9/9/2020

na influenced broader risk-off money flows across asset

classes including energy, where oil prices fell by as much
as 9% intraday. Economic data was thin and did not ma-
terially move markets while there was no Fed speak.
The relatively light news feed left the profit taking in
mega-cap tech shares to dominate the session as traders
continued to unwind long positions from historically very
overvalued names such as FB, AMZN, AAPL, MSFT, and
GOOGL, which combined recently accounted for roughly
September 9, 2020
a quarter of the entire S&P 500. The selling was not lim-
ited to those names as all 11 S&P Sectors were lower on
the day with the benchmark index ending near the lows.
Pre 7:00 Look
Market Multiple Table: September Update
• Equity futures initially declined at the electronic open last
night after AstraZeneca reportedly halted their COVID-19 There was improvement in market fundamentals over
vaccine trial due to an adverse reaction by a subject in the the past month, but that improvement was moderate,
U.K. but S&P futures have stabilized, and are now up 1%.
and while the outlook for stocks remains generally posi-
• Economically, Chinese CPI and PPI headlines for August tive over the medium and longer term, it still doesn’t
both met estimates at 2.4% and 2.0%, respectively.
justify current levels, and as such it should not be a
• Outside of the AstraZeneca trial headlines, news flow was shock if this pullback continues near term.
mostly quiet overnight with investors remaining focused
on the recent rout in tech shares. Looking at market influences, the Current Situation re-
flects legitimate, but partial, improvements in the mar-
• Econ Today: JOLTS (E: 5.950M). No Fed speakers today.
ket influences from August. Regarding coronavirus, cases
continued to trend lower, and almost more importantly,
Market Level Change % Change death and hospitalization rates remain far better than
S&P 500 Futures 3367.75 32.25 0.97% they were in March and April. So, while COVID-19 clearly
U.S. Dollar (DXY) 93.526 .081 0.09% remains a serious health risk, the medical community
Gold 1935.00 -8.20 -0.42% has significantly improved treatment and outcomes, and
WTI 37.55 .74 2.01%
as such it remains unlikely that we will see material eco-
10 Year 0.684 -.037 -5.13%
nomic closures across the country. The net effect is to
Equities largely remove that risk from markets, which argues for
a higher market multiple. To that point, we increased
Market Recap the market multiple range on the “Current Situation”
Stocks began the week with more volatile trade yester- from 17.5X-18.5X in August to 18X-19X, which account-
day as selling across the tech sector continued to drag ed for the uptick in current situation “fair value.”
down the major indexes while escalating tensions be- Regarding economic data, the numbers have remained
tween the U.S. and China weighed on sentiment. The Market Level Change % Change
S&P 500 declined a steep 2.78%.
Dow 27,500.89 -632.42 -2.25%
The major indexes gapped lower at the open with the TSX 16,099.52 -118.49 -0.73%
S&P quickly falling below Friday’s lows amid continued Stoxx 50 3,297.19 29.82 0.91%
FTSE 5,982.75 52.45 0.88%
profit taking in tech names such as AAPL and AMZN,
Nikkei 23,032.54 -241.59 -1.04%
which dropped 6.73% and 4.39%, respectively. Hang Seng 24,468.93 -155.41 -0.63%
ASX 5,878.63 -129.21 -2.15%
Outside of tech, Trump’s threat to “decouple” from Chi-
Prices taken at previous day market close.
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 9/9/2020

