9/23/2020

September 23, 2020

The market’s 5-year inflation expectations, which proved
to be among the best leading indicators of the equity
Pre 7:00 Look market in H1’20, are threatening to rollover again, and if
they do, that will be a stark warning sign for risk assets.
• Futures are rallying with international shares this morning
as investors digest soft economic data and look ahead to
another day of Powell’s testimony before Congress. The latest resurgence in the coronavirus outbreak re-
mained in the headlines early yesterday as the U.K.’s
• The EU PMI Composite Flash missed estimates this month
(50.1 vs. E: 51.7) due to an unexpected drop in the services Prime Minister outlined new restrictions that could last
index but the weakness is bolstering stimulus hopes. as long as six months, which pressured stocks to fall back
to flat in early trade.
• Econ Today: FHFA House Price Index (E: 0.6%), PMI Compo-
site Flash (E: 54.5). Fed Speak: Mester (9:00 a.m. ET), Evans Midmorning, trader focus turned to Capitol Hill where
(11:00 a.m. ET), Rosengren (12:00 p.m. ET), Bostic (1:00
Fed Chair Powell and Treasury Secretary Mnuchin were
p.m. ET), Kashkari (1:00 p.m. ET), Daly (3:00 p.m. ET), Pow-
ell (10:00 a.m. ET). set to testify about the economic recovery. Both pointed
to the very swift, strong recovery in U.S. growth which
was initially seen as hawkish, pressuring shares to ses-
Market Level Change % Change sion lows ahead of the lunch hour before collective calls
S&P 500 Futures 3317.75 18.50 0.56%
for more stimulus being critical to the recovery continu-
U.S. Dollar (DXY) 93.971 -.017 -0.02%
Gold 1891.80 -15.80 -0.83% ing saw stocks recover to new session highs in the early
WTI 40.03 .31 0.74% afternoon. The S&P continued to grind higher over the
10 Year 0.664 -.007 -1.04% course of the afternoon on bullish momentum but inves-
tors remained tentative to pile on to the long side with
Equities two more days of Powell and Mnuchin testifying.
Market Recap Trading Color
Stocks posted modest gains yesterday, recovering much The overall movement in stocks was the opposite of
of Monday’s losses as Fed officials maintained a dovish Monday as markets saw broad gains, but the internals
tone while concerns about tighter restrictions due to were the same as super-cap tech and defensive sectors
COVID-19 moderated. The S&P 500 rallied 1.05%. Market Level Change % Change
The major averages opened higher yesterday, led by Dow 27,288.18 140.48 0.52%
tech shares as momentum for Monday’s late-afternoon TSX 16,142.89 161.12 1.01%
rally carried over into the morning session. AMZN was a Stoxx 50 3,219.58 55.45 1.75%
FTSE 5,960.71 131.25 2.25%
notable upside standout with a more than 5% gain
Nikkei 23,346.49 -13.81 -0.06%
thanks to a an analyst upgrade at Bernstein which Hang Seng 23,742.51 25.66 0.11%
helped power a broad rally in work-from-home stocks. ASX 5,923.93 139.86 2.42%
Prices taken at previous day market close.
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 9/23/2020

outperformed while cyclical sectors lagged. lus and 2) Fed disappointment.

