Stocks had a good day on August 25 but seemed to be setting the stage for one of those 4-5% pullbacks we have grown so fond of.

Stocks Rises On August 25, Setting The Stage For The Next Pullback

This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.

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August 25, 2020


Macro – SPY, QQQ

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Stocks where higher today, but the Nasdaq 100 ETF finds itself in an interesting spot. We have been tracing out the channel for some time now, and algo’s have respected the lower and upper bounds of that channel. Whenever the QQQ has hit that upper bound, in conjunction with the RSI crossing 70, it has resulted in a pullback to the other side of the trading channel since June 10. Now maybe this time, it will be the time it doesn’t work because I’m pointing it out. But that has been what has happened; if the pattern holds, then we should see one of that sharp 4-5% decline, any day. (Mike’s premium content – Nasdaq Setting Up For Typical 4-5% Correction)

The chart above also shows how the advance-decline line continues to trend lower, again, this a bearish divergence. When the market decides to turn lower, I don’t know. All I can is tell you what these things mean and point them out.

Could the S&P 500 first rise to 3465. It seems possible. It would be the next significant level of resistance for the index. The one thing I haven’t been able to confirm is if this is the big break out or not. I would feel more confident in saying, yeah, the S&P 500 had a big break out and is going 3,800, if the RSI wasn’t already at 70, and the Advance-Decline wasn’t heading lower. I’m not there yet.

Treasury rates are still heading up and are around 70 bps. I think they are heading to approximately 78, and perhaps 90 bps. I know it is still 90 bps, and that is very low. But part of the reason why the market keeps rising is this narrative about the equity risk premium and the earnings yield of the S&P 500. Honestly, in 25 years, I have never heard this used as an excuse for higher prices. Yes, lower rates spur more risk-taking and make equities more attractive, encouraging higher earnings multiple. But this equity risk premium stuff was always in the classroom, not in the real world. Maybe I missed something along the way.

What is most bizarre is how all of this just one big circular reference. We find earnings estimates by using the value of the S&P 500 and backing into that number with the value of operating profits. We find the price to earnings ratio, by dividing the S&P 500 by the earnings we just backed into using the S&P 500, and the earnings yield by dividing the earnings we estimated by using the S&P 500 and dividing that by the S&P 500. Did you follow that? Makes total sense. 😛

Anyway, if the yields start to rise, that risk premium won’t be as attractive anymore, which means that multiple needs to contract.

Pfizer (PFE)

Anyway, the Pfizer call buyers were back, and the stock managed to hold support at $38. That is a big level that has to hold. (Premium content – Pfizer Call Buyers Come Back For Round 2)

Microsoft (MSFT)

It looks Microsoft if forming a rising triangle, maybe all the Apple traders will rotate to Mr. Softy. This one has been stuck in the mud since July. Maybe it’s headed to $234.

After all, Apple still trades with a lower one-year year earnings yields. So Microsoft has bps it can make up when compared to the 10-year.

Cisco has to be wondering how it gets into this game.

This one does not look healthy. It better hold $41.

Anyway, I had a lousy day overall and got very little done. So I’m going to call it quits.


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