Trader Talk

Gary Gensler, then-chairman of the U.S. Commodity Futures Trading Commission (CFTC).Simon Dawson | Bloomberg | Getty ImagesNew Securities and Exchange Commission Chairman Gary Gensler will testify before the House Financial Services Committee on Thursday. This is the third House hearing focused on GameStop, but this is Gensler's first appearance as chairman before the Committee.Gensler's prepared testimony indicates he will address a broad range of topics around Gamestop and protection of investors, including:'Gamification' of trading.Gensler will begin his testimony on the increasing gamification of trading, which he defined as trading that has "game-like features" — such as points, rewards, leaderboards, bonuses, and competitions — to increase engagement."Many of these features encourage investors to trade more," Gensler said. "Some academic studies suggest more active trading or even day trading results in lower returns for the average trader."Gensler said he has asked his staff to prepare a request for public input: "We need to ensure investors using apps with these types of features continue to be appropriately protected."Payment for order flowMany brokers now send their orders to market makers in exchange for payments, a process known as "payment for order flow."  The market makers can either execute the orders directly or pass it on to an exchange or other trading venues.Because higher levels of trading generate more payment to brokers, Gensler asked: "Do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict? Are broker-dealers incentivized to encourage customers to trade more frequently than is in those customers' best interest?"Gensler did not directly address these questions, but implied the recent enforcement action against Robinhood was a warning sign. "Robinhood explicitly offered to accept less price improvement for its customers in exchange for receiving higher payment for order flow for itself. As a result, many Robinhood customers shouldered the costs of inferior executions; these costs might have exceeded any savings they might have thought they'd gotten from a zero commission."Equity market structureThat payment for order flow has turned into a lucrative business. Gensler says about 38% of equity trading volume is executed by those off-exchange wholesalers. Citadel Securities, Gensler noted, has publicly stated that it executes about 47% of all retail volume.Gensler asked if this concentration was consistent with the SEC's mandate to promote fair, orderly, and efficient markets.  "History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration," he said, "I've asked staff to look closely at these issues to determine which policy approaches may be merited."Short positions: Should they be disclosed?Hedge funds and other investors who hold significant stock positions are required to report long positions on a quarterly basis, but those who hold short positions are not. That has led to calls that short sellers should also be required to disclose their positions:  "Enhancing disclosures could improve market efficiency and end some wild speculation (and misinformation) about short selling and short positions," Tyler Gellasch, executive eirector of Healthy Markets, said in an open letter to Gensler.Gensler told the committee he has directed SEC staff to prepare recommendations for the SEC's consideration on short selling disclosure.The Archegos messThough unrelated to GameStop, Gensler also brought up the failure of Archegos Capital Management and the losses incurred by several banks that provided prime brokerage services to them. The "core" of the problem, Gensler said, was Archegos' use of total return swaps based on underlying stocks, and the significant exposure that the prime brokers had to the family office.Gensler said he has asked his staff for recommendations on whether to include total return swaps and other security-based swaps under new disclosure requirements. Social media hypeGensler also raised concerns that wrongdoers will attempt to use social media to hype stocks or manipulate markets.  He offered no specific suggestions, but said that "This is an area for which we will continue to deepen our understanding, resources, and capabilities."Margin requirementsGensler noted that "at least one firm didn't have sufficient liquidity to meet margin calls and had to fundraise within hours to meet $1 billion-plus obligations, and several brokers chose to shut down customer access to trading."  Gensler said this raised questions about whether margin requirements are sufficient, and whether broker-dealers have appropriate tools to manage their liquidity and risk. "I've asked staff to look at these issues carefully," he said.Shorter settlement periodStocks currently take two days after a trade is made to settle, a convention known as "T + 2."  Gensler noted that "the longer it takes for a trade to settle, the more risk our markets assume" and that the technology exists to eventually shorten the settlement cycle to T + 1 or even same-day settlement.  "I've directed the SEC staff to put together a draft proposal for the Commission's review on this topic," he said.Where is the SEC going?While Gensler's comments lacked specifics, analysts noted that his comments clearly indicated the direction he was taking the SEC on these issues."This is the first time he has come out, and he is pretty negative on payment for order flow and the concentration of market makers," Rich Repetto from Piper Sandler told me, noting his remarks were "troublesome for e-brokers and market makers."Repetto also said not to mistake the lack of specifics for lack of direction:  "When he says he is 'directing' his staff he is implying there is going to be some kind of action," noting that the committee will now expect some kind of update on what the SEC is doing in the coming months.Indeed, Gensler told the committee his staff would be publishing a report on market events over the summer.Gensler also left the door open to enforcement actions against those violating SEC rules:  "While I cannot comment on ongoing examination and enforcement matters, SEC staff is vigorously reviewing these events for any violations. I also have directed staff to consider whether expanded enforcement mechanisms are necessary."
