Red Zone

By David Nelson, CFA CMT

With the exception of China most global markets put in a strong week and now the S&P 500 finds itself right up against resistance and a chance to break into the RED ZONE. With the goal line just 5% higher a little good news on the virus or earnings could set up a challenge to the all-time high from February 9th.

Red Zone

The disconnect between the market and the real economy is ignored by the index headline level and instead plays out in sector and market cap rotation. Underneath the surface is a ferocious battle between cyclical and secular growth.
iShares Growth (IVW) vs iShares Value (IVE) – Relative Performance
Growth val last week

The large cap secular growth outperformance has been trending all year in the face of the pandemic with last week being a rare exception. It will be interesting to see if Thursday’s NFLX miss was a harbinger of things to come or an outlier for the popular FANG trade. (FB, AAPL, NFLX, GOOGL, MSFT)

Meanwhile, other asset classes are responding to the slowdown in state by state attempts to reopen their economies. For the moment estimates for Q3 GDP growth of 18% seem to be holding but will change quickly if states retrench.

U.S. Yield Curve
yld today month year

Across the yield curve rates are lower in the last month and highlights the ongoing disconnect.


If I were an economics professor, I would give last week’s economic data a solid B. A highlight for the week was the NAHB Housing number coming in well above expectations at 72. With mortgage rates breaching below 3% a 30-year fixed mortgage looks like a no brainer for those looking to buy.

Retail Sales were also above expectations coming in at +7.5%. The better than expected NY State Empire Index and Philly Fed numbers of 17.2 and 24.1 respectively round out the positives for last week.

On the liability side of the balance sheet Consumer Sentiment at 73.2 missed the 80 estimate hostage to deteriorating headlines focused on the daily infection rate. There is significant debate over how the virus numbers are presented and will be a central point in upcoming Presidential debates.

We are at the start of earnings season but again I think the focus will be on guidance and less the headline report itself. Even for NFLX it was the Q3 guide on subscriber growth that punished the stock on Friday.

The coming week is light on economic data but a big one for earnings and will likely set the stage for the remainder of the month.

This just out

It’s hard to sift through all the noise on the virus. Every media outlet seems to cherry pick the data to fit their narrative. There is some encouraging research released by Pantheon Macroeconomics this morning. Ian Shepardson Chief Economist for the firm has put out a report suggesting the delta of the curve for daily infection rates is falling.

The slowdown in case growth is not a function of reduced testing.
The number of tests has risen by 14.3% over the past week,
and the share of positive tests has dipped to 8.5% from 9.0%.
That’s still too high, but it is headed in the right direction.

Outside of Florida the hospitalization figures are encouraging as well. All of this is just hitting now so a lot of work to validate the data.

*At the time of this article some funds managed by David were long AAPL, MSFT, AMZN, GOOGL and NFLX