reflect the ongoing shift toward remote learning. Some 55% of shoppers surveyed plan to take at least some classes online, with only 26% expecting to have most classes in person.
    • And parents with children in K-12 grades expected to spend $789.49/household on average, up from $696.70/household last year ($33.9B in total this year, vs. $26.2B last year). Some 63% of respondents say they plan to buy electronics or computer-related equipment, vs. 54% last year.
    • College is similar, with $1,059.20 the average up from last year's $976.78, and 60% of respondents looking to buy tech vs. 51% last year.
    • That points to CFRA's first expected winner of the season: Best Buy (NYSE:BBY), which dominates the S&P 1500 Computer & Electronics retail category. Its price target of $130 implies 23.5% upside from here.
    • Conversely, clothing and accessories could see a pullback. CFRA is using an expectations framework to find opportunities, chiefly through a regression of historical expected spending plans to build a forecast for Q3 revenues.
    • That points to other winners it expects to survive the COVID-19 "stress test" in this BTS season: Nike (NKE; dominating in footwear, and where the firm sees 15% upside in the coming 12 months); Ross Stores (NASDAQ:ROST) and TJX (leading in off-price apparel); and VF Corp (VFC; a leader in apparel, accessories and luxury goods).
    • Thank you for being a Seeking Alpha Premium subscriber. Subscribers have exclusive access to Notable Calls, Premium Insights, and our newly launched Catalyst Watch. Taken together, readers get transparency into the boldest calls from investment professionals, how the market digests the latest news developments and how you can stay ahead of market moving events.
    • Q2 results among consumer credit information stocks stood up fairly well, all things considered (including not only pandemic headwinds but also net pro-cyclicality), Baird says in its review of the sector.
    • "Consumer credit supply and demand, and financial institutions' receptivity to new solutions all appear relatively resilient and better than 2008-09," Jeffrey Meuler and team write.
    • Trends have improved materially since April, Baird notes, and "core" ex-mortgage revenues declined by a mid-single-digit OCC rate for the quarter.
    • A significant mix factor for the current market is U.S. mortgage market growth, with inquiries up 41%, the firm says. In Q2, the market likely accounted for about 30% of Equifax (NYSE:EFX) revenue, about 10% of TransUnion's (NYSE:TRU), and about 7% of Experian's (OTCQX:EXPGY). And material tailwinds in the market are ongoing for Q3 (though 2021 is harder to predict).
    • Equifax has a couple of other mix positives, Baird says: "Verification Services (structural positive, potentially with positive cyclical elements) and Employer Services (counter-cyclical positive)."
    • Its top idea among the credit bureaus is TransUnion, though it also likes Fair Isaac (NYSE:FICO).
    • As for Equifax, Baird likes it "structurally/on a multi-year basis" but rates it Neutral as it expects mix and margin cross-currents in the coming year.
    • A revisit of its models on nine residential REITs has J.P. Morgan looking to upside, particular in the single-family rental space and from supportive liquidity across the sector.
    • It examined models on six multifamily REITs and three single-family rental trusts, and determined to revise up estimates in SFR: "Both internal and external growth drivers are working, and we see bottom-line earnings growth being well above the REIT group average in the next couple years," the firm says.
    • In particular, it's keeping its FFO/share estimate for American Homes 4 Rent (NYSE:AMH) flat for 2020 and bumping it down 2-3% for 2021-2022 – but for Invitation Homes (NYSE:INVH), it's boosting estimates by 1% this year, 3% for 2021 and 4% for 2022, and raising expectations for Front Yard Residential (NYSE:RESI) substantially: to $0.55 from $0.23 for this year, to $0.64 from $0.53 for 2021, and to $0.76 from $0.62 for 2022.
    • Meanwhile over in the multifamily space, it's making "surprisingly minor" changes – which it considers a very positive outcome, noting that rental rate trends (and negative headlines about them) are spurring weakness in the stocks.
    • Digging into the underlying trends "suggests to us that there may not be as much downside to numbers from here despite how jarring the headlines appear," the firm says. "To be sure, 3Q is unlikely to show inspiring rent trends, but we think the companies can push through this and concessions should abate later into the year or early in 2021."
    • And overall it believes liquidity across the spectrum will support values. Its multifamily NAV estimates are more likely to look conservative as the private market starts to transact; "We would not be surprised to see cap rates at or below pre-COVID levels (i.e., mid-4s) come this time next year." Then for SFR, strength in the for-sale market points to higher-than-expected home values at this point in the pandemic. Overall, low-cost debt ("coupons in the 2s") should be a value driver.
    • Its favorite name in single-family rentals is American Homes 4 Rent, where its price target is up to $32 from a previous $30.
    • In apartment REITs, it favors UDR (where its $45 price target implies 27% upside) and Camden Property Trust (NYSE:CPT). In that space it also rates AvalonBay Communities (NYSE:AVB) Overweight, with a $217 target that implies 34% upside.
    • UBS is still looking positively on automobile suppliers, even as shares outperformed expectations during a weaker Q2.
    • But then the analysts believe companies are too cautious in their forecasting for 2021 – implying underlying global production falling more than 5%, vs. the UBS estimate of down 2%.
