S&P 500 Trendline

Summer to Fall

Summer trading is rounding third base and so might this rally from the March low. The size of the rebound does not match the recovery in the economy as stocks have front-run a return to normalcy. As we approach the seasonally weakest part of the calendar, the market will need to wrestle with the uncertainty of a Presidential election and the timing of a vaccine. The massive amounts of monetary and fiscal measures are in the trillions worldwide and they have worked to push up the financial markets into an unprecedented recovery wave.

There are some bright spots in today’s economy as the mass exodus from cities will benefit the housing sector but the hospitality and restaurant sectors will be impaired for some time. This means elevated unemployment could be with us well into 2021 which will drag on consumer spending which drives growth in the U.S. economy. I also think we are seeing the early stages of a permanent shift to remote working and education which will have lasting changes on real estate and how education is administered (no more snow days).

If we review the chart below, we can see a trend line from the 2009 low that has acted mostly as upper-boundary resistance for several years. If we continue higher, we should intersect this trend line around 3500 (about 3-4% higher than Friday’s close). Of course, the market could push through this trend-line in what could be a market melt-up but I think we will have to wait and see on that scenario.

Trend line from the 2009 low on the S&P 500 Index.

If we juxtapose the recent price action of 30Yr interest rates verses the S&P Index over the past several months, we can see that interest rates are pointing lower creating a negative divergence. If this divergence continues for much longer, I think the S&P will be vulnerable to moving into corrective territory. Timing is the tough part as the S&P has not broken trend and looks to continue a bit higher as we close out the summer. In the meantime, enjoy the remainder of the summer months as things should get interesting in the coming months.

Chart of 30Yr. Treasury yields compared to the S&P 500 Index.

Chart of the Week!

Statista COID-19 Deaths by country.

Economic & Central Banking Snippets 

  • The August Markit manufacturing and services composite index rose to 54.7 from 50.3 as “greater client demand and increased marketing activity led to a renewed rise in overall new business.” (Boock Report)
  • Sales of existing U.S. homes climbed 24.7% in July from June, according to the National Association of Realtors. That’s the strongest monthly gain in the history of the survey, going back to 1968, and the highest sales pace since December 2006. This overwhelmed the rise in inventory and drove months’ supply down to 3.1 from 3.9. This, along with lower mortgage rates, drove the median home price to a record high of $304,100 and which is an increase of 8.5% y/o/y. (WSJ/Investopedia)
  • U.S. new-home construction surged in July as housing starts jumped 23% from June to an annual pace of almost 1.5 million, a reflection of rock-bottom interest rates and strong demand from buyers. “Although housing accounts for a small share of GDP, its impact on the broader economy is wide,” said Berenberg Capital Markets economist Roiana Reid. (WSJ)
  • The August NAHB home builder index rose to 78 from 72 and that was 4 pts above expectations which matches the highest level on record dating back to the 1990’s. The NAHB said “Single family construction is benefiting from low interest rates and a noticeable suburban shift in housing demand to suburbs, exurbs and rural markets as renters and buyers seek out more affordable, lower density markets.”
  • While the housing market appears to be regaining ground at a healthy clip, there are signs other sectors are losing some steam. The New York Fed’s Empire State survey showed the state’s manufacturing activity growing at a much slower pace in August than July. Economists scrutinize the report as potentially foreshadowing other regional Fed surveys and closely watched national purchasing managers indexes. The message so far: “We have seen a number of signs that the economy has lost momentum lately and this regional indicator for one sector in the economy is roughly consistent with that message,” said JP Morgan Chase economist Daniel Silver. (WSJ)
  • The Fed minutes released on Wednesday revealed that the majority of the committee were not big fans of yield control but much of it was due to logistical reasons.
  • Japan’s economy shrank a record -7.8% (-27.8% annualized) in the April-June quarter. This was worse than expected and exceeded the previous record of -4.8% set in Q1 2009. The last time Japan saw three consecutive quarters of contractions was in 2011, when it was recovering from the strongest earthquake in its recorded history and the resultant tsunami. (Investopedia)
  • Initial jobless claims got back above 1mm this week, totaling 1.11mm, up from 971k last week and higher than the estimate of 920k. This metric will be closely watched for signs of a second wave within the economy.

Macro Snippets

  • Company insiders have sold $50B in stocks since the start of May, according to TrimTabs Investment Research data. Selling is taking place at the fastest pace in almost fifteen years with August on track to be the third month of the past four where the value exceeds $15 billion. This follows intense buying during the COVID-19 slump in March, which reached levels unseen since the global financial crisis.
  • Amazon.com is expanding its physical offices in six U.S. cities and adding thousands of corporate jobs in those areas, an indication the tech giant is making long-term plans around in-person office work even as other companies embrace lasting remote employment. (WSJ)
  • Swiss health care giant Roche and Regeneron Pharmaceuticals will develop, manufacture and distribute the latter’s COVID-19 antibody cocktail. The drug is currently in late-stage clinical trials and is meant to treat and prevent the disease. This collaboration is expected to increase supply to at least three and a half times the current capacity. (Investopedia)
  • Mexico has surpassed its “catastrophic” worst-case scenario of 60,000 Covid-19 deaths and is shaping up as one of the worst health and economic casualties of the global pandemic. Latin America’s second-biggest economy, which has the world’s third highest overall coronavirus death toll, hit the grim milestone on Saturday, when the health ministry reported 60,254 and 556,216 confirmed cases. But officials have long acknowledged that the government’s data is an underrepresentation and the health ministry and private studies say the real death tally could be some three times higher.
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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.