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Traders working at the New York Stock Exchange (NYSE), today, Wednesday, April 21, 2021.Source: NYSEThe NYSE is adjusting its COVID protocols and will allow more people on its iconic trading floor.Beginning May 10th, members of the floor community who have been fully vaccinated will be exempt from certain restrictions, including a random testing program, according to an internal memo. They will also be allowed to remove face masks, though they must continue to maintain social distancing (6 feet or more).If 100% of a trading firm's floor-based staff have been fully vaccinated (meaning 2 or more weeks have passed since the final dose of a vaccine), the firm will be permitted to bring them back fully staffed. The memo was first reported by Bloomberg News.Media organizations will also be permitted on the trading floor. Everyone will still be required to wear a mask when walking around on the floor.One issue not addressed: Whether employees or other entrants will still be required to sign a waiver of liability that prevents them from suing the NYSE in the event they contract COVID.
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Traders on the NYSE, May 3, 2021.Source: NYSEIt's not just about earnings anymore: Dividends and huge inflows are helping stocks power forward.April trading data is in, and it shows two surprises: an increase in dividends, and huge inflows into equities that are even stronger than the first three months of the year. Dividends are backIn April of last year, two dozen companies in the S&P 500 reduced or suspended their dividends. More suspensions and dividends came later in the year.For April of this year, the opposite has happened: 33 companies in the S&P 500 announced dividend increases. None announced a decrease, and none suspended dividends.Most importantly, 11 companies that had suspended dividends in 2020 began paying again in April:Reinstating dividendsRoss StoresTJXHCA Health CareUniversal Health ServicesFreeport McMoranEstee LauderKimco RealtyDarden RestaurantsWeyerhauserMarathon OilThree of them — TJX, HCA Healthcare and Freeport McMoran — are paying higher dividends than they were before they suspended payments."The bottom line is, a year ago companies had no idea what was going on," Howard Silverblatt, senior index analyst from S&P Global Indices, told me. "Now there is much better clarity, and they are willing to put their money where their mouth is."Will it continue? Silverblatt estimates that the overall dividend payout for the S&P 500 will increase 5% in 2021. That would mean a payout to investors of about $515 billion, up from $483 billion in 2020."That is money in your pocket," Silverblatt said. "Remember, when a company pays a dividend, it is expected that it will keep that dividend going. That is a commitment from the company and they don't make that decision lightly."Investors enthusiastic: Big inflows into ETFs continueNear-record inflows into ESG, thematic tech and other areas are also supporting prices.Exchange-traded funds started the year just short of $6 trillion in assets under management, and inflows have continued on a consistent basis every month in 2021.An extra $55 billion was put into equity ETFs in April, for a year to date total of $258 billion in equity inflows. 2021 will certainly see much higher equity inflows than 2020, when panicked investors threw money into bond funds."The money's coming from everywhere," Harry Whitton, senior vice president at Old Mission, an ETF market maker, told me. "There are people still sitting at home who are putting money into the markets. You are seeing huge interest in [Environmental, Social and Governance] ETFs. You are continuing to see money come out of mutual funds and into ETFs as well."Is the Reddit crowd turning into long-term investors?These inflows came despite a 30% drop in April equity share trading volumes compared to March, according to PiperSandler, and a similar 14% drop in equity options trading.Why are there big inflows into ETF equity funds, and lower overall equity and equity option trading?Nikolaos Panigirtzoglou, managing director at JPMorgan Chase, suggests retail traders are altering their trading patterns: "The behavior of US retail investors appears to be changing again, away from buying individual stocks or stock options and towards buying more traditional equity funds as was the case before the pandemic," he wrote in a recent note to clients.Harry Whitton agrees: "We are seeing selling of fixed income ETFs and buying of equity ETFs. Maybe some of the Reddit crowd turned into long term investors. Or they got their tax bills."Become a smarter investor with CNBC Pro.Get stock picks, analyst calls, exclusive interviews and access to CNBC TV.Sign up to start a free trial today.
