S&P 500 Index (Weekly Candlesticks)

Time to correct?

Is it time for a correction? Stocks have closed lower over the last three weeks and we did break a short-term support level on Friday afternoon which opens up the door to lower prices. We are also in a seasonally weak part of the calendar and there is a lot of uncertainty over the election and the ability of the results to be properly certified given that many may not vote in person.

If we look at the chart below of the S&P 500 Index, the most recent high at the end of August pierced the 2009 trend line (blue) where investors rejected that price level. The result is that most of September has been very choppy and corrective including the close into Friday. Another notable in the weekly chart below is the negative RSI divergence that has developed over the last week. If you look at the bottom of the chart you will see these negative divergences as downward sloping white lines that precede corrections in the S&P 500 (follow the vertical magenta lines higher to see how prices acted). The move from the March low has been unprecedented so it wouldn’t be a shocker to see another 10% move lower from here.

It does seem like the answer to this question will be answered imminently so how we trade next week could set the tone for the remainder of 2020.

Chart of the Week!

People are spending more time outdoors thanks to COVID-19 indoor restrictions. New data shows what people are spending their money on for outdoor activities. In data collected by the NPD group, cycling-related sales are seeing one of the largest upticks in the U.S., rising by 63% compared to this time last year to reach nearly $700 million in sales in June. Paddle sports sales are also up 56% year-over-year for a total of $172 million in June. Golf and camping equipment also made the top list, while sales related to nature sightings and bird-watching grew by 22% year-over-year. (Statista)

Economic & Central Banking Snippets 

  • The preliminary September University of Michigan consumer confidence index rose 4.8 pts m/o/m to 78.9 and that was above the estimate of 75. Both Current Conditions and Expectations were higher. For perspective, confidence is still about 10 pts below where it was in March when it printed at 89.1 and not surprisingly pre Covid well below where it was in February when it was at 101.
  • Americans with mortgages have accumulated nearly $10 trillion in home equity thanks to a decade of rising home prices. Yet millions of them have fallen behind on mortgage payments and risk losing their houses. (WSJ)
  • The labor market’s recovery is showing fresh signs of losing momentum as persistently elevated applications for unemployment benefits show layoffs remain historically high despite summer hiring.
  • Rising real-estate prices are rippling through the market. The median U.S. home-sale price increased 13% from a year earlier during the four-week period ending Sept. 6 to the highest level on record, according to a report from real estate broker Redfin. “The sudden rise of remote work has allowed homebuyers who are priced out of one neighborhood to expand their search to more affordable areas. In turn, they are pushing up home prices in those relatively affordable areas, causing more people to look to even more affordable areas, and so on. Price growth may slow in 2021, but even if it does, high prices are going to continue to make affordability a concern for buyers,” said Redfin chief economist Daryl Fairweather.

Macro Snippets

  • Moderna says a pivotal study of its COVID-19 vaccine could tell if it can be safely used as early as November. On Thursday, Moderna publicly posted the 135-page protocol for the clinical trial, which the company says will provide transparency around its rapid development efforts. (Investopedia)
  • Turks are piling into gold as the country’s financial system unravels. Turkish households bought record volumes of the precious metalthis summer—and safe-boxes to keep it at home, David Gauthier-Villars and Caitlin Ostroff report.
  • Top executives at major U.S. airlines met Thursday with White House chief of staff Mark Meadows as the companies and their employees make a final push for more job-saving government aid. Airlines agreed not to furlough or lay off employees through the end of September in exchange for $25 billion as part of a broad pandemic-relief package this past spring. Six months later, travel demand is still hovering at around 30% of last year’s levels and airlines expect recovery to be rocky and slow. Unless they receive another infusion of cash, airlines have said they would furlough tens of thousands of workers starting Oct. 1st. (WSJ)
  • An informal partnership that kept Germany’s economy tethered to China’s for decades is unraveling, threatening Berlin’s—and Europe’s—post-pandemic recovery. The relationship that saw Germany provide China with the machines to power its economy helped the German economy recover rapidly after the 2007-09 financial crisis. But the model is no longer working. That is partly the result of Beijing’s strategy to encourage manufacturers to produce machinery that is more competitive with high-end German capital goods. For many German exporters, this doesn’t just mean that selling in China is becoming more difficult. It also means Chinese companies are popping up more as rivals elsewhere, Tom Fairless reports.
  • Facebook is again being sued for allegedly spying on Instagram users through the unauthorized use of their mobile phone cameras. In a complaint filed Thursday in federal court in San Francisco, New Jersey Instagram user Brittany Conditi contends the app’s use of the camera is intentional and done for the purpose of collecting “lucrative and valuable data on its users that it would not otherwise have access to.” The lawsuit springs from media reports in July that the photo-sharing app appeared to be accessing iPhone cameras even when they weren’t actively being used. (Investopedia)
  • China’s chip industry has urged Beijing to intervene in Nvidia’s $40bn takeover of Arm, warning that the deal will hand the US control over key technology used in almost all mobile phone chips. Competition lawyers said getting China’s approval for the deal represented a huge challenge. Lex says Arm and Nvidia face losing sizeable sales in China, even if the deal does go through. (FT)

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

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Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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