Our caution last week proved to be the right choice with stocks head-faking “buy on the dip” types. The markets fell sharply to close out trading last week. Wall Street chose a deep red to start the new week with the S&P 500 and Dow losing 1.16% and 1.84%, respectively.
Meanwhile, the NASDAQ gave up just 0.13%. Here’s a trick question for you, was the NASDAQ up or down on the day? Answer: Up. But how can that be if it lost 14.48 points? The tech-heavy index’s first print of the week was 10,610.10 and its last for Monday’s regular trading session was 10,778.80. Despite being lower than Friday’s final number, the NASDAQ gained 168.7 points from open to close on Monday.
That means there were more buyers, a lot more buyers than sellers. Ordinarily, we’d find an intra-day revival like this to be bullish, perhaps very bullish. However, upside could have a cap at the index’s 50-day moving average of basically 11,000. That’s minimal upside with an outside chance the index could fall to its 200-day benchmark of 9,490. There is a lot of support along the way; so, it wouldn’t be a direct flight. Nonetheless, we must consider potential landing spots if selling accelerates.
While you might hear about the coronavirus or a lack trillions more in COVID stimulus or the economy slowing or a slew of reasons for the recent bout of selling, that’s’ not what driving the downturn in our opinion.
Agree or not, full Covid lockdowns are a thing of the past. Unquestionably, the worst for COVID-19 is over. Stimulus is not needed as both the ISM Services and Manufacturing readings are well above 50, any score above 50 means the economy is expanding. Besides, these are knowns to Wall Street and their algorithms.
The Presidential Election is the unknown and our opinion is that investors see the death of Supreme Court Justice Ruth Bader Ginsburg as a positive for Joe Biden, much like the Antonin Scalia’s death was a positive for President Trump’s chances in 2016.
Democrat nominee Joe Biden has made it clear he plans on undoing the Trump tax cut and raising capital gains taxes to 40% for high earners. https://www.cnbc.com/2020/09/18/wall-street-democrat-roger-altman-on-bidens-capital-gains-tax-plan.html
Here’s the deal, if I can take profits today and pay 25% or take profits tomorrow and pay 40%, I am taking profits today i.e. selling. Additionally, savvy and institutional investors, no matter what anybody tells you, incorporate the total cost of an investment when considering where to put money – higher costs for stocks make them less attractive.
If the cost of capital goes up, and taxes are a cost, then the other side of the calculation is that potential return goes down. If potential returns drop, it alters the risk versus reward equation. That means, investors must take more risk to achieve target returns or could seek alternatives.
Longer-term, institutions and individuals will adjust to the rules. Stocks will likely remain the go to investment no matter who the next president is because there aren’t many alternatives with interest rates at close to zero. In the meantime, however, equity markets could continue “repricing” to reflect Joe Biden’s policy if Wall Street believes he’s the next President. (Before anybody gets upset, this is not a political statement, just a statement based on experience and the basics of investing.)
As for us, we’ll continue to exercise caution until the market gives us the green/red light. At best, today’s NASDAQ reversal is a flashing yellow. Based on the index’s chart, we won’t be green until the NASDAQ can close above resistance at 11,250. As such, we’ll avoid making a call on a Sector ETF or stock for consideration until our signals are bullish or unequivocally bearish.