Markets higher with earnings, stimulus in focus

Matt Maley, Miller Tabak & Co Chief Market Strategist, joins Yahoo Finance's The First Trade with Alexis Christoforous and Brian Sozzi to discuss what’s moving the markets on Wednesday morning.

Video Transcript

ALEXIS CHRISTOFOUROS: All right, let's get back to the markets now with Matt Maley, chief market strategist at Miller, Tabak, and Company. Of course, as always, we also have Brian Sozzi and Jared Blikre with us. Good morning, guys.

So, Matt I was reading over your notes this morning. And I got to say, you're sounding a little pessimistic. You're not outright saying there's going to be some savage bear market but you say we could be in for a 10% correction in the market in the coming weeks. Why? And what might get us there?

MATT MALEY: Well I mean, first of all, it's just the market-- the biggest thing is just a lot of froth in the market. And to be honest with you, if you're a bull, you should be hoping for a pullback of at least, you know, 7% to 10%. And the reason why I'm looking more to the 10% and maybe even a little bit more than that is that, in today's markets with the way the algos move things, we always seem to overshoot in either direction.

But I just look at what we've seen. Of course, we saw last week at Kodak and we saw with Hertz before that, there's some definite froth in the market. But it's not just in some of these speculative names. I mean, Apple computer, you look at that, great company, great prospects, but it's becoming quite overvalued. The same thing with Taiwan Semiconductor, great news.

But for mature, established companies to rally 25% in two days like Taiwan Semiconductor did and Apple computer to rise 18% in just over a week, like it has, these-- it would be one thing if they were coming out with some whiz-bang new product. These are the kind of things that shows there's too much froth in the marketplace on a near term basis and that we need to pull back.

So I think it's going to happen. What the catalyst is going to be, it could be with China. That's still something we're watching closely. But I just think that these mega-cap tech stocks and tech stocks in general will see a pullback. And that will be healthy and normal and cause the rest of markets come in.

BRIAN SOZZI: Matt, why is the market melting up again?

MATT MALEY: You know, it's the combination-- well, you have a couple of short-term things. People are hoping or expecting a deal out of Washington, DC, which I definitely look for too. And then, of course, there's the fear of missing out. The market's moving, you've got to be there, especially these institutional players. You know, we're moving back towards a new all-time highs. And they can justify it because interest rates are at record lows and tech's going to save the world, et cetera.

But it's way ahead of the fundamentals, even if we're looking towards 2021 and 2022. So therefore I think it will pull back. And I think it should pull back.

ALEXIS CHRISTOFOUROS: Matt, you're talking about a pullback in those high-flying tech names. But you're also looking at gold. I know you've been a buyer of gold. But you believe that is sort of over-loved and overbought at the moment as well?

MATT MALEY: Right, exactly. I mean, again, this is something-- I love gold at 1,550. And it broke out to the upside. I'm really pounding the table on it then when it got-- in the spring months, I turned a little bit more cautious, just saying it's going to take a breather. And then when it broke 1,750 again, I again pounded the table. So I've been very bullish on this.

But now if you look at it, I mean, look at their relative strength index chart on gold. It's above 88, at least it was about an hour ago. That's the highest level since 1999, the most extreme overbought on a near-term basis for gold since 1999. The daily sentiment index, which is a poll of futures traders, it shows bullishness at 93%. You could get a little bit higher. But you rarely see things get into the mid-90s on that kind of readings. So it's just really extended on a short-term basis.

I love gold long-term. But I think like what we saw in April and May, it's getting due for a breather. I think it could pullback, actually, all the way to 1,820. That would be a 10% pullback. But again, that would be healthy for the commodity. I'm bullish on commodities in general, longer-term.

BRIAN SOZZI: Matt, on gold, just staying on gold, do you think gold is pricing in a chaotic election day, not the lead up to election day, but the actual election day and the series of days that may follow it?

MATT MALEY: That's certainly part of the play. I mean, obviously there's talk about inflation. But that's really not there. If we get inflation, that's going to take some time to reach. I think it's more so-- it's a fear gauge. And I do think it's kind of interesting because one thing investors need to know is that you go back to 1960, the stock market had rallied from basically election day or in or around the election day and to the end of the year, Republican win, Democratic win, incumbent win, incumbent loss, whatever.