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President Joe Biden addresses a joint session of Congress at the U.S. Capitol in Washington, U.S., April 28, 2021.Doug Mills | ReutersIf the stock market is considered a barometer of success, Joe Biden's first 100 days in office is starting off with a bang...a big bang.Since the election, the S&P 500 is up more than 20%. Since his inauguration in January, it's up 10%.According to JPMorgan, that is the best 100 day run for an inaugural President in more than 75 years.  The only other one close was John F. Kennedy in 1963, who also saw a return north of 20%. Investors, understandably, are more focused on the future. What will happen in the second 100 days? What about the second 100 days?Investors are focused on five major drivers of stock prices in the coming months:  the rate of change in earnings, the stability of profit margins, the future of the Biden legislative strategy, the Fed tapering and rate hikes, and the reopening and continued economic growth.Earnings growth: With 50% of the S&P 500 reporting first quarter earnings, the trend of outsized earnings beats has continued.  Companies have reported beating earnings by an average of 22.7%, according to Refinitiv, way above the historic beats of 3%-5% that were typical prior to 2020.  Moreover, more than 60% have seen second quarter estimates raised, which is higher than the previous quarter."More analysts are raising estimates and at a faster pace," Nick Raich, who tracks corporate earnings at Earnings Scout, told me.  "The rate of change is accelerating, and that is what drives stock prices."Andrew Adams from Saut Strategy noted that EPS growth for the S&P 500 is now north of 30% in the first quarter compared to the same period a year ago, the best growth in more than 10 years."Such a high growth rate will almost certainly decline once the COVID shutdown impacts start to fall off, but there should still be a fairly low bar to beat in the next few quarters for many companies," he said in a recent note to clients.  "So for now the market just isn't showing me a lot of reason to worry other than the fact that the large cap averages are hitting up against overbought levels." Stable margins:  One major concern for corporate profits has been higher input costs, everything from packaging to transportation to fuel costs, which would adversely impact corporate margins.  Several companies, particularly food and consumer companies, have reported higher input costs, but mostly without adverse consequences.   Factset reports that blended corporate margins for the first quarters are at 11.6%, the third highest level since tracking began in 2008. They expect that to hold above 11.0% for the rest of 2021.  The main reason:  many companies have successfully announced they were raising prices to keep up with the higher costs, thus maintaining margins. "Investors have not punished companies for raising prices," Raich told me. The future of the Biden legislative strategy.   The President has proposed two major additional pieces of legislation, the American Jobs Plan and the American Families Plan, both of which could impact stock prices this summer.  The President Wednesday night unveiled details of the American Families Plan, a $1.8 trillion package of spending and tax cuts.  While restoring the top individual income rate to 39.6% and taxing capital gains as ordinary income for households making over $1 million has caused some ripples among investors, most believe that any tax hikes will come in at far lower rates than those proposed."In our view, a capital gains tax increase looks more likely to come in around 28%," Jan Hatzius at Goldman Sachs wrote in a note to clients.The Biden administration has also proposed higher corporate taxes, but most analyst also argue that the increase will be far more modest than the 28% rate that has been proposed.John Normand of JP Morgan summarized the current consensus on the impact of the proposed tax hikes on stocks:  "The view since the 2020 campaign has been that a higher corporate rate would lower S&P500 EPS by several dollars, but within a surging earnings growth environment driven by greater fiscal outlays and vaccine-driven reopening." In other words, higher taxes will likely be more than offset by stimulus and the reopening.  Not surprisingly, JP Morgan has made no changes to their year-end S&P target of 4,400.The Fed tapering and rate hikes:  Few issues have caused more debate than the timing of when the Fed will raise rates and begin tapering its $120 billion a month bond buying program. At his press conference Wednesday, Fed Chairman Jay Powell reiterated "We would have to have made very substantial progress in getting the virus under control" before the Fed would consider tapering, and again insisted that any price increases are likely to be "temporary."How long it will take for the Fed to feel that the virus is "under control" is hotly debated.  