Key Takeaways:

  • Flat market early after Monday’s rally as caution shows up ahead of tonight’s debate
  • Fed speakers in focus as five prepare to deliver remarks today
  • Micron earnings after close could put focus on semiconductor industry

After the week started with a bang, what kind of follow-up might be in store? Maybe one where the market just drifts around looking for direction, in part because of trepidation ahead of tonight’s presidential debate.

The cautious mood seems to be reflected in pre-market trading, where major indices were barely changed ahead of the open. Besides the debate, focus could turn toward Fed policy, with no fewer than five Fed officials scheduled to deliver remarks spread out across the day. Investors also await any stimulus-related developments in Washington, D.C.

Another thing awaited is a look into the semiconductor industry, with Micron (MU) expected to report after the close. Memory chip prices are likely to be under scrutiny when the company unveils results, according to MarketWatch. Prices for those have been under pressure lately following a rush to buy chips by Chinese telecommunications-equipment company Huawei earlier this year.

Technical factors could also come into play today, as the S&P 500 Index (SPX) starts Tuesday just below its 50-day moving average (near 3350) after bouncing off its 100-day moving average late last week down near 3210. A close above the 50-day average, if it happens, could potentially provide more upward traction (see chart below). The 50-day had been holding as key long-term support before it got breached recently, so bullish investors would probably like to see it back above that level as a sign of possible strength.

About tonight’s debate: It would probably take a major “win” or “loss” by one or the other candidate to really steer the market in any particular direction. Still, the debate is important because if one candidate or another appears to benefit, certain sectors might be affected. Health Care and Financials are always among the ones that leap out in terms of impact, but as far as this particular debate, it’s unclear if reality will exceed the trepidation.

Volatility was pretty muted yesterday, and futures trading doesn’t indicate much in the way of expected choppiness early on. That could change quickly if the debate raises any concerns, so continue keeping an eye on the Cboe Volatility Index (VIX), which is up a bit in the early going—to right around 27 .

Momentum and Merger Monday

When people talk about “a case of the Mondays” they’re often using the phrase to talk about being in a bad mood to start off the work or school week. Well, this week started on a much better foot, with stocks getting up on the right side of the bed.

All three of the main U.S. indices rose more than 1.5% Monday. Some of the gains may have been momentum from a strong performance on Friday, but the market also got help from news about a potential domestic stimulus deal, merger and acquisition announcements, and an encouraging reading on Chinese industrial profits.

Comments from House Speaker Nancy Pelosi about chances for a last-minute coronavirus aid deal helped cheer investors who have been hoping that Congress will pass additional stimulus. Extra funds for Main Street might help boost consumer spending, which is a big driver of the health of the domestic economy as well as global fortunes.

Deal announcements also seemed to help the mood. Devon Energy
WPX
Corp. (DVN) and WPX Energy (WPX) announced a merger. Meanwhile, casino operator Caesars Entertainment
CZR
(CZR) is in advanced talks to buy British betting company William Hill (WMH), both companies said Monday.

M&A activity can be a sign of a healthy market. It tends to be looked on positively by investors because it signals that the acquiring companies see value in what they’re buying and because the acquirers are often viewed as being healthy enough to make purchases that involve paying premiums for what they’re buying. (See below for a more in-depth look at the announcements.)

In addition to gains from DVN and WPX, rising oil prices also helped boost the Energy sector. Oil futures gained ground amid the risk-on sentiment sparked by hopes of a congressional stimulus package. With a 2.33% gain, Energy edged out Financials to cinch the lead among the S&P 500 Index’s (SPX) 11 sectors.

Financials Sector Has a Good Day

The Financials sector, another hard hit segment of the stock market, was a close second, rising 2.27%. As with the Energy sector’s gains, there may be an element of bargain hunting behind Monday’s gains as Financials were off more than 14% on the year through Friday’s close. Ten-year yields were a bit higher yesterday, which might have helped the sector, but let’s put things in perspective: They remain historically low.

Banking stocks have gotten hammered as their profitability has taken a hit from ultra low interest rates and socking away money for loans that might go bad because of the pandemic. While cost cutting has helped, and the Fed’s new policy of inflation averaging has helped steepen the yield curve, a broad rally in the banks might not be in the cards until we see more marked economic improvement. 

As we pointed out in yesterday’s outlook for October, research firm FactSet expects the Financials sector to be among the bottom-four earnings performers for the third quarter earnings season.

Looking for Leadership

Without leadership from the Financials, it can be hard to sustain broad rallies over the longer term. We’ve been seeing that lately as leadership from mega-cap technology related companies has been a double edged sword, helping the market some days and pushing it lower on others.

A combination of upward leadership from tech and banks would arguably help underpin a broad market rally. But for that to happen, the broader economy probably would need to be in better shape. 

The big cloud hanging over the economic recovery is a potential resurgence in coronavirus cases as the weather cools. On top of that worry, the market could also remain choppy as we near earnings season and the election in November. While up-days like Monday are a welcome sign for bulls, they aren’t a sure thing given the amount of uncertainty in the market at the moment.

Betting on Online Gambling: One of the themes that has emerged during the pandemic is that the coronavirus has accelerated trends that were already in play, notably the move toward playing, working, and learning online. Casino operator Caesars Entertainment’s (CZR) potential acquisition of British betting company William Hill (WMH) seems to be another example of this. Although casinos have been reopening, physical gambling sites have been hit hard during the pandemic. It appears that CZR’s potential purchase of WMH is in part a bet – excuse the pun – on online gambling as the pandemic accelerates the appetite for in-home entertainment. According to a recent research study by IBISWorld, the global online gambling market is forecast to grow from nearly $59 billion now to $92.9 billion in 2023.

Energizing A Beaten-Up Sector: The other deal of the day from Monday also involved an industry that’s been hard hit by the pandemic. However, the Energy sector hasn’t had an outlet for online sales like the casino industry has. Of the SPX’s 11 sectors, Energy is by far the biggest loser in terms of annual performance, having dropped more than 46% over the year through Friday’s close. Even with gains after the merger announcement, both Devon Energy and WPX Energy were trading at deeply discounted share prices compared to where they were before the coronavirus crippled demand for oil as it dented global business and personal travel and crimped manufacturing. The merger announcement boosted both companies shares on Monday, helping the Energy sector to a rare day on the sector leaderboard.

Spooky Stock Market: While the past isn’t necessarily precedent, it can be helpful to be a student of history. September has lived up to its tendency to be a poor month for stocks. Will October live up to its reputation as a notoriously volatile month? According to investment research firm CFRA, the SPX saw its highest monthly price rise in October, gaining 16.9% in that month in 1974. But it also saw its deepest drop in that month, losing 21.8% in October 1987. October’s standard deviation of monthly returns is 36% above the average for all other months, according to CFRA. “Investors may be convinced that Halloween was purposely placed in October because the market’s actions can be so spooky,” CFRA said.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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