There's only been two times where it's done nothing. And every other time it's rallied strongly, 5% to 8%, except for one year, the year 2000. What was that? A contested election or contested election results. And the market definitely sold off, went down 8%. So we need to be careful at year end and what happens with this.

And gold, I think, is exactly what you're saying, Brian, is that gold is one of those hedges against that kind of result.

ALEXIS CHRISTOFOUROS: You know, Matt, when you look at what's been moving gold higher, we have treasury yields falling. We have a weak dollar. It doesn't seem like either one of those scenarios is going to change anytime soon. So what would happen with gold? Why would there be a pullback of as much as 10% as you're saying? Is it just that people are going to say, we've topped out here, and I'm going to cash in some profits?

MATT MALEY: Well, I think it's this big momentum play. And one of the reasons is just exactly what you say. There's really no reason to think that gold will go down when it becomes-- everybody gets on one side of the boat, like I said, bullishness is crazy high. We see no real reason for the situation to change now. That's usually when the situation does change. You get too many people on one side of the boat.

And the same thing with the dollar. It's getting incredibly oversold. It's getting ripe for a bounce, even though there really isn't a big fundamental reason for it to bounce near-term. Again, these are near-term calls. I think over the next few weeks, you know, in other words. So traders might want to take some profits. Investors don't want to chase it. Both should be looking to buy it, I think at lower levels.

JARED BLIKRE: Matt, I've got to ask you about another axis here besides currencies, besides gold, what about the dollar? And what about the longer-term interest rates? We got the 10-year down to basically 50 basis points, bouncing a little bit today. But how low can it go? And what effects does that have on the other markets?

MATT MALEY: Well, I mean, to me, I'm still concerned about what's going to happen with the economy in this second wave, so-called second wave. Are we in a second wave right now? Is it part of the first wave? What I'm worried about is another wave. And the reason why I look at the southern hemisphere, we see what's happening in Melbourne, Australia and in Australia in general.

They're in wintertime. And that's when people been always worried about, jeez, what's going to happen in the fall and winter when things get cold again. We're not going to have a vaccine at least by fall. And we're going to get-- my fear is that we're going to get another wave.

The wave in Australia is worse than the first wave. I'm not saying that's going to happen. And I think there'll be fewer deaths because we've been able to treat it. But does that cause another wave of lockdowns, which Melbourne is going through right now? That's going to slow down the economy. That causes-- so on an intermediate-term basis, I do see interest rates continuing to stay down, the dollar getting weak again, and then again, that'll be bullish for gold and other commodities on an intermediate-term basis.

BRIAN SOZZI: Matt, we've got about 30 seconds left. We're coming up against the July jobs report out on Friday. If this jobs report comes in negative on the headline, which, you know, I've seen some speculation that could not be ruled out, what happens to the market?

MATT MALEY: Well, I think that could be a catalyst for the kind of pullback I'm looking for in the broad market. But again, like I said, these tech stocks are very, very much extended. And we're really kind of-- we'll have no more news. Earnings season is basically over. August tends to be a quiet month for new news. So if we get that catalyst of, oh, my gosh, we are going to get another wave, employment is slowing down, even with the fiscal policy out of Washington, DC, that could be the catalyst for the kind of 7% to 10% correction I think we could get.

ALEXIS CHRISTOFOUROS: You know, Matt, we saw this morning private payroll company ADP showing that there was definitely a pullback in hiring in July, just adding 167,000 jobs. What are your expectations for this unemployment report on Friday?

MATT MALEY: Well, I mean, the thing is, because I'm not the economist, I don't put the official estimate out and the strategies. But at the same time, I do think that we look at the jobless claims numbers which have been bumping up, this ADP report, and the high frequency data, I think that we could be a little bit of a surprise to the downside that Brian's talking about.

ALEXIS CHRISTOFOUROS: All right, Matt Maley, chief market strategist at Miller, Tabak, and Company, thanks for being with us this morning.

MATT MALEY: Thank you. Have a great one.