Shaky Foundations

Shaky foundations.  Stocks slipped late in yesterday’s session after a medical blog questioned Moderna’s Phase-1 results, out just a day earlier. The sharp moves in stocks highlight investors’ desires for clarity on the future of the economy, though none exist… yet.

 

N O T E W O R T H Y

 

Strong hands versus weak.  You know how Wall Street loves Wall Street Terminology.  It makes us feel as if we can communicate a narrative in a unique, Wall Street sort of way.  One of the favorites is the term “weak hands”, which refers to investors that do not have a strong conviction.  If a stock is in weak hands, the slightest bit of negativity is likely to ignite a selloff.  The term also implies that weak-handed investors are generally smaller retail investors.  Larger, institutional asset managers are thought to be more informed thus having stronger convictions… strong hands.  Before I delve a little further into the concept, I would like to reflect on yesterday’s market move.

 

Monday was a great day for the market.  Since the pandemic struck, many of us wake up in the morning dreading that first glimpse of the futures markets… some of us earlier than others. After all, it has been a trying couple of months with market volatility that is rarely, if ever, seen.  Though the craziness is justified given what is going on in the real world, for those that like to be “in the know”, it has been a wild ride.  Monday was different, because for a few hours it seemed that everyone could see the light at the end of the tunnel. Thanks to Moderna’s (MRNA) announcing encouraging results from their Phase-1 clinical trial of a COVID-19 vaccine, markets staged a rally in which one could feel the release of months of tension.  You know, there is another Wall Street adage that goes “if it appears too good to be true, it probably isn’t”.  Yesterday, late in the session, respected medical blog Stat released an article that questioned Moderna’s claim.  They interviewed some respected academics who basically said that while the results were, in fact encouraging, it was too early to jump to conclusions and that a solution is still a long way off.  In other words, the “end of year” target is questionable.  Interestingly, the company filed for a secondary stock offering after its shares surged hoping to raise more money to develop the vaccine further.  Not necessarily a bad thing, but the timing and choice of words in Monday’s release might raise an eyebrow.  The company’s stock gave up -10.41% yesterday after adding around +20% in the prior session.  Easy come easy go. That is not a Wall Street saying, but getting back to the strong hands.

 

When analyzing market conditions it is often instructive to find out what different types of investors think about the market and current conditions.  We know that markets are, in fact, ultimately driven by crowd psychology. Numbers such as economic releases and earnings are just numbers which relay important descriptive facts.  How the markets react to those facts is another thing entirely. Professional asset managers spend much of their waking hours (and sleeping ones too) analyzing numbers and facts about companies, industries, and economies.  This helps them formulate an informed narrative that they can pass along to their clients and make investment decisions.  They are not always correct, but they do have the advantage of spending full-time on their research, while smaller retail investors must balance their research time with their full time jobs.  Bank of America conducts a monthly survey of global fund managers and I thought I would highlight some of what the so-called strong hands were thinking.  According to the results, 75% or managers expect a U-Shaped or W-Shaped recovery while only 10% believe the recovery will be V-shaped.  Note that a W-shapes recovery is a double-dip.  They are also doubting this latest rally is for real, as 68% of respondents believe that it is a bear market rally compared to the 25% who believe that the bull market is legitimate. Managers are also worried about getting stuck in value traps as a majority believe that growth will outperform value stocks.  The net difference between those that favor value over growth is at its lowest since 2008.  Not surprisingly, the report shows that managers assess the biggest market tail risk coming from the Coronavirus.  In the first two months of 2020 the outcome of the Presidential election took the top spot after the trade war dominated for much of 2018 and 2019.  Finally, the survey shows that average cash balances are at their highest since the 9/11 terrorist attacks, indicating that managers are reticent to jump in just yet.  While that is “usually” considered a contra-indicator sending a “buy” signal, we must remind ourselves that these are “unusual” times.

 

THE MARKETS

 

Stocks traded sideways for much of yesterday’s session but ultimately sold off into the close after a report questioning Monday’s vaccine news hit the tapes.  The S&P 500 traded off by -1.05%, the Dow Jones Industrial Average fell by -1.59%, the Russell 2000 slipped by -1.95%, and the Nasdaq Composite Index gave up -0.54.%.  Bonds advanced and ten-year treasury yields gave up -4 basis points to 0.68%.

 

NXT UP

 

– This afternoon, the Fed will release the minutes from its April 29th FOMC meeting.  It is expected to give insight into just how deep the central bank will go in its stimulus.  The report will be released at 2:00 PM EST and it will be closely watched.

– Atlanta Fed President Raphael Bostic and St. Louis Fed President James Bullard will speak.

– Treasury Secretary Stephen Mnuchin will speak today.

– The Treasury will auction 20-year notes today for the first time since the 1980’s.

– This morning Target, Lowe’s, and McKesson beat estimates and we will hear from Analog Devices before the bell.  After the bell Take-Two Interactive, Expedia, and L-Brands will release their earnings.

 

 

daily chartbook 2020-05-20

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