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Things you need to know:

  • Markets get caught up in the angst last week – try to ignore that today
  • PM’s have percentage limits – selling does not always mean a negative story
  • US/China continue to argue – as Beijing orders us out of Chengdu (in retaliation for the US closure of the Houston Chinese consulate)
  • GOP comes up with a new plan – will the DEMS support it or want more?
  • Big week for earnings and eco data – Will investors embrace the news and buy stocks?
  • Biden to announce VP on Saturday… expect the speculation to build
  • Try the Flank Steak with Red Wine Shallot Sauce

Tech steals the show again on Friday as the weakness in that sector was felt across the board as the rotation continues Information Technology – a sector that has been leading the rally – has suddenly hit a wall and was in fact the worst performing group for the week and that set the tone for the broader market as investors watch the tech heavy weights and the momentum plays come under pressure – which then sends a message that maybe there needs to be a revaluation of the market. What is also important to recognize is that many portfolio managers have hard limits on percentage holdings of any stock – so for instance, if there is a 5% limit of any given name – then there is a 5% limit – so as those limits get hit – the manager has no other choice than to reduce the size of the holding and re-allocate – so it is not necessarily a statement on the outlook of the company – it is more about following the investment guidelines… which is why – you have the ‘core’ position and then you have a bit extra to trade with – so while a portfolio manager may be selling a bit of Apple here – it does NOT necessarily mean he/she has changed their opinion of the stock it just means he is managing the risk as per the investment ruleset.

Now look – none of this should come as a surprise at all… money has been chasing anything tech as a result of the chaos created by the pandemic. Technology names have soared – dragging much of the market with it… the stocks priced to perfection as they led the way higher – I mean it was and is a classic story… buying creates more buying, momentum creates more momentum, new highs create even more new highs and then everyone says – the group is extended – the strong rally can’t keep going on – the group is bound for a pullback… remember – when stocks sell off – it’s not because there are more sellers than buyers – it’s because there are more aggressive sellers allowing the buyers to become a bit more pricey… which causes a void in prices – leaving an air pocket that when pierced sees the wind come out of the sails… It’s all very interesting… but should not be a surprise at all. (The reverse is true as well….buyers become more aggressive and sellers back off – allowing for a void in prices and the rally to ignite).

Mid- week we started to see the likes of FB, AAPL, NFLX, TSLA, MSFT, INTC, GOOG, AMZN, TWTR, CRWD, ZM, TWLO, ETC. all begin to come under pressure – as the earnings announcements in some of the names did little to ignite a new fire – this week we will get more reports and in fact this is the biggest week for reports this season… so expect to hear a lot about ‘beats, misses and guidance’. Look – what investors realized is that those stocks may have been priced to perfection already and had no-where else to go but lower – as many trader types and the algo’s identified these names as ‘sources of cash’ – cash that will allow for the re-allocation of assets.

More worrisome sentiment hits the tape…

Both Barron’s and our friends at Goldman tell us that the 5 largest stocks in the tech space – AAPL, FB, AMZN, GOOG, MSFT actually make up 25% of the S&P index and so – as they go, so goes the Nasdaq and the S&P! In fact – Barron’s led with the headline in its Up and Down Wall Street section –

“If the Big Five Falter, Rest of the Stock Market Could be Deep Sixed” 

Randy Forsyth reminds us of Steins law – that ‘if something can’t go on forever, it will stop’… OK – that’s true – but let’s be rational here… just because a fund manager is selling the stock doesn’t mean it’s over… it just means that they are managing risk (for their fund) while other fund managers remain buyers of the stock – managing risk for their fund – what drives the sentiment is the conversation surrounding the moves… so when earnings are good and hit or beat the target and prices have surged ahead of these earnings – it only makes sense that when they announce some managers will take advantage of the recent surge and take money off the table – some retail investors do the same thing… I love how the headlines paint a negative picture – because when there is a seller – there is also a buyer – and if the buyer is buying on the way down its because he/she believes there is value there. The depth of any selloff (or any rally) is driven by headlines and sentiment surrounding the markets – March 2020 or December 2018 are just the most recent examples of how negative sentiment can create short term chaos in such a short period of time – only to see the markets bounce back once that sentiment changes.

Over the weekend – we found out that Florida is now in the lead with a surge in cases surpassing NY’s case load… but what does this really mean?  As we continue to test more – we are sure to get more infections… but does that latest news in Florida suggest that the infections lead to more deaths? What we have seen is that answer is no (yes, deaths are still happening, but the pace is slowing). We have new treatments, we are being more proactive, Americans are wearing masks in public to help flatten the curve and we are starting to see a decline in the hottest states…

Headway with a possible vaccine or vaccines is also in the news – but now – there is a question of the efficacy of these vaccines… is the fact that we are pushing so hard and so fast to come up with a vaccine – going to cause more people to refuse it? Not wanting to be the ‘first one’ to get vaccinated… which now is only creating a bit more confusion… Look – any of these vaccines are not expected to eradicate it on the first go around – but they are expected to dull the pain – the same way the flu vaccine doesn’t prevent you from getting the flu – it does though soften the blow… At some point if we are going to get back to any sense of normalcy we have to be willing to vaccinate ourselves against this plague to begin to build up herd immunity.

