Rebound Madness?

The rebound from the March low continued this week as the large-cap technology stocks power the S&P and NASDAQ higher. As the chart below shows, the indices have become heavily concentrated in just a handful of names as the breadth of the market narrows. More than 95% of tech stocks were above their 50-day averages a month ago and now this ratio has dropped below 75%. Underneath the hood, the rebound from the March low is running out of gas.  

Chart of the most concentrated stocks in the S&P 500.

The ratio of the NASDAQ to the S&P 500 Index has now exceeded the tech bubble peak of 2000. As you can see, this ratio accelerated in 2020 as the Fed dumped in massive amounts of liquidity which seems to have found its way into the large-cap tech stocks.

Ratio of the S&P 500 to the NASDAQ.

According to Goldman Sachs there is a considerable performance bifurcation between stocks with strong and weak balance sheets. Since the March low, this differential continues to widen which means investors are piling into the same names in a flight to quality.

Goldman Sachs: Strong balance sheet companies verses weak balance sheet companies.

These investment grade names are also getting a tailwind from the Fed’s purchasing programs as corporate bond spreads are at or near record lows. This will probably spur on more debt creation as long as this dynamic continues.

Bloomberg Yield to Worst on Corporate Bonds

These companies may need the cheap financing as it looks like the coronavirus continues to spread across the southern states. This means that the economy will only rebound so much in 2020. More of the southern states will need to throttle back economic activity so the growth spurt experienced over the last few weeks is probably over.

COVID-19 Cases by week.

And now we are on to Q2 corporate earnings which begin next week with the large commercial banks (Citigroup, JPMorgan Chase, Bank of America, and Morgan Stanley). Their earnings will be terrible and projections are that S&P 500 profits likely contracted 44% this quarter according to FactSet. Stock prices may look past Q2 earnings and consider this period as transitory but that also assumes the damage is temporary. However, there is still very high unemployment and COVID-19 could go on well into 2021. How far will stocks go considering this backdrop?

If we look at the chart of the S&P 500 below, the rebound from the March low looked to be over in mid June. However, we have chopped sideways for almost four weeks which may mean the S&P is consolidating before another push higher. There have been many divergent signs that this uptrend has been weakening over the past two weeks so I expect a pullback to correct this move from the March low sometime this summer. Perhaps, a rise in COVID-19 cases combined with the reality of Q2 earnings reports will put the sellers in control of the market sometime in July.

Kisco Capital chart analysis on the S&P 500 Index.

Chart of the Week!

Working from home statistics.

Economic & Central Banking Snippets 

  • U.S. home prices will fall about 6.6% during the 12 months through May 2021, the first annual annual decline since 2012, as the economic impact of the Covid-19 pandemic deepens, according to a report Tuesday by CoreLogic Inc.
  • U.S. mortgage applications to purchase a home rose 5% for the week and were 33% higher than a year ago, according to the Mortgage Bankers Association’s.
  • Another 1.4 million Americans filed for unemployment benefits last week. While the headline initial claims figure has been gradually moderating, the situation is more troubling when the Pandemic Unemployment Assistance (PUA) program is taken into account. When you combine the array of long-established and brand new state and federal programs, total continuing claims hit a record high of 32.9 million during the week ending June 20, the latest data available. (WSJ)
Initial jobless claims plus the pandemic unemployment assistance.
  • The Fed’s balance sheet shrunk for the 4th week and is back below $7 Trillion. The main reason has been a reduction in swap lines while their repo facility usage has been reduced to near nothing.  
  • The European Commission has downgraded its economic forecasts since “the lifting of lockdown measures is proceeding at a more gradual pace than assumed.” It now projects that the euro area economy will contract by 8.7% in 2020 and grow by 6.1% in 2021. The EU economy is forecast to contract by 8.3% in 2020 and grow by 5.8% in 2021. (Investopedia)

