SPXN

With coronavirus infections and lockdown risks now on the rise, could a second wave of downgrades be on the horizon?We see further signs of wavering in forward-looking EPS revision trends.As current valuation levels imply, investors appear to be looking beyond the depressed near-term outlook for the brighter longer-term prospects of a post-COVID-19 world.

Traders are clearly in risk-off mode at the moment.A correction of sorts makes sense.But, my question is if it's time to return to the COVID Winners?

The dramatic risk rally since March has driven a sharp expansion in global forward P/E multiples.The disconnect between "P" and "E" is most extreme for the US small-cap Russell 2000 and the least extreme for the FTSE UK.Sector-level P/E expansions have also been fueled by price gains, which themselves have been significantly polarized, reflecting the uneven impact of the pandemic on sector earnings.

Monday’s rout in U.S. stocks saw a pullback from the 3400 level on the S&P; the market is taking a pause and that is setting the tone for the week.FX volatility is low and there have been no big moves in emerging markets - even for the Turkish lira, which has been coming apart at the seams.Going into the middle of the week, we’ve got pressure on the markets, some expected volatility, and we’re once again seeing that familiar lockdown rotation.

There are three negative inputs to the current market action.And one ginormous positive.From my seat, the positive gives the bulls an edge.

It seems there will be no stimulus anytime soon.Depending on the election, it may be months before a new one is agreed.This a risk that has not been priced into the market yet.

The Chicago Fed's National Activity Index is pointing towards more growth.South Korea has emerged from its recession.The weekly charts for the larger indexes show double-tops, which probably means the 4Q20 will be a tough trading environment.

We have a perfect storm on the horizon that is approaching fast.Election turmoil, another wave of the pandemic, and an economy absent needed stimulus are the three fronts of this storm.The market implications between now and year end are a correction at best and another bear-market decline at worst.