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Strategists' Mood Darkens on US Stocks as Headwinds Swirl

Strategists' Mood Darkens on US Stocks as Headwinds Swirl

Monday, 21 September 2020 10:07 AM

The pullback in U.S. equities may be more than just a passing phase, according to strategists.

As investors fret over the presidential election, a Congress deadlocked over the next stimulus package and extended lockdowns around the world, S&P stock futures are extending three weeks of losses.

With the benchmark down 7.3% since its Sept. 2 record and the Nasdaq 100 some 12% lower, strategists from Miller Tabak + Co. to Tallbacken Capital Advisors LLC say the selling is likely far from over.

“This month’s underperformance of U.S. assets affirms an anxiety that has existed for some time -- that the U.S. would generate the greatest and the widest range of wild cards this fall,” JPMorgan Chase & Co. strategists led by John Normand wrote in a note Friday.

Developments Friday deepened the concerns. The S&P 500 and Nasdaq closed below their 50-day moving averages, a line that had previously offered good support. And the passing away of Justice Ruth Bader Ginsburg could mean the Senate will be so focused on a replacement that lawmakers won’t be able to agree on additional stimulus. U.S. equity futures sank on Monday, reflecting losses in European stocks.

While the S&P 500 and Nasdaq’s technical moves “were only slight ‘breaks,’” a pattern of lower lows in stock prices of large tech companies that have led the market in recent years is a bearish sign, said Matt Maley of Miller Tabak. “It increases our confidence that we will indeed see another leg lower for the stock market before long.”

“Negative momentum signals suggest stocks are likely to remain in a period of weakness in the near term as rotation to new cyclical leadership from technology combines with election jitters to weigh on risk tolerance,” Michael Casper, Bloomberg Intelligence strategist wrote in a note.

A delay in stimulus could boost the VIX and cause cyclical stocks to lag behind, as well as send rates and the U.S. dollar lower, according to Michael Purves, chief executive officer at Tallbacken. The prospect of a delayed election result could also boost implied volatility of gold as well as the VIX curve, he said.

The bearish outlook has coincided with U.S. equities entering a seasonally weak month, according to Bespoke Investment Group.

“September has historically been the worst month of the year, and it’s a month that is usually volatile as well. Given the recent action, it’s not the most positive backdrop for the weeks ahead,” Bespoke wrote in a blog Saturday.

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The pullback in U.S. equities may be more than just a passing phase, according to strategists.
strategists, mood, darkens, stocks
Monday, 21 September 2020 10:07 AM
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