Some, like Adrian Miller, chief market strategist at Concise Capital Management believe the Fed will begin tapering in 2021:  "The Fed is likely to begin tapering in the fourth quarter.  By June several million more people are likely to be back in the labor market.  It might be a modest tapering, but we will be far enough along in the labor market recovery by the third quarter that some tapering is likely in the fourth quarter," he said. More typical is that of Guggenheim's Scott Minerd, who tweeted this out shortly before Wednesday's Fed announcement: "The market is being too aggressive on timing of tapering  (Q4 2021) and first rate hike (Q1 2023).  Under the new framework, the first rate hike could be pushed back to 2025."The reopening and continued economic growth:  Just as stock pickers are paid to sniff out peak earnings growth, economists are paid to sniff out peak economic growth.  Most still expect that the best news is still ahead of us.  Typical is Lori Calvasina from RBC Capital Markets, who in a note to clients said that while economic forecasts for 2021 are high and going higher, this has not yet impacted perceptions about 2022:  "One piece of good news is that 2022 forecasts haven't gone down, suggesting that 2021's faster and more powerful recovery in the economy hasn't borrowed too much from against 2022's growth outlook yet."The biggest problem for stocks in the second 100 days The biggest problem for stocks going into Biden's second 100 days may not be related to the economy at all.  Stocks may simply prove to be a victim of their own success."Peak everything" is a common refrain among investors, the concern that economic growth is peaking this summer, along with the rate of change in earnings growth.  The data we have, many argue, is as good as it gets.Companies have reported boffo earnings since the reporting season began two weeks ago, but the broader market has remained unchanged which, JPMorgan's John Norman says, gives some credence to those concerns. "Stock price reaction has been disappointing despite the strong beats," he said.  "Misses are being penalized as per usual, and the beats are not translating into positive stock price reaction."
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Traders on the floor of the New York Stock Exchange.Source: NYSEThe reopening story is now getting very real, at least for Wall Street.Today's crop of earnings reports are chock-full of companies reporting earnings above expectations and, most importantly, raising guidance.Take steel maker Nucor, which reported what CEO Leon Topalian called the "most profitable quarter in our Company's history" on improved pricing and margins. "We expect earnings for the second quarter of 2021 to exceed our first quarter results, setting a new record for quarterly earnings. Most of the end-use markets we serve remain strong and inventories remain lean across supply chains. We believe the current favorable demand environment will continue through the rest of 2021," he wrote to investors.Another large industrial, iron ore mining company Cleveland-Cliffs, raised full-year EBIDTA (cash flow), also on expectations of higher prices.Whirlpool reported net sales growth of 24%, beat earnings expectations by more than 30%, raised full-year guidance by 18%, raised the dividend, and announced an increase in share buybacks.Homebuilder D.R. Horton reported a significant earnings beat and raised full-year revenue guidance.In health care, HCA Healthcare raised full-year guidance, joining other providers UnitedHealth and Tenet Healthcare.One exception to the earnings bright spots: railroads.Union Pacific was the latest railroad to miss on earnings, following Kansas City Southern and CSX, which also missed. The inability to model bad weather may be the explaining factor: "The Q1 EPS shortfall largely reflects the winter storm disruption," Baird analyst Garrett A. Holland wrote in a note to clients. "The 2021 outlook is intact and may prove conservative as economic activity strengthens."Headwinds for stocks: high prices and "peak everything"And yet.The market, as every analyst and strategist has noted, is not cheap. Stocks have had significant run-ups in anticipation that companies would indeed be raising guidance, including companies reporting today: Firms reporting earnings vs. year-to-date performanceEarnings Reporters
