Morning Comment: An August Pull-Back Would Actually Be Healthy

It’s the last day of July and it seems like we’re setting up for an exciting August. In other words, those who are looking for the dog days of summer this year are going to be sorely disappointed. On the positive side of the ledger this morning, we have the fabulous earnings reports last night out of AAPL, FB, AMZN and GOOGL. Those reports have AAPL, FB & AMZN trading at least 6% higher (although GOOGL is down a little bit after posting their first quarterly decline in revenue ever). This has the Nasdaq futures trading more than 1% higher this morning...and although the S&P is not indicating the same kind of gain, they’re still looking about 20 points higher than where the cash market closed yesterday.

The key for this group is going to be whether these names can hold their gains as we move throughout the day. Just over a week ago, we saw companies like MSFT and TSLA report great numbers after the close one evening...and then saw their stocks open strongly higher the next morning...only to see them roll-over in a meaningful way shortly after the stock market opened. This led to a pretty decent decline in the broad market. Given that all of these stocks that reported last night have seen major rallies over the past four months, it’s not out of the we could see another “sell the news” reaction today.....Of course, just because we got a “sell the news” reaction in one instance last week does not mean we’ll get one this week...but today’s action in these stocks should be important one way or another.

On the negative side of the ledger, the negotiations in Washington DC over a plans to add a new round of stimulus have come to an impasse. This is not having a significant impact on the stock market so far...because most people believe that the worst case scenario is that the two sides will come up with a stop-gap plan at the very least. In fact, there are reports that the GOP has shown some willingness to extend the $600 unemployment benefit for several months. (Our guess is it will be long enough to get to the election. 😊).....Therefore, the expectation that Congress won’t let this issue turn into a debacle seems to be warranted. However, we never want to underestimate the ability of our elected officials to do something ridiculously stupid......For us, however, we think they’ll get something done...and if they don’t, the markets will force them to do it VERY quickly.

The other issue this morning is Europe. After we got some disappointing GDP numbers out of Germany on Thursday, we saw some similarly weaker-than-expected GDP data out of France and Spain today. Of course, these are backwards looking numbers, but they are having a dampening effect on the stock markets of those two countries. However Germany’s DAX is bouncing a bit (after its 3.4% drop on Thursday). This has enabled the DAX to hold its 200 DMA. That is important because Thursday’s drop took it below its trend-line from the March lows...and a break below the 200 DMA following a break of the four month trend-line would raise a yellow flag on that market.

Don’t get us wrong, we’d have to see a more important “lower-low”...below its mid-June lows (just below the 12,000 level) to confirm that the intermediate-term trend for Germany’s stock market has shifted to the downside. Therefore, we don’t want to sound overly cautious about the DAX right now. The economic news out of Europe has generally been better than the least until this week, so the action over the past two weeks could just be a “breather” after its strong advance in recent months. In other words, we’re still constructive about the action we’re seeing in Europe. However, if the DAX does indeed break-down once we move into the month of August, it will raise some warning flags about the economy and the markets from across the pond. (Chart below.)

However on this side of the pond, the action in the tech stocks...and the news out of Washington DC...should dominate things as we move into the last month of the summer......We still worry that the stock market will see a pull-back next month. Actually, we should not use the word “worry.” We believe that a pull-back of 7%-10%...or even a full blow correction...would be quite healthy. Given the parabolic moves we’ve seen in companies like Tesla...and especially ones that we’ve seen in companies like Kodak and Hertz...there is a certain amount of froth in the market that needs to be tapped-down to keep the rally a healthy one. The kind of pull-back/correction we’re talking about would do just that.

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Jul 31, 2020 — 8:07 AM
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