    • It's continuing to forecast global production up 15% next year, which it says implies its covered suppliers will see organic sales growth in the 16-25% range, helped by geographic mix and content (mostly CO2/EV-related and traditional parts, it says).
    • "This should drive sharp margin expansion and deleveraging, two major KPIs for share price performance," UBS says, and it expects the companies to increase EBIT margins by 250-500 basis points.
    • Meanwhile, the European electric vehicle market is running above expectations (up 150% to July, including lockdowns, and up 300% in July alone) and UBS says successful strategies in the EV area will "drive earnings upgrades and valuation re-rating."
    • And the companies it highlights as best positioned to benefit from a re-rating include Aptiv (APTV; "high voltage potential underestimated, and selling EV-related parts is margin accretive"); Valeo (OTCPK:VLEEY; "Siemens JV loss will start shrinking with some near-term upside potential"); and Hella (OTCPK:HLLGY; "highly margin-focused EV content").
    • It's boosting targets for all three of those Buy-rated stocks, as well as Neutral-rated Conti (OTCPK:CTTAY), by more than 10% to reflect the stronger underlying EV growth. It's also raising its target on Neutral-rated Autoliv (NYSE:ALV), pointing there to higher earnings/free cash flow.
    • This year's presidential election matters more than usual to the oil and gas industry, Wells Fargo argues, with potentially very divergent outcomes to consider in an environment with some heavily leveraged participants.
    • The firm is used to opposing views squaring off in elections; "However, those differences have typically fallen along the line of expansion/conservation, tax policies/subsidies, access/restrictions and modest proposals for renewables/alternatives." And ultimately, those programs have been implemented or opposed by both parties at different times.
    • But the 2020 election isn't following that script, Roger Read and team write. Re-electing President Trump would keep the conventional oil and gas industry in a "favorable political environment."
    • By contrast, the Democratic primaries saw their candidates (including nominee Joe Biden) advocating the phase-out of oil and gas in favor of renewable energy, Read notes, and Biden's agenda sets specific targets for zero-emission cars, buses and trains within 10-15 years.
    • And that would bring "significant deterioration" for oil/gas prospects beginning in 2022, Wells Fargo says, including undercutting prospects for growth and investment, and potentially shortening the useful lives of existing assets.
    • Ahead of such a critical election, the firm argues that there's less risk in companies with "diversified operations, significant international exposure, and less exposure to undeveloped federal lands offshore."
    • That means favoring IOCs/IECs like Chevron (NYSE:CVX) and BP, at least for now. And it says it's favorably disposed toward several refiners, but the potential for a Biden victory is "likely enough to keep most investors on the sidelines at least until the election results are known."
    • Meanwhile, "we would be very careful investing in highly leveraged oil & gas companies" like Occidental Petroleum (OXY, which it rates Underweight) or Calumet Specialty Products Partners (NASDAQ:CLMT) ahead of the election.
    • Evercore ISI starts off coverage on FedEd (FDX +2.6%) with an Outperform rating and price target of $300.
    • Analyst Duane Pfennigwerth: "Years of growth has been generated in a matter of months, soaking up domestic parcel capacity. Off-peak periods now offer peak-like demand levels. Healthy capacity utilization inspires pricing confidence and a willingness to walk away from lower margin business. We believe a near-term pricing opportunity exists in ground, freight and International express (air cargo) given sharply lower belly capacity in passenger aircraft."
    • The firm also points to the vaccine wildcard. "Upon achievement of a safe and effective vaccine, companies like FedEx will have a key role to play in making it widely available. This could further accelerate what is already going to be a very interesting peak demand period," notes Pfennigwerth.
    • FedEx's Seeking Alpha Quant rating of 4.79 ranks the 15th highest out of 506 industrial stocks.
    • The Bank of Canada keeps its target for the overnight rate at 0.25% and continues its quantitative easing program with large-scale asset purchases of at least C$5B per week of Canadian government bonds.
    • The loonie rises 0.3% against the U.S. dollar; iShares MSCI Canada ETF (NYSEARCA:EWC) gains 1.8%.
    • "The Bank continues to expect this strong reopening phase to be followed by a protracted and uneven recuperation phase, which will be heavily reliant on policy support," the central bank said in its statement.
    • Of course, the pace of the recovery will depend on the path of the COVID-19 pandemic and "the evolution of social distancing measures required to contain its spread."
    • "As the economy reopens, the bounce-back in activity in the third quarter looks to be faster than anticipated in July," it said, pointing out that economic activity has been supported by government programs to replace incomes and subsidize wages.
    • Tesla (NASDAQ:TSLA) +8.74%, Nio (NYSE:NIO) +7.55%, Li Auto (NASDAQ:LI) +2.55%, Xpeng (NYSE:XPEV) +2.45% and Kandi Technologies (NASDAQ:KNDI) +1.15% are all higher on a positive turn in investor sentiment and with some analysts noting that China auto sales were officially reported to have increased 8.9% in August.
    • On the EV front, a micro electric vehicle by General Motors' local Chinese joint venture was the top-selling EV model in China in August at 15K units sold, followed by Tesla with the Model 3 at 11,800 unit sold. Reports out of China indicate improved interest for EVs outside of major cities.
    • 6.618M July job openings vs. 6.001M prior (revised from 5.889M) and 5.950M consensus.
    • Job opening rate 4.5.