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A pedestrian wearing a protective mask exits from the Wall Street subway station in New York, on Monday, July 20, 2020. Michael Nagle | Bloomberg | Getty Images Wall Street is getting bulled up on earnings, and that is highlighting the divide it has with Main Street. Earnings season is two days old, and already Wall Street pundits are optimistic. Corporate profits "have been more resilient than we expected and we are raising our estimates," UBS chief investment strategist David Lefkowitz wrote in a report to clients. The firm is raising its earnings estimates for the S&P 500 for both the full year 2020, and full-year 2021. Dennis DeBusschere from Evercore ISI is equally optimistic, stating that the rise in earnings would support a move in the S&P 500 toward 3,650 over the next few quarters, a 4% gain from the current level. This, after one day of (admittedly) blowout earnings from JP Morgan, Citigroup and Blackrock? It's more than that. Even before bank earnings, nearly two dozen companies — including heavyweights like FedEx, Lennar, and CarMax — that have already reported third-quarter earnings have beaten estimates by roughly 25%, an unusually wide earnings beat, according to Earnings Scout. What's going on? A combination of a slowly improving economy, a lack of earnings guidance, an overly cautious analyst community, an emphasis on corporations improving efficiency, and a belief that a vaccine will become available in early 2021 is slowly but surely nudging corporate earnings estimates higher. Analysts, who have underestimated the extent of the corporate profit recovery, are now busily revising earnings estimates upward: "There are twice as many S&P 500 stocks receiving upward earnings revisions vs. those experiencing cuts, which is well above average levels seen over the last 40 years," Ann Larson at Bernstein noted. The Main Street divide But why are earnings so much better when much of Main Street is in such dire shape? This earnings outperformance is again highlighting the difference between Wall Street — the investment economy — and Main Street — the so-called real economy. Main Street observers have long complained of this disconnect: with GDP estimated to be down 4%-5% this year and millions out of work, how could the stock market be approaching new highs? Shouldn't there be some correlation between GDP and corporate profits? There usually is, but Wall Street does not exactly represent Main Street, and the Covid downturn has highlighted those differences. The main reason for the divergence is that the U.S economy is heavily weighted to services like retail, restaurants, and doctors, rather than selling goods. But the earnings profile of the S&P 500 is more heavily weighted toward companies that sell goods. How big is the difference? UBS estimates that services comprise 83% of U.S. economic activity but only 54% of S&P 500 profits. "This is a crucial difference because spending on goods has actually increased since the pandemic hit. In contrast, spending on services has contracted fairly sharply," Levkowitz wrote. That goes a long way toward explaining the Wall Street/Main Street disconnect. The strong showing from goods companies is one reason the earnings decline this time has not been nearly as bad as 2009, when both goods and services collapsed. Third-quarter earnings are expected to have declined by roughly 20% in the third quarter, but the second quarter, when earnings declined 30%, is likely the trough for earnings, UBS noted. By contrast, earnings dropped 45% in 2009 from peak to trough. That's not all: publicly traded companies have been able to take more advantage of the Fed's programs to support the economy and have been able to raise more debt through the public markets. They also have had more exposure to the work-from-home trends that have accelerated during the pandemic, as witnessed by the huge run-up this year in shares of Apple, Microsoft, Amazon, Alphabet and Facebook. Earnings have been so strong it's reasonable to ask, is this the best it's going to get? The issue, as UBS' Levkowitz admits, is that earnings remain hostage to Covid-19 and the elections: "The range of outcomes for S&P 500 profits remains wide due to uncertainties about: the timing of vaccine availability; the size and timing of additional fiscal stimulus; and possible changes to corporate taxes in a Democratic sweep election outcome," the firm wrote. What about stock prices? If you're expecting a huge run-up in prices, it's already happened, with the S&P only 2% from an historic high. "Unfortunately, price action following beats was extremely muted last quarter," Jonathan Golub at Credit Suisse noted.
