S&P 500 Index - OCT 2020

Decision Time 2020

It is decision time for the S&P 500 and it is no surprise that the Presidential election coincides with a potential top given the policy divergence between the two candidates. If we ignore the politics and focus on the chart below, it looks as though the next move is going to be lower in the S&P 500. The rebound from the March low ended in early September as the last rebound high on October 12th failed to take out the previous high.

I am using the same weekly chart below that I used in Swells of Uncertainty from last week (each bar in the chart is equal to one week of trading). Here, I assumed the September high was a top and laid over a Fibonacci grid to determine the most likely points of support. One observation is that the 50% retracement at 2883 lays exactly at the January 2018 top which may act as a magnet if we begin to accelerate to the downside in November. The good thing is that this is a significant point in the chart and should act as support. Also, the Relative Strength Index on the bottom is showing weak momentum into the September high which creates a negative divergence and warns of corrective price action.

Kisco Capital technical analysis on the S&P 500 Index (SPX).

The very nature of corrections manifests in layers of uncertainty and are difficult to navigate. However, if I can boil everything down to one thing is that if the March low (2185) holds in the coming months then a new bull market will be in the making. One with a recovery from the pandemic that would mean new highs and a trend like we last saw from the 2016 low. If we break below the March low, then a credit cycle is underway where we will see rising defaults and a contraction in the economy. I think we find a bottom in the coming months but it does come down to what it means to hold/break 2185 on the S&P 500 index.

For perspective, the chart below shows what is considered to be a good long-term view on valuation of the stock market. You don’t have to be a Wall Street person to see that a mean reversion is overdue.

Wilshire 5000/GDP Ratio

Chart of the Week!

Data from the U.S. Elections Project shows that 28,378,765 in-person votes and 53,663,285 mail ballots have been cast so far, approximately 82 million in total as of October 30, 2020 at 1:47am ET. That’s already significantly higher than the 56 million early votes cast in the 2016 presidential election.

Statistica Early Voting

Economic & Central Banking Snippets 

  • Q3 GDP rose 33.1% verses Q2 but GDP fell 2.9% compared to Q3 2019. In terms of value, the Q3 real GDP level of $18.58 Trillion is still 3.5% below the level of Q4 2019 at $19.25 Trillion. So, improving but not a full recovery.
US GDP since 2015
  • Core durable goods orders in September rose by 1% m/o/m, twice the estimate and August was revised up by 2 tenths to a gain of 2.1%.
  • Fed Governor, Bill Dudley, commented this week that “No central bank wants to admit that it’s out of firepower. Unfortunately, the US Federal Reserve is very near that point… Even if the Fed did more – much more – it would not provide much additional support to the economy. Interest rates are already about as low as they can go, and financial conditions are extremely accommodative. Stock prices are high, investors are demanding very little added yield to take on credit risk, and a weak dollar is supporting US exports.”
  • New home sales in September totaled 959k which is the highest monthly level of since 2006. Months’ supply did tick higher to 3.6 from 3.4 but is historically still very low as the 20 average is 5.8. The median home price rose 3.5% y/o/y but this bounces around a lot each month as mix is the big driver. The average price rose to a record high of $405,400, again mostly due to mix as there was a pick up in homes sold priced above $750k and a decline in those sold below $300k. Regionally, sales in the Northeast fell to the lowest since May but are up sharply since then down South and out West.  (WSJ)
US Home Sales (WSJ).
  • The Bank of Japan kept monetary policy unchanged Thursday and maintained its view that the country’s economy is gradually recovering from the impact of the coronavirus pandemic. The bank’s policy board projected that the Japanese economy will shrink 5.5% in the year ending March 2021 and grow 3.6% the following year. (WSJ)
  • Heard on the Street’s Justin Lahart writes that some unusual dynamics in two key areas of demand—cars and housing—are playing a big role in demand for factory goods. Auto sales have jumped, a reflection not only of pent-up demand but of the new urgency many people felt to get a first or second set of wheels as a result of the pandemic. Meanwhile, demand for suburban and second homes has led to a resurgence in home building, fueling orders for construction materials and equipment, and appliances. Manufacturers are racing to keep up: New orders in September were rising faster than shipments.
US Auto and light truck assemblies.

Macro Snippets

  • U.S. states are facing their biggest cash crisis since the Great Depression. Nationwide, the U.S. state budget shortfall from 2020 through 2022 could amount to about $434 billion, according to data from Moody’s Analytics.
Change in state tax revenue.
  •  The surge in demand for cloud computing services during the pandemic, along with an increase in video gaming and computer purchases by consumers spending more time at home, lifted Microsoft’s September quarter results. Revenues were up 12% to $37.2bn, earnings per share were 28 cents ahead of expectations at $1.82. (FT)
  • Las Vegas Sands is exploring the sale of its casinos in Las Vegas for $6 billion or more, according to Bloomberg. An adviser is soliciting interest for the Venetian Resort Las Vegas, the Palazzo, and the Sands Expo Convention Center. This would mean the world’s largest casino operator is exiting the U.S. gambling industry completely. While U.S. sports betting and online gambling’s gross revenues have soared this year compared to 2019, slot and table games are over 40% lower year-to-date as of August. (Investopedia)
  • A housing crisis centered on the vast apartment and home-rental markets is emerging in the U.S., threatening to send millions of renters into eviction and leave landlords short billions of dollars. A large number of renters have been unable to pay some or even all of their rent since March, when the pandemic temporarily shut down businesses and pushed millions of people into unemployment. Federal and local eviction moratoriums have protected many from losing their homes but the national eviction ban and some state and city protections are set to expire by January or sooner. (WSJ)
Using credit cards to pay rent.
  • In California, Proposition 15 would increase taxes on commercial property owners — a move critics say would hurt small businesses because, under most commercial leases, tenants are responsible for paying property tax increases. Property owners said they also fear some businesses could leave the state as a result. (WSJ)
  • Regeneron Pharmaceuticals said its COVID-19 antibody cocktail significantly reduced viral load and visits to hospitals/doctors in ongoing late-stage trials. The drug maker has shared these results with the Food and Drug Administration (FDA), which is reviewing an emergency use authorization submission. (Investopedia)
  • U.S. holiday season online sales will reach $189 billion this year, up 33% year over year, according to Adobe Analytics. Representing two years of growth in a single year, this figure could rise by $200 billion if consumers receive stimulus checks and physical stores shut down. The biggest days are Black Friday with $10.3 billion (+39%) and Cyber Monday with $12.7 billion (+35%). Retailers are offering discounts earlier in 2020, and consumers will spend $56 billion pre-Thanksgiving (Nov 1-22).
Paul J. McCarthy
Paul J. McCarthy III

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.