solid and that implies that the July pause was temporary, In that scenario, markets will move towards a 20X multi-
at least so far, and that’s also a positive. Politically, we ple, likely aggressively, and perhaps try and justify a 21X
have seen polls tighten, as we’d Market Level Change % Change multiple if the Fed is sufficiently
expect as we get closer to Elec- DBC 12.82 -.32 -2.44% dovish in September (as they are
tion Day. As such, chances of a Gold 1936.5 2.20 0.11% expected to be). In this scenario,
“Blue Wave” are reduced from Silver 26.800 .088 0.33% while election uncertainty will like-
Copper 3.0150 -.047 -1.53%
August (although the prospects ly make markets more volatile for
WTI 36.99 -.278 -6.99%
for a contested election are ris- Brent the next two months, I’d not be
39.98 -2.68 -6.28%
ing, but we’ll address that next Nat Gas 2.388 -.20 -7.73% surprised to see the S&P 500 chal-
month). RBOB 1.1057 -.0715 -6.07% lenge the old highs before year
DBA (Grains) 14.66 -.09 -0.58% end.
So, there was legitimate, if again Prices taken at previous day market close.
partial, improvement Things Get Worse If:
in three of the four A Game of Multiples (Updated 9/8/2020) Essentially we see a
market influences in Market Influence Current Situation
Things Get Better Things Get Worse reversal in the gains
If… If...
August, which we re- from the last month in
flected in an uptick in Coronavirus cases both coronavirus cas-
Coronavirus cases have rise following
the Current Situation es (so we see a Labor
plateaued in the U.S. Coronavirus infec- Labor Day and
“fair value.” and appear to be rolling tions continue to incremental re- Day spike like we saw
Coronavirus
over, although the recede to May openings, rein- a Memorial Day spike)
But not all was posi- absolute numbers are levels (and below). forcing that the
and economic data
tive, as there’s been no still higher than in May. virus isn’t “going
away.” begins to soften, re-
motion on stimulus.
flecting a delayed
While the market still High frequency (i.e. the
U.S. economic U.S. economic
data continues to data begins to roll negative response to
expects a deal, the most current) U.S.
improve and over, revealing the lack of additional
chances are rising that economic data implies
Global Economic Data implies the eco- that the loss of
the economic recovery stimulus (remember
nothing gets done be- nomic rebound stimulus is an
is ongoing despite the it’s been cut off since
fore October, and if will continue into economic nega-
end of stimulus in July.
year-end. tive. July).
nothing is done in Oc-
The stimulus negotia- The negotiations
tober, doubts will rise The stimulus deal Additionally, there
tions are dragging on drag on past Sep-
about anything getting at or above $1.5 remains no progress
but markets still expect tember 30 and
trillion and weekly
done before early Stimulus Expectations a deal by the end of
unemployment
markets begin to on stimulus (so no
September, although consider no addi-
2021—and that will payments around stimulus bill passed by
doubts are starting to tional stimulus in
increase the economic $400/week. September 30) and
rise. 2020.
headwinds on stocks. Polls have tightened
chances of a “Blue
but Biden is still ex- Wave” where Demo-
Things Get Better If: The presidential Chances of Demo-
pected to win with crats take the Senate
Trends in economic Politics polls continue to crats taking the
Congress remaining
tighten. Senate increase. increase.
data and the corona- split (Republicans keep
virus cases stay the the Senate). Bottom line, there are
same, and we get a Expected 2021 S&P 500
$165 $170 $155
two key takeaways
EPS
$1.5 trillion stimulus from the September
Multiple 18X-19X 19X-20X 16X-17X
bill and the markets Market Multiple Ta-
believe there will be a S&P 500 Range 2970-3135 3230-3400 2480-2635 ble. First, the funda-
split government after S&P 500 Target
3052 3315 2558
mentals of this mar-
(Midpoint)
November. ket have improved
Change from today -9.7 -1.8 -24%
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over the past 30 days, as economic data has stayed solid
and coronavirus has receded. But those improvements
are more than factored into stocks at these valuations,
and it’s not an exaggeration to say this market is trad-
ing well above the “Best Case” scenario outcome,
which leaves the market still at risk of another 5%-10%
decline.
Second, looking to the future, there is an easier path to
the “Things Get Better If” scenario, because we can usu-
ally count on Congress to get these types of things done
regarding stimulus (usually at the last minute), and also
because presidential polls typically tighten into Election
Day (so reduced chances of a Blue Wave).
While the path is “easier” to the “It Get’s Better If” sce-
nario, the “It Gets Worse If” scenario also is very plausi-
ble. The last few holidays have caused a surge in coro-
navirus cases; it’s not clear economic data can remain
this solid without stimulus, Washington seems as dys-
functional as ever with the stimulus bill, and while polls
may tighten so too will the chances there’s no clear
election result.
The concerning thing is that if this happens, then we’re
easily looking at another 20% decline in stocks. Again, is
that the most likely outcome? No, it’s not. But, it’s a lot
more possible than stocks would
imply, given that if even some of Market Level
Dollar Index 93.478
it comes true we’re looking at a
EUR/USD 1.1782
further 10% decline. Meanwhile, GBP/USD 1.2991
if the “Best Case” scenario occurs USD/JPY 106.04
(stable data, coronavirus trends, USD/CAD 1.3227
AUD/USD .7213
a stimulus bill and no Blue Wave)
USD/BRL 5.3541
we’re looking at about 3% funda-
10 Year Yield 0.684
mental upside from here. Again, 30 Year Yield 1.423
we don’t like that risk/reward, 10’s-2’s
and that’s why we’d prefer to Prices taken at previous day market close.
wait for a further decline before adding incremental
stock exposure, even after the recent pullback.
Please email info@sevensreport.com if you’d like an
unbranded copy of the Market Multiple Table.
Economics
There were no material economic reports yesterday.
Copyright 2020, Kinsale Trading LLC. All Rights Reserved. www.sevensreport.com
9/9/2020
Commodities
Commodities suffered steep declines to start the week
with energy futures leading the way lower amid increas-