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A view of NASDAQ in Times Square during the coronavirus pandemic on May 7, 2020 in New York City. Noam Galai | Getty Images Entertainment | Getty Images In the ETF space, success begets success. Just look at what Invesco is doing Tuesday. It's launching a new product, the Nasdaq Next Gen 100 ETF (QQQJ). It might more appropriately be called the Nasdaq 100 Junior Varsity list. The Invesco QQQ Trust (QQQ) started tracking the Nasdaq 100 Index in 1999. Since then, it's become the fifth-largest ETF listed in the U.S., with $135 billion in assets under management. Now, Invesco is looking to capitalize on the interest in technology and growth stocks by offering a new "junior" QQQ. Any why not? QQQ is up nearly 40% this year. Shares outstanding are up nearly 20% since March, a sign of the exploding interest in the growth stocks the fund is famous for. The Invesco Nasdaq Next Gen 100 ETF will consist of 100 mid-cap companies that are using technology in interesting or innovative ways. Included are obvious tech choices like Seagate and internet security firm Zscaler, but also companies like Garmin, Lyft, and social game developer Zynga, not necessarily tech companies. Why, in an ETF known for tech heavyweights, would it want to include nontech companies? "QQQJ will give investors access to 100 mid-cap companies using technology to disrupt their sector," said John Hoffman, Invesco's head of Americas ETFs. "While this does include companies in the technology sector, the commonality across these companies is their legacy of using innovation and technology to create competitive advantages across multiple sectors and industries." Besides, the Nasdaq 100 has never been exclusively about tech. It has always had a healthy weighting of consumer stocks (Pepsi), consumer cyclicals (Costco, Starbucks), and even health care (Amgen). This junior QQQ is part of a series of new products Invesco is launching around the QQQ on Tuesday, which Invesco is calling an "Innovation Suite." Also launching is the Invesco Nasdaq 100 ETF (QQQM), a lower-cost version of the QQQ for longer-term buy and hold investors, Invesco Nasdaq 100 Index Fund (IVNQX), a mutual fund tied to the QQQ for investors (like some retirement plan advisors) who can't invest in ETFs but can invest in mutual funds, and the Invesco Nasdaq 100 Growth Leaders Portfolio (QQQG), a unit investment trust. This isn't the first time we have seen a "junior varsity" version of an ETF. In 2009, Van Eck, on the heels of its very successful Gold Miners ETF (GDX), launched its Junior Gold Miners ETF (GDXJ), which has become a regular part of the gold trading space.
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People walk by the New York Stock Exchange (NYSE) in lower Manhattan on October 5, 2020 in New York City. Angela Weiss | AFP | Getty Images Stock market bulls, rejoice.  Third quarter earnings season begins Tuesday with JPMorgan Chase.  The good news: in the second quarter, companies delivered surprisingly large earnings beats as analysts underestimated the strength of the recovery.  That is happening again. The bad news: fourth quarter earnings — which is the quarter now on the minds of traders — remains hostage to the vaccine and reopening story, and to a lesser extent to the election.  Third quarter estimates rising, an unusual development  In most quarters, estimates for the quarter start out high, and then are adjusted downward — typically by 3% to 5% — as the quarter ends because analysts are too optimistic. Not in the third quarter.  Analysts started out assuming that the S&P 500 would see an earnings decline of 25% compared to the same period last year.  But that was the bottom, and the estimates have been steadily improving since:  S&P 500 Q3 earnings:  improving July 1:              down 25.0% September 1:  down 22.4% Today:             down 21.0%  (Source:  Refinitiv) Still, it's a pretty bad number.  If the decline comes in at down 21%, "[I]t will mark the second largest year-over-year decline in earnings reported by the index since Q2 2009," according to John Butters, who tracks earnings for Factset. Early reporters are killing it  Another encouraging sign:  of the 22 S&P 500 companies that already reported, 20 beat estimates, a much higher beat rate than usual. And they are beating by a very wide margin of 25%, according to Nick Raich, who tracks corporate earnings at Earnings Scout.  That is way above historical averages.  Typically, companies will beat by 3% to 5%.  This implies, Raich said, than analysts are again underestimating the extent of the recovery.  "Analysts have not had the benefit of corporate guidance, and without that guidance they assumed the worst, and the worst has not come," Raich told me. Most importantly, the majority of the companies that have reported are seeing their fourth quarter earnings estimates raised by analysts, a sign that it is not a one-quarter fluke.   