Reduce Equity Exposure, Be Happy

S&P 500 had its best quarter in 2 decades
React with the markets, not to the markets
ADP Payroll shows fewer jobs gained than expected
Equity Index futures

Equity Index futures

Tuesday's Close

E-mini S&P 500 Futures (September): Settled at 3090.25, up 42.50

E-mini Nasdaq-100 Futures (September): Settled at 10,147.25, up 173.50

Call it quarterly window dressing, call it Fed driven, or call it something totally different. The S&P 500 index settled 3.5% from its Sunday night low. This was the third weekend reopen in a row that price action found its floor Sunday night trapping bears.

With a new quarter upon us and a holiday session Friday, it begs the question whether stocks will see outflows given the S&P 500’s best quarter in more than 2 decades and the Dow’s best in more than 3. At Blue Line Capital we have favored some rebalancing at the very least given how the S&P 500 gained 50% from its March low; it simply makes sense with an uncertain road ahead.

It would be smart for investors to reduce exposure, even marginally, and still be happy if the S&P marches to 3525 in the coming months. Why? Because having cash ready to deploy upon what has become a common 10 or 20% selloff is just as important. Or, upon a 35% selloff witnessed in March, It’s necessary. We spoke to more people through March and April than we could have imagined, some working with fiduciaries and some managing their own accounts, who didn’t have cash to deploy and instead found themselves in a panic. Why is having cash important you ask? If nothing else, it’s for the psychology of being able to react with the market, not react to the market. 

Risk assets remain buoyant despite Covid-19 cases lurking higher and a geopolitical nightmare developing in Hong Kong. On the other side of the coin, the bullish cash amid the newest wave of virus outbreaks is highlighted by a lagging death rate. As for U.S.-China relations, the bulls can also hang their hat on the upcoming election. President Trump has already shown an unwillingness to be confrontational towards China as November nears. 

On the economic calendar, German and Eurozone Manufacturing PMI improved from their preliminary reads. ECB President Lagarde speaks this morning. The private ADP Payroll survey posted fewer jobs gained than expected at 2.369 million versus 3 million. Final June U.S. Manufacturing PMI is due at 8:45 am CT and the more closely watched ISM Manufacturing follows at 9:00. The Federal Reserve’s June meeting minutes are released at 1:00 p.m. CT. Here, we will look for insight on stimulus measures and the potential adoption of yield-curve control, both of which could add bullish tailwinds. As a reminder, the Nonfarm Payroll report is tomorrow.

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Blue Line Futures, is a leading futures and commodities brokerage firm offering discounted personalized service and futures and commodity research.