ing concerns about the fundamental health of the oil
market, while a stronger dollar and continued equity
market volatility weighed on the metals in early trade.
The commodity ETF, DBC, dropped 2.44%, the biggest
one-day decline in months.
Metals were universally lower to start the day as the
combination of risk-off money flows and a stronger dol-
lar weighed on industrial and precious varieties. Gold
reversed course and eked out a gain of 0.19% as bond
yields declined yet inflation expectations stabilized.
Looking ahead, gold traders will remain closely focused
on key support between $1910 and $1920, as a break
below that level will likely trigger a test of $1800/oz.
Copper slid 1.45% as the escalating tensions between
the U.S. and China dampened the recently optimistic
outlook for demand growth for the industrial metal. The
potential for ongoing supply disruptions due to COVID-
19-related production issues and still-upbeat economic
trends across most of the globe supporting demand pro-
spects leave the path of least resistance higher.
Oil Plunge
Change % Change Oil was the focus of the com-
.759 0.82%
modity markets to start the week
-.0035 -0.30%
-.0175 -1.33% as both the domestic benchmark
-.23 -0.22% (WTI) and the international
.0129 0.98% benchmark (Brent) crashed to
-.0064 -0.88%
multi-month lows on the back of
.0523 0.99%
multiple negative shifts in energy
-.037 -5.13%
-.047 -3.20% market fundamentals. WTI end-
55 bp ed the day down 7.37%.
Beginning internationally, sepa-
rate data sources reported that Chinese oil imports in
August dropped by more than 7% from July while Saudi
Arabia slashed prices on exports to global customers.
The actions by the Saudis signal potentially weakening
demand trends, specifically out of Asia, but also that the
Saudis could be quietly attempting to recapture market
share with cheaper prices and increased exports after
they were been forced to cut back production in recent
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quarters to help balance the global market. Any situation
where the Saudi’s are focused on recovering lost market
share and are not committed to stabilizing/higher prices
is a negative one for oil and the broader energy market.
Domestically, in the wake of Hurricane Laura it appears
that oil and refined product demand was “front loaded”
ahead of the storm and may not rebound as quickly as
physical traders initially thought. Additionally, the WSJ
reported that the most recent data shows U.S. gasoline
demand is down as much as 10% in year-over-year terms
and that the recovery since the Q2 lockdown has stalled.
Bottom line, there is emerging evidence that global over-
production may be leading to a bearish shift in supply
dynamics but the market’s real concern is demand. As
we saw in April when WTI futures turned negative, a de-
mand shock is by far the biggest threat to the physical oil
market. If we don’t see a rebound in optimism for future
demand, then oil prices could continue to bleed lower.
On the charts, WTI closed a longstanding technical “gap”
to the early March levels (low $40s) over the course of
the summer but then turned sideways as traders digest-
ed the historical price action in oil YTD. WTI now is into a
key support zone between $34.50 and $36.50, which if it
holds could see prices settle into a new sideways range.
If that support breaks, a drop into the mid-upper-$20s
will become all but inevitable as momentum traders
begin to pile on the offers. Whether the oil market stabi-
lizes after this most-recent correction, or drops further,
will be an important, real-time and anecdotal indicator
of real consumer demand in the market right now.
Currencies & Bonds
The dollar rebound that started late last week continued
on Monday thanks to negative Brexit news combined
with a risk-off bid in the dollar as stocks extended their
pullback. The Dollar Index rose 0.65%.
Normally, we see the dollar and the euro trade equal but
opposite. But that was not the case on Monday as the
euro fell vs. the dollar, but only a modest 0.3%, much
less than the 0.65% dollar rally would imply. The reason
for that was the pound, which plunged 1.3% and broke
below 1.30 for the first time since late July.
The reason for the decline was clear: With Britain and
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9/9/2020
the EU deadlocked on their Brexit negotiations, PM
Johnson threatened to suspend negotiations on October
15 if material progress hasn’t been made. That’s two-
and-a-half-months before the December 31 deadline.
If these threats sound familiar, they should, because this
is exactly the way the Brexit negotiations went last year.
Bottom line, the pound was extended vs. the dollar and
due for a pullback, and this is adding to general pound
uncertainty. But with the pound still near 1.30, the mar-
ket still clearly expects either 1) A post-Brexit EU/Britain
trade deal or 2) A deadline extension past December 31
that leaves the current trade deal in place. If the market
did not expect either of those two things, we’d be talk-
ing about the pound breaking $1.20, not $1.30.
As mentioned, both the euro and yen were generally
little changed on the day. The euro fell 0.2% while the
yen gained 0.3%, which is consistent with a milder risk-
off move in currency markets. There was no notable
news for either currency on Monday.
Turning to Treasuries, the 10-year yield fell 4 basis
points, which is to a point what we’d expect given the
decline in stock prices and the general risk-off move in
markets Monday. The 10-year yield closed at 0.68%,
again failing to break decisively through resistance at
0.72%.
There wasn’t a specific catalyst for the drop in yields,
other than some mild pressure from a 3-bps decline in
German 10-year bund yields, which was courtesy of the
negative Brexit headlines (no EU/Britain trade deal
would be bad for the EU and British economies). But
again, it’s a reminder that this is still a global bond mar-
ket, and if we are going to expect the 10-year yield to
move towards 1% on hopes for better economic growth,
it’s going to have to come with better growth expecta-
tions from the U.S. and the EU.
For now, the 10-year yield remains in the 0.50% to
0.72% trading range, as it once again failed to decisively
close above that level.
Have a good day,
Tom
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 9/9/2020