Early reporters like Darden, FedEx, CarMax, Lennar, AutoZone, and Nike saw their fourth quarter estimates raised due to either commentary or their strong third quarter performance. Guidance is still light, but commentary is more positive In the second quarter, the markets cratered when corporate America decided that the economy was so bad they would, for the most part, stop providing guidance.  Wall Street freaked out. There is still a problem providing longer-term guidance for many companies.  More than 25% of the companies in the S&P 500 are still not providing any earnings guidance for 2020 or 2021, according to Factset.  However, some companies are starting to loosen up on near-term quarterly guidance.   "[I]t does appear that some S&P 500 companies have better visibility on future earnings heading into the third quarter earnings season than they did heading into the second quarter earnings season," Factset's Butters said in a recent note to clients.  You can see that for the third quarter.  While the number issuing guidance was still below normal, more companies issue positive guidance than negative guidance.  That is the opposite of what usually happens.  Of 69 companies that gave guidance, 46 were positive, 23 were negative.   So what does this mean for markets in the fourth quarter?  Unfortunately, for veteran trader Art Cashin from UBS, while the good earnings news remains a tailwind, the market remains hostage to Covid headlines.  "Earnings will be important but not a dominant factor, because any news on the virus and any sudden change on reopening or the economy is what is really going to move the markets," he told me.   "This is not a normal earnings season."
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The New York Stock Exchange is pictured in the Manhattan borough of New York City, New York, October 2, 2020. Carlo Allegri | Reuters Some are calling it "a la carte stimulus," with aid for airlines in Column A, PPP aid in Column B.  Whatever it is, hopes for stimulus — preelection, postelection, comprehensive package, stand-alone deal, whatever and whenever — is supporting breakouts in cyclicals like industrials, materials, consumer discretionary and banks. Many big names like Caterpillar, Eaton and FedEx have broken to new highs. Materials stocks like Martin Marietta, Vulcan Materials and Nucor are up 10% in the last week. Even bank stocks like US Bancorp are breaking out to multimonth highs.  For some, the cyclical rally is getting way too stretched. "The action over the last couple weeks is baking a lot of positive news into the market," said Jack Miller, head of trading at Baird. Alec Young, chief investment officer at Tactical Alpha, agrees. "We are quietly getting overbought. The market is looking a little tired, the size of the rallies is getting smaller, with little waves of selling," he said. "It's true cyclicals are rallying, but they have not shown any ability to do longer-term rallies." "I don't think this market is very compelling, and I am pulling back and waiting to see what happens," he added. Others also have doubts about this rally. They note that volume on up days has been notably light while on down days it's notably heavier. This implies there's not much buyer conviction, that much of the rally is simply sellers holding onto stocks unless prices rise. Jim Besaw, who manages $3 billion as chief investment officer at GenTrust, said this signals that many still don't believe the rally: "The market is underpositioned. That's why the markets go up on light volume days.  The pain trade is still higher because most people are underweight the market." So is the market moving on a pipe dream? Besaw doesn't think so.  "Stimulus will get done," he said. "If we have another big downturn like we did in March, it will get done sooner rather than later, but it will get done." As for the outperformance of cyclicals,he said: "Biden ahead brings in the likelihood that infrastructure will likely be very high on the list, and that is why materials and industrials are outperforming." Still, what if there is no stimulus until well after the election? Could the market handle that? Besaw thinks it could: "If Biden continues to poll well, there is still room for the markets to run, particularly if corona cases don't increase dramatically. When investors are underweight, you don't necessarily need good things to happen to have the market go higher, you just need the absence of bad things."  For the moment, traders are not as focused on the other side of the story — that Biden would likely mean higher taxes and weigh on stocks. "You can say that means higher taxes, but the market seems to be saying that the contested election was an even bigger issue," Besaw said. So what should traders do? Besaw agrees it's tricky to add equity risk, and that option prices are high now.   His advice to bullish clients is to use call spreads. For example, buy a higher strike call on the S&P 500 (say 3,700) and then sell an even higher strike call (say, 3,800). "So if everyone goes smoothly and there is no contested election, and if the market goes through 3,800 (up 10% from where you are now), the call spread you bought" would net a handsome profit.
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