On an index level, the Nasdaq Now, after tech made fresh lows
Market Level Change % Change
again outperformed (same as last Friday, we’ve seen a turna-
Monday) and rose another DBC 13.04 -.06 -0.46% round despite more bad news:
Gold 1906.60 -4.00 -0.21%
1.71%. The S&P 500 recouped Coronavirus uptick in the EU and
Silver 24.545 -.250 -1.01%
much of Monday’s losses, while Copper
Britain, which to a point is bleed-
3.0735 .0360 1.19%
the Russell 2000 and Dow Indus- WTI 39.60 .29 0.74% ing over the concerns about an-
trials lagged (up 0.79% and Brent 41.72 .28 0.68% other wave in the U.S. Nothing
0.52%, respectively). Nat Gas 1.843 .008 0.44% positive has happened, yet tech
RBOB 1.669 -.0102 -0.87%
has rallied 2%. Put differently,
On a sector level, Tuesday was DBA (Grains) 14.67 -.05 -0.34%
Prices taken at previous day market close. none of the problems that
quite similar to Monday. Super-
weighed on tech last Friday are
cap tech outperformed, and that meant a strong rally in
suddenly cured.
XLK and XLY (thanks to AMZN rising 5.7% on the Peloton
competitor). Also similar to Monday, defensive sectors Instead, we are seeing investors react to coronavirus
lagged but were still positive on the day. Utilities (XLU) headlines by piling into super-cap tech for protection, as
and consumer staples (XLP) super-cap tech remains the
both rose 0.6%. Finally, undisputed beneficiary for
cyclical sectors again another coronavirus lock-
lagged. Energy dropped 1% down.
despite the weakness in oil,
Bottom line, we’re still long-
while financials fell 0.84%
term positive on tech, and
as momentum in both
for time horizons that span
those sectors remains de-
beyond the three months,
cidedly lower.
we think tech still represents
Does This Bounce Mean an the sector with the best sec-
“All Clear” In Tech? ular growth potential (i.e.
growth that can occur inde-
The Nasdaq has rallied The Nasdaq fell nearly 12% from the recent highs before this
pendent of small changes in
more than 2% this week week’s bounce.
economic activity). That’s
and has significantly di-
why we continue to favor tactical allocations to tech and
verged from the rest of the major indices, again, and
defensive sectors (because we don’t see the growth cat-
that’s prompted some to ask if the tech pullback is over.
alyst yet).
It’s entirely possible that it is, as the Nasdaq was off
But, the fact is that nothing occurred over the past three
more than 10% from the highs on Monday’s lows. At the
trading days to reverse this tech pullback, other than
same time, we have to realize that this two-day tech
knee-jerk “coronavirus up = buy tech” behavior. Howev-
outperformance isn’t based on earnings or some other
er, this isn’t March and it isn’t June. So, if you are looking
fundamental catalyst. Instead, it’s just a Pavlovian re-
to add to tech, I could see adding small here just due to
sponse to concerns about the coronavirus resurgence.
the decline in valuations, but I do not think we have seen
Consider: The nearly three weeks tech has lagged thanks the short-term bottom in tech yet.
to a correction that is returning valuations to something
considered reasonable. During that time, tech led the Economics
pullback in stocks, just like it led on the upside. Mean- There were no material economic reports yesterday.
while, the “reasons” for the pullback were 1) No stimu-

