Flip a coin – Markets are now at an interesting intersection.  They have bounced nicely looking forward, but it will take time for the economy to heal.  Yes, indicators are showing that the reopening is helping, but at some point the low hanging fruit will be harder to reach.  Volumes have been trending lower recently (yesterday was down 23% versus 5 day average), and that can be an indicator that investors are unsure what to do next. The S&P 500 is trading at 3100, Nasdaq is close to new highs, and the Fab Five have three companies with market caps near $1.5 trillion.  How long can Buy the Dip hold?

A Familiar Routine… When World War 3 is literally trending on Twitter and futures are in the green, you know stocks are back in their groove of “focus on the good, ignore the bad.” But while reopening remains apple of the market’s eye, signs of progress (NYC Phase 2 coming Monday!) don’t seem to be eliciting as much exuberance as they did previously. The scars of last Thursday’s plunge are visible: the VIX and gold remain elevated, USD has stopped going down, and the S&P is back to counting on FANG mega-caps to drag it higher today (AAPL new ATH). So while the narrative is the same, the grind higher feels different…

“I’ma Need Some Whiskey Glasses…Cause I don’t wanna see the truth…” That may be because the truth is being completely warped by the quite visible hand of the Powell print. And the Trump Administration (a cool $1 trillion anyone?!). And economic data, which seems to be about as misleading as they come. How is it possible that retail sales are up so much M/M?! Recall they came from a very low base — down 16% in April meant a snapback was not expected and unsurprising. Also, people are possibly now spending their government signed checks, which could be a one-time event. However, skepticism is running rampant in regards to what is formerly known as “the market,” which is leaving fund managers in the latest BofA survey asking how far is too far. 78% of the managers surveyed see the stock market as “overvalued.”

Defying Gravity…The markets are “through accepting limits cause someone says they’re so…(h/t Idina Menzel).” Despite second wave corona concerns peppering headlines over the weekend, US markets moseyed their way back into positive/neutral territory over the course of this quiet (volume-wise) Monday. The move was already heading from bottom left to top right before Citigroup’s U.S. economic surprise index was revealed to have surged to the highest level since 2003 inception, and before Reuters reported the U.S. will allow American companies to work with Huawei to develop standards, despite its blacklisting. Not to mention the 2pm announcement that The Fed’s going to buy a broad based portfolio of US corporate debt. That’ll do. The leaderboard includes tech and consumer discretionary, as well as oil, which reversed early losses. This week there are an array of potential wrenches to be thrown into the mix, ranging from retail sales to quad witching, but the way things have been going it seems fighting the tape (or The Fed) is in not in anyone’s best interest.

BTD? If you just look at the final tally for yesterday’s selloff, it was an ugly outcome.  But the intraday charts showed the broader equity indexes (conversely for bonds) trading in a diagonal top left/ bottom right pattern.  Hence, it appeared to be a systematic decrease in risk (because of Powell’s remarks?).  The trading trend has been to buy the dip, and today’s early action was exactly that.  The S&P opened +2.7%, but the early support has diminished and stocks have retreated steadily all day.  Value is outperforming, but more sectors are turning red (see above).  The S&P 500 200 day moving average is 3013, and the index is just below that level now.  Could the markets see a shift from the recent BTD trend?

Doctor Jay… Picky Fed-watchers apparently wanted to hear only about the medicine, not the illness. Dr. Powell checked all the boxes on reiterating the Fed’s policy prescriptions, but his less than peppy prognosis for the sickened US economy’s recovery was enough to make jittery investors to lose their patients. Certainly some profit-taking is warranted given the rush higher (recently hot rotation sectors are the biggest underperformers), but taking a wider view FOMC + FOMO remains in place as a dangerous combo to pick a fight with.

Nasdaq Attack: You cant keep a good index down. It helps when your components include you know who and so good, bad or otherwise for the overall markets, the Nasdaq keeps calm and carries on, now +ve for 8 of the last 9 days. Defensive and reliable tech sectors are setting the pace while volumes have been relatively light. Thank Chairman Powell’s pending appearance. Stimulus is the number one reason we are where we are, bulls and bears can at least agree on that much. And with concerns about the pending fiscal cliff as unemployment looks set to end next month and no future relief coming from Congress, Powell is the only one that controls the purse strings right now. Speaking of, the market rebound has far overshot the amount of $$ put into the system – does the below look right/feel good to you? Markets are priced for perfection – a scary thought given they are most definitively not…

Do NOT Blink….You might miss something good like Nasdaq 10,000! Which is interesting, because first thing this morning the market was collapsing under its own weight as Treasuries were bought and hedges started to look attractive again. It seemed as though the last 2 weeks of covering/squeezing had come to an abrupt end. The proof was in the momentum reversal and curve finally flattening, as some of the best performing cyclicals from the past 2 weeks were put back in their place (lower). See: energy, financials and airlines. However, you can’t keep a “good” market down and the invisible hand came back in to buy mid-morning, leaving the markets in an optically meh day of losses, down just 70- bps from almost double that earlier in the day. Apple also helped, of course, rallying over 3% on news that it will shift its own main processors in Mac computers. The pain is real.

More Value Violence… Rotation rolls on after Friday’s fierce move into Value/Cyclicals/smalls caps as investors scramble to avoid missing out on the bounce of the beaten-downs coming on back of the reopening narrative. The usual Value suspects (Energy, Banks, Autos, cruisers, airlines) are leading the way while FANG weakness makes it clear where the funding $ are coming from and keeps the wider indices somewhat at bay (flexing their concentration risk muscles).

Markets have been showing true signs of re-risking the last few days. Treasuries finally broke out of their tight Covid range (0.60-0.80%), and the Dollar was moving lower (Aussie back to pre-Covid levels). It was the much better than expected ADP on Wednesday that finally pushed some off the sidelines, and the data proved prescient.  Today’s NFP not only beat estimates, but surprised EVERYONE with a gain.  Animal spirits are alive, and the S&P 500 moved back above 3200.  Nasdaq is also just a couple points away from All Time Highs.  All sectors are green, but Value is outperforming.  And in the Small Caps joins the other global indexes above their 200 day moving averages.  All point for the potential for further upside as momentum funds are forced to pivot.