  8. Remind me to avoid having a meal at tommyt's home…. ;)

  9. CMG/Phil- STP has some Short calls expiring in Sep. Is there a plan to roll this week or wait till next week?

  10. Lordy, we have tapes! We are led by fools…

  11. Phil  PTON

    I am not much of a momentum trader but curious what you thought about the company that makes bikes that go nowhere.  Are they about to smash earnings and have a ZM style Friday? is there a craps play in there somewhere.  Gottahavesomefun

  12. Dow up 666, might be a sign…

  13. Pharm/TRIL – Thanks for the tip. Even with the covered call it was 30% win for me. I'm looking at the roll to the Feb $12.50 for about a $0.60 credit. But, with about a $1 of extrinsic left in the short Nov $10 I may wait a little longer to make the roll.

  14. Daveo….that's probably a good play to do.  

    MYOV…people are high on them. Already recovered and NDA is accepted.

  15. TRIL/Pharm – Very nice call!

    Canada/Tommy – We're about to have that here too.

    LOL 1020.

    CMG/Ravi – We discussed rolling options in the Webinar and I'll get into it next week for sure.

    PTON/Monk – I liked them when they came out as the numbers worked but overdone now for sure.  I still wouldn't bet against them – just a stay-away for me.  

    Doing a lot better than bikes that go somewhere:



    Another chance to short at 3,420 on /ES with tight stops above.  Lined up with 28,200, 11,475 and 1,540.

  16. No virus aid before election? Pessimism before Senate vote