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Oct. 6, 2020, 10:36 a.m. EDT

Here’s how to spot whether a stimulus deal will bring a ‘short-lived’ stock market bounce or a sustained rally, strategist says

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By Callum Keown

Any near-term bounce from a new fiscal plan is likely to be “short-lived,” according to Miller Tabak & Co’s lead strategist Matt Maley.

Maley said Trump’s positive COVID-19 test improved the chances of a new stimulus boost, as it gave both sides the opportunity to concede ground without losing face.

However, he warned multiple factors meant any pop fueled by a deal would be brief.

Read: Trump’s coronavirus recovery, stimulus hope, election clarity: What’s really driving the market?

“We believe an agreement on a new fiscal plan is likely, but we’re not so sure it will help the stock market rally in a sustainable way. The market is still quite overvalued and the combination of the weakening employment picture plus a second wave of the virus does not bode well for any improvement for the ‘E’ part [earnings] of the P/E ratio going forward,” Maley said.

“More importantly, history shows us that stimulus programs play a much bigger role as a catalyst for a strong/sustained rally when the stock market is flat on its back…not after a strong six-month rally,” he said, noting that the S&P 500 /zigman2/quotes/210599714/realtime SPX -2.45% was still more than 50% above its March lows,” he said.

He added that another “down-leg” to the September correction will come in October before we see a sustainable rally in stocks.

But the strategist said Miller Tabak & Co one important indicator — chip stocks — would signal whether they were wrong. “The chip stocks have been a very important leadership group for the broad stock market, so it’s action over the coming days and weeks should be vitally important.”

He said if the SMH semiconductor ETF /zigman2/quotes/200571902/composite SMH -5.58% can break above its September closing highs of $183.55 it was “very, very bullish on several different levels.”

“If that happens, we’ll have to change our tune rather quickly.”

/zigman2/quotes/210599714/realtime
US : S&P US
3,829.34
-96.09 -2.45%
Volume: 2.92B
Feb. 25, 2021 5:19p
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/zigman2/quotes/200571902/composite
US : U.S.: Nasdaq
$ 236.08
-13.94 -5.58%
Volume: 6.16M
Feb. 25, 2021 4:00p
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