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Commodities
Commodities largely shrugged off a continued rally in
the dollar yesterday and recovered some of the early
week declines amid tentative risk-on money flows across
other asset classes. Weakness in refined product futures
resulted in a modest drop in the commodity tracking
index, DBC, which ended down 0.46% on the day.
Beginning with energy, oil futures were able to notch a
gain yesterday, rising in sympathy with stocks as markets
continue to stabilize after recent risk-off money flows.
WTI rallied 0.63%.
Traders were looking ahead to today’s weekly EIA report
where analysts are calling for a 1.4MM bbl. draw in com-
mercial crude inventories and a 600K bbl. draw in gaso-
line stockpiles. Concerns about the latest resurgence in
the coronavirus outbreak were clearly visible by looking
at various refined products futures yesterday as gasoline
and heating oil notably fell by 0.85% and 0.95%, respec-
tively, amid fears of another huge drop in consumer de-
mand as a result of potential new shutdown measures.
Bottom line for energy, the economic recovery and con-
tinued, albeit fading, hopes for a new stimulus bill have
been supportive of the oil market in recent months. But
the latest COVID-19 outbreaks around the globe and lack
of progress towards a stimulus Market Level
deal are both acting as headwinds Dollar Index 93.95
for the market right now, and will EUR/USD 1.1710
GBP/USD 1.2739
likely keep WTI from breaking
USD/JPY 104.92
through key technical resistance USD/CAD 1.3306
in the low to mid $40/bbl. range. AUD/USD .7170
USD/BRL 5.476
Turning to the metals, copper
10 Year Yield 0.664
enjoyed solid gains yesterday 30 Year Yield 1.414
with futures rising 1.37% as the 10’s-2’s
market overlooked a stronger Prices taken at previous day market close.
dollar and instead focused on the latest liquidity injec-
tion by the People’s Bank of China. The latest stimulus
bolstered the argument that demand is poised to remain
solid in the months ahead as the global economic recov-
ery remains well underway, and that is also a positive
sign for equity markets and other risk assets.
Gold prices suffered a modest 0.19% drop yesterday as
the dollar headwind continued to pressure the yellow
Copyright 2020, Kinsale Trading LLC. All Rights Reserved. www.sevensreport.com
9/23/2020
metal while traders were hesitant to take any sizeable
positions with two more days of Powell testimony due
this week. The technical breakdown below the $1,920
area on Monday was a bearish shift in momentum and
further profit taking, even down towards $1,800 should
not come as a shock in the near term as the market be-
came overbought this summer. On a longer time hori-
zon, the uptrend in gold is very much alive and buying
material weakness should continue to offer good entry
opportunities.
Currencies & Bonds
The dollar surged to a two-month high on Tuesday
thanks to growing concerns regarding the potential eco-
nomic fallout from surging coronavirus cases in Europe.
The Dollar Index rose 0.36%.
In a stark departure from the past two months, where
the dollar was the driver of the currency markets, the
greenback has taken a decided back seat to the euro and
pound, as those respective economies face new head-
winds from surging coronavirus cases and new lock-
downs.
Specifically on Tuesday, British PM Johnson announced
new restrictions on restaurants and pubs, and encour-
aged people to once again work from home. Johnson
Change % Change said these new restrictions could
.40 0.43% be in place for up to six months,
-.0061 -0.52% and there could be more restric-
-.0078 -0.61%
tive policies coming if the virus
.270 0.26%
-.0002 -0.01%
continues to get worse. That
-.0054 -0.75% news sent the pound down 0.6%
.0620 1.15% and also to a two-month low.
-.007 -1.04%
-.013 -0.91% The euro dropped 0.5% in sym-
54 bp pathy with the pound. EU coun-
tries did not announce any new
restrictions yesterday, but with cases rising in France,
Spain, etc., the prospects for more restrictive policies
(and less economic growth) are rising, and the euro re-
acted accordingly.
Bottom line, the BOE and ECB were expected to eventu-
ally unleash more stimulus on their respective econo-
mies at some point in the coming months. Now, with
these economic restrictions further pressuring economic
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growth, the chances the BOE and ECB will act sooner
than expected, and more forcefully, are increasing, and
that’s why the pound and euro fell to two-month lows
vs. the dollar.
Domestically, the testimony of Fed Chair Powell and
Treasury Secretary Mnuchin didn’t move markets, as the
focus of their questions was on the logistics of the dis-
bursement of stimulus funds, not future policy. Howev-
er, both Powell and Mnuchin both stressed the urgency
for Congress to strike a stimulus deal, something that is
now all be guaranteed not to happen given the looming
Supreme Court nomination.
Absent any material economic data, the dollar traded at
the mercy of the euro and pound, and as they declined,
the dollar rallied. Until the economic outlook for Europe
improves, it’s safe to say the May-September dollar
downtrend, which saw the Dollar Index fall from par to
92, is over—and with it a tailwind on stocks.
Turning to Treasuries, they were again little changed,
and with good reason, as none of the incremental lock-
down measures implemented on Tuesday in Britain, nor
those being considered in the EU, mean that much for
global yields, which are already very low. Notably, 10-
year GILT yields (the British 10 year) rose 4 basis points
on the news to 0.20% as the lockdown measures were-
n’t as draconian as feared. But that is a British-specific
issue for now, and while that supported the dollar it had
little impact on the Treasury market, and rightly so be-
cause it made no changes to expected Fed policy, or
global growth (at least not yet).
Bottom line, the 10-year Treasury yield remains at the
higher end of the 0.50% to 0.72% trading range, and un-
til we get more clarity on whether the Fed will do more
QE or a surprise uptick (or downtick) in growth, the 10-
year yield will likely stay at the upper end of this range.
A very strong flash PMI report today might get the 10
year to challenge resistance at 0.72%, but breaking
through remains unlikely for now.
Have a good day,
Tom

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 9/23/2020

Technical Perspectives
(Updated 09/20/20)

S&P 500
• Technical View: Momentum in the S&P 500 is bullish following the latest run to rec-
ord highs while Dow Theory has been bullish since the all-time highs in February.

