Fiscal Stimulus: Hoping and Praying

Commentary

As has been the pattern lately, equity indexes began the day moving upward, but then gradually retreated into lower territory and eventually followed through with a failed reversal culminating in heavy selling in the final hour of trading. Hopes of a stimulus jumpstarted stocks from yesterday’s losses but were dashed once it became apparent that its passage faces opposition from both sides of the ailse, albeit for different reasons. With Senate GOP leader McConnell admonishing the White House not to rush anything before the election and House Democratic Speaker Pelosi tamping down expectations by warning that a stimulus bill may not be introduced before the November 3rd election, the market trended lower.

Bullish Events

  • Social Media: After reporting a positive surprise in earnings, Snapchat (SNAP) and its competitors Facebook (FB) and Twitter (TWTR) gapped upward in price.
  • Precious Metals: Safe haven demand for Gold is returning on expectations of passage of US stimulus aid, dovish Federal Reserve policy, rising interest rates and inflation. Other contributing factors are political uncertainty in the US election, US/China geopolitical issues and yet to-be-determined closure on Brexit.

Bearish Events

  • Central Banks: US Fed Governor Brainard echoed recent forewarnings of deceleration in the labor market and urgent need for fiscal stimulus, which if Congress fails to pass could result in not meeting the 2% inflation target.
  • Central Banks: ECB President Lagarde marked the suprise 2nd wave of Covid19 across Europe as a clear threat to its economic outlook.
  • Coronavirus Pandemic: The spread of Covid19 is increasingly showing signs that a 2nd wave outbreak of the virus is advancing unchecked, especially in the United States, the world’s largest economy.
  • Currencies: Weakness persists in the US Dollar due to anticipation of dovish monetary policy and eventual passage of a pandemic stimulus aid package by Congress.
  • Commodities: The potential return of pandemic lockdowns is bearish for both oil and gasoling prices. In addition to this, Libya’s return to production and WTI Crude Oil inventories being almost 10% above their seasonal 5-year average is also weighing donw the price of petrol-based energy commodities.

ETF Summary

As Asia and emerging markets distinguish themselves from the US and Europe with respect to mitigating the spread of Covid19, their markets are experiencing a positive decoupling from equities. Japan (EWJ), China Large Cap (FXI), Emerging Markets (EEM) and Latin America (ILF) delivered positive price changes.

Amongst US sectors, Consumer Staples (XLP), although barely changed, was the sole positive performer. Notable laggards were Energy (XLE) and Industrials (XLI). Homebuilders (ITB), a key economic barometer for my daily ETF summary list, were noticeably weaker and may be reflecting the weakened outlook for consumer trends and the labor market.

Market Summary

Benchmark IndexPrice1D-Chg
SP-5003,435.56-7.56 / -0.22%
Nasdaq-10011,665.37-12.47 / -0.11%
DJ-3028,210.82-97.97 / -0.35%
Russell 2K1603.780.00 / 0.00%
US Dollar92.72-0.32 / -0.34%
Euro1.18544+0.00339 / +0.29%
Yen0.95630+0.00850 / +0.90%
10 Yr Treasury Rate0.82+0.02 /+2.50%
Gold1,924.32+17.38 / +0.91%
WTI Crude Oil40.03-1.66 / -3.98%
DJ US Real Estate317.37-1.09 / -0.34%

Techncial Analysis Chart of the Day

Last Friday, I pointed out that the final 30 minutes of last week’s trading sessions consistently resulted in rising prices on anemic volume during the first 30 minutes only to be concluded by falling prices with surging volume in the last 30 minutes was indicative of weakness in buyer demand and that one should anticipate lower prices. So far this week, the above described scenario is exactly what has been occurring.

Today’s chart analyzes the SP-500 cash market within a 144-minute timeframe spanning over the last 3 months. Despite the breakout above resistance at the neckline of an inverse head-and-shoulders pattern, the benchmark index peaked in mid-October and has since reversed into a bearish channel pattern. Such a development increases the probability that support will be tested @ 3400 and even 3325 levels. Should the SP-500 fail to maintain support @ 3325, then 3200 comes into play as a legitimate target level.

Click image to enlarge

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