This is a big week – we are going to get hit with more than 150 earnings reports – and 12 of them will be Dow stocks… Oil, Industrials, miners, tech, agricultural names all due to report… on the economic front – we will get Durable Goods, Dallas and Richmond Fed surveys, we will get Retail and Wholesale inventories, Pending home sales, personal income and personal spending.  We will also hear from the FED on Wednesday – when they emerge from their FOMC (Fed Open Market Committee) meeting… where they are expected to keep rates between 0%- 0.25% – the only thing we can expect is what will Powell say? Will his story change or will he maintain the status quo? 2Q GDP is set to be announce on Thursday at 8:30 am. The expectation is for a negative 35% print – but we KNOW this… the market has already discounted this number – so unless it is far different than that expectation – I would not expect any major dislocation as result.

This morning – US futures are up – Dow futures are +125 pts, S&P’s are up 20, the Nasdaq is about to add 124 pts and the Russell is plus 11 pts. Ignoring the negatives – i.e. The virus and the closure of the US consulate in Chengdu, China while accentuating the positives – New Moderna (MRNA) vaccine news – new trial, and promises of 500k doses by Christmas and 1 billion doses in 2021…….and word that the WH has is going to push another stimulus package thru congress (the markets like that)  – and that will depend on how the negotiations go with the Democrats this week.  Yesterday – Stevey Mnuchin – Treasury Secretary – announced that the GOP has finalized a $1 trillion relief bill – another $1200 is on its way – now let’s see what Nancy (Pelosi) and Chucky (Schumer) have to say. The early call is that there is really wide gap between what the GOP and the DEMS want – so don’t expect this stimulus package to breeze through the halls of congress… especially as we get closer the election… both sides will position themselves to take full advantage of the coming election and the pain that the country is feeling.

And speaking of the election – simmering under the surface – we are now 99 days away from election day and we still don’t know who the Democratic VP candidate is, we still don’t know what the platform will be and we still don’t know whether or not the election is actually going to take place as an election – due to the virus. Will polling stations open? Will mail in ballots be the way in 2020 – so many questions, not enough answers. And all this will only add to the volatility yet to be seen.

European stocks are mixed as the headlines talk of new quarantines imposed on everyone traveling to the UK from Spain – after that country sees a surge in cases… this is sending travel and hospitality stocks lower… rising diplomatic tensions between the US/China also putting a damper on the mood. It is a big week for earnings across the continent as well – so get ready for investor reactions.  As of 7 am – the FTSE -0.19%, CAC 40 -0.123%, DAX +0.32%, EUROSTOXX +0.02%, SPAIN -1.3% and ITALY – 0.08%.

This morning oil is trading at $41.44 – after testing $40.90 overnight… rising tensions between DC and Beijing being called the culprit… but still – oil is on track for its fourth monthly gain… as supply cuts kicked in and demand begins to surge as the world awakens. In addition, the hurricane season is in full speed mode – as Hannah hit the Texas coast over the weekend. Remember – Hanna represents the 6th named storm and it’s not even August yet… so there is some speculation that the storm season has not seen its worst yet… and that could mean disruption to supply if we get some more storms in the gulf… We are still in the $35/$45 range where I suspect it will remain – We do have the 50 dma trendline rising while the 200 dma continues to fall… and this will create a triangle leaving oil to either break down or break out… My guess is a break out… not a break down… but let’s see how this works out.

The SPX closed at 3215 after testing 3200… backing and filling its recent advance… as it attempts to complete filling the gap created back in February. This morning’s action should see the S&P begin to rally back and if the news is positive and earnings do not disappoint then I suspect the market will once again begin to look beyond the angst… The DNC promises us that the VP announcement is to be made on Saturday August 1st (this Saturday) so expect the speculation to build as the week comes to an end… and then the market will have something new to focus on… as analysts begin to weigh the possible outcomes of events now that it is clear who his choice is.

Take good care

Kenneth Polcari
Chief Market Strategist, Consultant

Pan Seared Flank Steak w/Red Wine Shallot Sauce

This is easy to make and will present like you spent hours in preparation. For this you need:

A Flank Steak, butter, garlic, s&p, Red Wine, Shallots, Balsamic Vinegar (a good thick one) and olive oil.

Begin by melting a stick of butter – now season the steak with s&p, add chopped garlic and massage. Now pour the melted butter and massage that into the meat as well. Cover and set aside.

In a small pan – melt more butter (1/2 stick) with some olive oil – so that the butter does not burn.  Now toss in sliced shallots – maybe like 4 shallots in total – sauté for 5 mins or so. Now add in ¾ cup of red wine (your choice) and 2 tblsp of the nice thick balsamic vinegar. Bring to a boil and then turn to simmer. Reduce by half – will only take a couple of min. Turn off the heat and whisk in one more tblsp of butter. (Can never have enough butter)

Preheat the oven to 400 degrees.

In a large skillet – add a touch of olive oil and heat up. When ready – add the flank steak to the pan and sear on both sides – 3 – 4 mins per side. Now remove and place in a pyrex dish and put it in the oven for 5 – 8 mins (depending on thickness). Remove and cover – let rest for another 5 mins.

Prepare you serving platter with fresh kale – When ready – slice the flank steak across the grain and arrange on the platter with the kale. Looks good, no? Now you can spoon the Red wine shallot sauce over it all or you can keep it on the side and let your guests serve themselves. Serve this dish with smashed roasted potatoes and a lg mixed salad.

(*you can use this sauce on any type of steak you like… grilled rib-eyes, filet etc.)

Buon Appetito.