• Dow Theory: Bullish (Since the week of September 9, 2019)

• Key Resistance Levels: 3412, 3454, 3508

• Key Support Levels: 3271, 3216, 3145

WTI Crude Oil

• Technical View: The summer rebound in oil prices has been losing momentum for
weeks and the recent breakdown to two-month lows shifts the outlook to neutral.

• Proprietary Model: Neutral (Since the week of August 31, 2020)

• Key Resistance Levels: $42.25, $42.82, $43.41

• Key Support Levels: $40.18, $37.32, $36.03

Gold
• Technical View: Despite the recent spike in volatility, the long-term trend in gold
remains decidedly higher, confirmed by the latest run to all-time highs.

• Proprietary Model: Bullish (Since the week of June 17, 2019)

• Key Resistance Levels: $1994, $2037, $2069

• Key Support Levels: $1922, $1884, $1813

10-Year T-Note Yield

• Technical View: The 10-year yield has stabilized since Q1, and given the recent rise
towards the middle of the summer range the outlook has shifted to neutral.

• Proprietary Model: Neutral (Since the week of August 10, 2020)

• Key Resistance Levels: 0.746, 0.829, 0.904

• Key Support Levels: 0.649, 0.622, 0.543

Dollar/Yen
• Technical View: The USD/JPY has been pinned in a trading range between 104-114
since late 2016, but signs of weakness and a potential new downtrend are emerging.

• Proprietary Model: Neutral (Since the week of July 9, 2018)

• Key Resistance Levels: 105.35, 106.85, 107.55

• Key Support Levels: 104.19, 103.07, 102.33

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 9/23/2020
Fundamental Market View
(Updated
(Updated
(Updated09/20/20)
6/24/18)
4/22/18)
5/6/18)

Near-Term General U.S. Stock Market Outlook

This is designed to provide a snapshot of our near-term (1 month) outlook for stocks. For general equity market ex-
posure, we use a mix of SPHB (S&P 500 High Beta) and SPLV (S&P 500 Low Volatility) to create an aggressive, neu-
tral or defensive stance on general equity market exposure.

Near Term Stock Market The pullback in the S&P 500 continued last week thanks to “not dovish enough”
Outlook: Fed commentary, combined with some lackluster economic data. Looking forward,
the key question for the market is, “When will the economy return to normal?”
Neutral Right now, markets are pricing that in by later this year, so that needs to become
SPHB: 50% SPLV: 50% reality for stocks to hold current levels.

Tactical Allocation Ideas:

• What’s Outperforming: Super-cap tech (FDN/XLK) and defensive sectors (XLU/XLP/XLRE/XLV) have relatively outperformed
both during, and in the aftermath of the surge in volatility earlier this year.
• What’s Underperforming: Cyclical sectors and those with positive exposure to higher yields.

Long Term Fundamental Outlook for Other Asset Classes

Fundamental Market Intelligence

Commodities rallied last week thanks to a supply driven rally in oil, while copper also traded well on
Commodities Neutral solid Chinese data. Commodity markets in general have been trading better as they continue to price
in hope for a sooner-rather-than-later return to an economic “normal.”

The Dollar Index dropped modestly last week but did trade back below 93.00 thanks to strength in
US Dollar Neutral the British pound, combined with some lackluster economic data.

The 10-year yield rose slightly last week as bonds largely looked past the Fed decision (it didn’t
Treasuries Neutral change the outlook for policy one way or the other), and broadly the 10-year yield remains in the
0.50% to 0.72% trading range.

This page is meant to provide a general outlook for the path of each major asset class and is updated at the start of each week.
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