There is no question that yesterday was a rough day for the stock market...as the S&P fell 1.86%, the Nasdaq declined 1.64% and the DJIA & Russell 2000 both dropped more than 2%. The decline came on very negative breadth of 11 to 1 negative for the S&P 500...and the volume data gave us a 90% down day (where the “down-volume” was 90% of total volume)......Having said this, the numbers in other parts of the market were not quite as bad. The breadth was less than 5 to 1 negative for the Nasdaq Composite (6 to 1 for the NDX 100) and just over 6 to 1 negative for the Russell. Also total volume was pretty low...at just 3b shares. (Those are not benign numbers, but they’re not scary ones either.)
In other words, we’re going to have to see more downside follow-through before we can say that yesterday was the beginning of another significant pull-back/correction in the stock market. Having said this, a big pick-up in Covid-19 cases around the country...and a sharp decline in the stock market...is the last thing that President Trump wanted one week before the election. Therefore, even though yesterday’s developments might not be overly compelling for the future of the stock market, it might be important to what happens a week from today.
The most important development in our minds was the news from SAP. Some analysts are saying that SAP’s announcement that their earnings are going to be hurt by further lockdowns due to the coronavirus through the first half of 2021 is a company specific issue. However it’s not a reach to think that other companies in that sector...or from other sectors...will face some very similar problems. So we’ll be keeping any eye out for any announcements other companies who declare some similar concerns. If it does, it throw a serious wrench in the works of the 2021 earnings estimates for the S&P 500...which are no better than what the S&P 500 was able to earn in 2019 and 2018.
The futures are bouncing back a little bit this morning...and as we highlighted this past weekend, the stock market usually rallies in the last week before the election. However, with the fiscal plan negotiations going nowhere...reports of Covid cases picking up significantly...and the New England Patriots spiraling out of control without Tom Brady...there’s no guarantee that we’ll any bounce-back from today will gain traction. One thing is for sure in our minds...if we get more announcements like the one we just got from SAP, another correction like the one we saw in September will become highly likely.
CAT announced earnings this morning and they beat estimates, but the stock is trading lower by almost 2%. We still like CAT on a technical basis...because it has been lagging well behind DE in recent months. As we have shown several times in the past, CAT and DE have been very strongly correlated over the years, BUT they have also diverged from one another on a rather regular basis. (Every 18 months or so). However, the divergence always resolves itself before too long. Since DE has moved well ahead of CAT, we have been saying that CAT would likely play catch-up (and that a long CAT/short DE trade should work well).
We still believe this to be true...as CAT’s fundamental outlook also remains quite good. However, it had become quite overbought recently...and it was testing its highs from early 2018. Therefore, it is not a big surprise to us that CAT did not break above those old highs on its first try. In fact, it might take a breather for a few weeks. However, if CAT can break above those old highs of $171 in any meaningful way after it works-off its current overbought condition, it’s going to be VERY bullish for the stock on a technical basis.
Of course, we do have to guard against an important “double-top” forming...and signaling a major decline in CAT going forward. However, if any pull-back in the stock is a relatively shallow one...and gives us another “higher-low” (like the other declines we have seen since March)...and then bounces back and takes-out the above-mentioned 2018 highs, it’s going to be wildly bullish for the shares of CAT. (Two charts attached below.)
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Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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