Technical Perspectives
(Updated 09/07/20)

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: 3485, 3508, 3565

• Key Support Levels: 3392, 3334, 3271

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: $41.28, $42.25, $43.45

• Key Support Levels: $39.04, $38.05, $36.26

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: 106.85, 107.55, 109.10

• Key Support Levels: 104.91, 103.07, 102.33

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 9/9/2020
Fundamental Market View
(Updated
(Updated
(Updated09/07/20)
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 S&P 500 dropped sharply last week thanks to a big selloff on Thursday, alt-
Outlook: hough there was no catalyst other than an exhaustion of the recent melt-up rally in
stocks. Looking forward, the key question for the market is, “When will the econo-
Neutral my return to normal?” Right now, markets are pricing that in by later this year, so
SPHB: 50% SPLV: 50% that needs to become 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 dropped sharply last week, led lower by oil, which fell on a sell-the-news reaction from
Hurricane Laura, combined with general risk-off selling as stocks fell. Commodity markets in general
Commodities Neutral 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 rallied modestly last week following better-than-expected U.S. economic data, com-
US Dollar Neutral bined with underwhelming EU data and increased “chatter” about the ECB possibly easing policy
further.

The 10-year yield rose modestly last week thanks to better-than-expected economic data. Both the 10
Treasuries Neutral -year yield and the 10s-2s yield spread recently hit the highest levels since June as over the longer
term, the average inflation target should boost inflation.

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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