The S&P 500 continues to hover below its June 8th high (3,234) as the earnings season kicks off and the country struggles with a new wave of coronavirus cases in the southern states. The uptrend from the March low is stretching valuations and continues to be driven by a handful of large-cap technology stocks which is unsustainable.

SPX: S&P 500 Index

A rotation to other sectors could lead the market higher or perhaps a larger correction is on tap before the summer is over. In the chart below I have plotted the SPX above with 30Yr Treasury yields – typically, an inverse relationship. However, this relationship has been diverging since June 26th which signals the uptrend in equities may be on borrowed time. Divergences can continue longer than you expect so the signal is not great from a timing standpoint but I would expect this relationship to reconcile by the end of the summer.

Looking at the S&P 500 Index against 30Year Treasury bond yields.

It is a bit of a waiting game right now to see how earnings affect how stocks trade but reality could be hitting the market in the coming weeks. There are definitely signs of froth in this market that serve as a warning especially if you look at the options market. Options traders have been opening long call positions (leveraged bets on higher prices) at the highest rate since the stock market top of 2000. However, in the chart below, you can see that small option traders are taking things beyond the moon. In the week of July 12th, these traders bought twice as many than at the market top in January and nine times the amount bought at the stock market top of 2000.

Small trader option volume July 2020.
From Elliott Wave International

Chart of the Week!

Economic & Central Banking Snippets 

  • The NAHB July home builder sentiment index jumped to 72 from 58 and was 11 pts above the estimate. The NAHB said “New home demand is improving in lower density markets, including small metro areas, rural markets and large metro exurbs, as people seek out larger homes and anticipate more flexibility for telework in the years ahead. (Boock Report)
  • For the 12 months thru June, the US budget deficit stood at $3 Trillion, about 14% of GDP. (Boock Report)
  • New car registrations in the EU in June fell by 22.3% y/o/y but a moderation from the 52% decline in May. (Boock Report)
  • The U.K. economy grew by 1.8% in May, versus a 5.5% expansion expected by analysts. This is a very modest recovery after drastic dips of 20.3% in April and 6.9% in March. The service sector, which makes up 80% of GDP, showed the weakest growth of all at 0.8%. 
  •   The U.S. Treasury is on track to sell anunprecedented sum of nearly $5 trillion in new debt this year. American money-market funds have bought the brunt of the roughly $2.2 trillion worth of bills issued so far. That’s in contrast to the Fed, which has concentrated its purchases in longer maturities. (280 Capital Markets)
  • The producer-price index unexpectedly fell in June, signalling subdued inflation that should allow the Federal Reserve to keep injecting money into the economy. The PPI for final demand stood at minus 0.2% in June compared with the previous month, down from May’s 0.4% increase. Economists polled by The Wall Street Journal expected 0.4% growth. The report from the Labor Department on Friday showed that energy prices ticked up, but were offset by deflation in final demand services and food. In April, amid the Covid-19 pandemic, producer prices fell by 1.3%, the biggest decline since December 2009. (WSJ)
  • The Fed’s beige book said economic activity picked up almost everywhere in the second half of May and June, but remains well below pre-pandemic levels. “Outlooks remained highly uncertain, as contacts grappled with how long the COVID-19 pandemic would continue and the magnitude of its economic implications.”
  • Meanwhile, new filings for unemployment benefits, which are released every week, have stabilized at 1.3 million, a worrying sign that the recovery in the labor market has stalled. That’s around five times more than the number of weekly claims that were routinely filed in the weeks before the pandemic started. The labor market still has a long way to go and the last few weeks haven’t been encouraging, economists said.

Macro Snippets

  • U.S. banks think the worst of the recession is yet to come. Lenders are stockpiling billions of dollars to prepare for a wave of loan defaults. Americans had taken on record amounts of debt, which for a time helped banks make big profits. But, as coronavirus cases rise, expectations of an extended economic downturn mean the outlook for that debt has grown murkier. (WSJ)
  • Netflix Inc.’s ferocious growth in the first half of the year – driven by the homebound and bored – is not going to be repeated in the third quarter, with the company projecting 2.5 million new subscribers in its results after the bell yesterday. That number is less than half of what Wall Street had expected. (280 Capital Markets)
  • In Europe, traders are holding out hope for policy makers to conclude a stimulus pact. German Chancellor Angela Merkel raised doubts on Friday that European Union leaders would be able to agree this week on a landmark 750 billion-euro ($855 billion) recovery fund to help their economies heal from the pandemic. (280 Capital Markets)
  • The U.S. Centers for Disease Control and Prevention (CDC) has extended the “No Sail Order” for cruise ships (at least 250 passengers) through Sept. 30. Major companies had planned to restart operations on Sept. 15. Since March 1, there have been 2,973 COVID-19 or COVID-like cases on cruise ships, in addition to 34 deaths. (Investopedia)
  • Moody’s predicts that airline passenger demand won’t return to 2019 levels until the end of 2023, assuming COVID-19 vaccines and medicines are available. Aircraft manufacturers Airbus and Boeing – and the broader global supply chain feeding into their operations – will be the last of the direct aviation industry stakeholders to regain their 2019 footing. (WSJ)
  • American Airlines says it has 20,000 more employees than it needs this fall when federal aid rules expire, according to The Wall Street Journal. The airline has sent potential furlough notices to 25,000 workers, including 9,950 flight attendants. This will be on top of the 5,000 management and support jobs it said it would cut in May.
  • California Resources Corp., the state’s biggest oil and gas producer, has filed for bankruptcy, becoming the latest US energy group to buckle under a crash in crude prices triggered by the coronavirus pandemic. Recent market ructions proved to be the final straw for a company that had struggled under the weight of its debt load since it was spun off from Occidental Petroleum six years ago. 
  • U.K. to ban Huawei from 5G networks. The British government said it would bar telecom companies from buying equipment made by China’s Huawei Technologies. It’s a sharp change in policy for the U.K., which only months ago said it could manage the risks of the company’s 5G presence.
  • U.S. Chapter 11 bankruptcy filings are up 43% over June of last year, with 609 new filings, up from 424 from the same period last year, according to Epiq. For the first half of 2020, total commercial Chapter 11 filings are up 26% with 3,604 new filings, up from 2,855 from the same period last year.

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


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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