Macro Snippets

  • United Airlines and the union that represents its some 13,000 pilots have reached a tentative agreement for voluntary furloughs and early retirement packages, according to CNBC. The carrier has warned up to 36,000 of its workers could be furloughed this fall due to the coronavirus pandemic.
  • The International Energy Agency says the worst of the pandemic’s impact on oil demand is behind us. Demand plunged by 10.75 million barrels a day in H1 and is expected to be down 5.1 mb/d in H2. While IEA has improved its 2020 outlook, it says that “the accelerating number of COVID-19 cases is a disturbing reminder that the pandemic is not under control and the risk to our market outlook is almost certainly to the downside.” (WSJ)
  • Prices for forest products like lumber and plywood have soared because of booming demand from home builders making up for lost time, a DIY explosion sparked by stay-at-home orders and a race among restaurants and bars to install outdoor seating areas. (WSJ)
Prices of Random Length Lumber - 2020.
  • Sony has bought a 1.4% stake in Epic Games for $250 million. This translates to a $17.8 billion valuation for the creator of the massively popular “Fortnite.” Epic is also backed by China’s Tencent, which owns a 40% stake.
  • Retail investors now make up roughly one-fifth of participants in stock market trading and up to one-quarter on the busiest trading days, according to Citadel Securities. Structural market changes such as zero commissions are cited as a factor. (SIFMA)
  • China’s stock market, which had been on a tear of late as the government encouraged citizens to invest, has pulled back sharply to end the week as state-run media has changed its tune. The Shanghai Composite had risen 16.5% over eight straight sessions of gains, the biggest eight-day percentage increase since March 2008, but there are reports this morning that two state-run pension funds have been unloading stock as markets get overheated. (Investopedia)
  • Tyson Foods is looking to replace labor with robots, according to The Wall Street Journal. The giant beef, pork and poultry company has engineers and scientists, some from the auto industry, working on a long-term solution as coronavirus makes processing plants even more dangerous for workers. 
  • An early trial of an experimental coronavirus vaccine from Pfizer Inc. and BioNtech SE showed it’s safe and prompted patients to produce antibodies against the new virus, keeping it in the lead pack for a pandemic shot. (280 Securities)
  • NPC International Inc., the largest franchisee of Pizza Hut restaurants in the U.S., filed for bankruptcy after coronavirus-related shutdowns added to competitive pressures in the restaurant industry.
  • Delta, United, JetBlue, Southwest, and Alaska are the latest major airlines who have signed letters of intent for emergency loans from the U.S Treasury Dept. Last week, American, Frontier, Hawaiian, SkyWest, and Spirit Airlines also struck agreements for the aid. The CARES Act set aside $25 billion in loans for U.S. passenger airlines. (Investopedia)
Airline corporate vs domestic ticket volume.
  • The U.S. government awarded drugmaker Novavax a $1.6 billion contract to develop a coronavirus vaccine, the biggest amount yet granted under the White House’s “Operation Warp Speed.” Regeneron Pharmaceuticals has received a $450 million contract. (WSJ)
  • 202 year-old clothier Brooks Brothers filed for bankruptcy today and announced dozens of store closures. The bankruptcy filing in Delaware allows Brooks Brothers to keep operating while it works out a plan to turn the business around and pay its debts. (Investopedia)
  • Wells Fargo, the largest employer among U.S. banks, is preparing to cut thousands of jobs starting later this year, according to Bloomberg. Pressure to dramatically reduce costs is coming to a head inside the bank, prompting executives to draft plans that may ultimately eliminate tens of thousands of positions. (Investopedia)
  • The vacancy rate for Manhattan’s apartments in New York City jumped to the highest on record in June as people ditch The Big Apple. Available listings surged 85% from a year earlier to 10,789, Miller Samuel and Douglas Elliman said. The median rent slid 6.6% to $3,242, the first drop in 18 months. (Investopedia)

That is all for now and thank you for being a subscriber!

Paul J. McCarthy


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.