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June 27, 2020
STOCKS – NONE
MACRO – SPY
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- Facebook Adding Fuel To Fire – Midday
- Disney Shares May Plunge By Up To 14%
- Winds Are Swirling
- Stock Testing Critical Resistance
- Stocks Face A Challenging And Important Day – Morning
- Betting On A 10% Drop In AT&T
- Nasdaq 100 May See A Sharp Reversal Short-Term
- Betting Indicates Facebook Falls
- The New Week Faces Headwinds – Morning
Stocks didn’t finish off the week in grand style, and based on the IG weekend index; the selling appears it may continue on Monday. The IG Weekend Wallstreet index has the DJI trading down another 90 basis points from Friday’s close, as or June 27 at 10:03 am ET. It certainly seems possible that there could be some continued pressure on stocks when the futures resume on Sunday night.
The coronavirus cases are now beginning to rise across the country, and this may severely damage the bull narrative of a smooth reopening.
Remember, the bull narrative has mostly been based on two factors 1) a “V” shaped recovery, and 2) a Fed liquidity-driven event. Both have serious issues right now.
The V-shaped recovery is still very much priced into the market based on the shape of the recovery in earnings estimates. The latest data from S&P Dow Jones shows just that, with earnings forecast to plunge by 30% in 20202 to $109.48, and then snap back in 2021 by 47.5% to $161.51.
This outlook will need to change; in one of two ways, earnings for 2020 will need to fall even further, or estimates for 2021 need to be pulled lower, creating a more extended recovery period. I attempt to show in this rough drawing. The reason for this is simple; states like Texas and Florida have started to walk back their reopening processes; other states will likely begin to follow as cases continue to rise.
If earnings estimates for 2021 are too, then it likely means that the market will need to start repricing the possibility of that, and that likely means lower stock prices.
The other issue is that the Fed’s balance sheet has contracted for two weeks in a row.
The reason for the decline is because the Fed is reducing REPO operations. Notice, that Repo activity started to slide off the week of June 3, and stocks have steadily declined since that week. Also, notice how the market bottomed and began to recover the week after the Fed started its massive repo programs, and topped as the repo programs have slowed.
This is precisely how the Fed’s liquidity program has helped to fuel the market’s rise. This is how the Fed adds and drains liquidity from the banks. If the liquidity is declining, and should it continue to decline, it is likely to add yet another headwind to the market.
These are two pieces of the bull narrative that need to be monitored very close, especially this upcoming week.
-Mike
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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