Stocks are extending September losses as the Dow falls. BTIG Managing Director & Chief Equity Derivatives Strategist Julian Emanuel joins the On the Move panel to discuss.

Video Transcript

ADAM SHAPIRO: We've got to make heads or tails of what's going on with these markets, and we're going to do that with Julian Emanuel, BTIG Managing Director and Chief Equity Officer. Good to here-- good to have you here. We should point out you're the chief equity derivative strategist. And very simply, Julian, what goes up does come down. We never like it. It's unsettling to our stomachs. Anything in particular driving these markets down?

JULIAN EMANUEL: Well, I think, Adam, it's more like, is there everything in particular driving these markets down? You know, obviously, we've known all along that you were going to have a lot of uncertainty coming into this election. The events over the weekend with the passing of Justice Ginsburg accelerated that.

But the-- the real issue is-- is that coming into September, the options market, among other things, and the figures on public participation show that there was a lot of froth, particularly in the high-flying NASDAQ type stocks. And from our point of view, you know, the weakness in September is pretty reliable from a seasonal perspective, so you have to unwind it. And again, there's all this uncertainty that if anything between now and November 3 is likely to accelerate from here.

JULIE HYMAN: Hey, Julian, it's Julie here. It's good to see you. I wonder how much the coronavirus numbers and fears of additional lockdown are-- are playing into all of this? We are approaching 200,000 deaths here in the United States. We've got a lockdown in Israel. We've got a potential lockdown in the UK. We've got numbers on the rise once again throughout Europe. The market has shrugged off these concerns before. Are they playing into the sell-off today, or are they just another excuse for the sell-off?

JULIAN EMANUEL: Well, they certainly are, Julie. I think as we look at it, as Fed Chair Powell looks at it, part of the narrative when you're thinking about the virus interplay with the economy is that another round of stimulus is absolutely essential to get us through what is likely to be a rise in-- in the virus during this seasonal period. That's expected to a certain extent.

But the fact that you've got all this other political noise now that may short circuit the-- the stimulus negotiations really is an extreme headwind coupled with the fact that it's very clear that the-- the virus is starting to surge once again in Europe. And so I think that sort of, you know, focuses people again on the potential for that happening in the US.

JULIA LA ROCHE: Hey, Julian, it's Julia La Roche here. And I heard you earlier saying that there was a lot of froth the-- in the markets, and we've seen-- we've seen this unwind. And there's, of course, as you mentioned, a lot of uncertainty ahead. So it kind of makes me wonder, have we already put in the highs in the markets for the year and we just kind of go sideways from here? What's kind of your outlook on that?

JULIAN EMANUEL: So from our point of view, if you think back to March the 23rd at the peak on September the 2nd, the NASDAQ was up over 83% off the bottom. The S&P 500 was up over 63% off the bottom. To-- to argue against a pullback, particularly with all this uncertainty, didn't really make sense. We don't think it makes sense.

From our point of view, we think the market is likely to be on the defensive into the election, perhaps beyond depending on the outcome, whether it's unclear, contested, or both, which in from-- from where we sit is-- points the way towards a resumption of the uptrend, but likely not till later in the year or early next year.

EMILY MCCORMICK: A similar question here, but just taking a look at the pullback. Already with Friday's close, we were down about 7% on the S&P 500 from that recent September 2 closing high. Has this correction that we've seen so far overshot your expectations for a pullback, or do you think we still have further to go in terms of what's being priced in now and where things are heading?

JULIAN EMANUEL: No, we-- we think you have further to go. We're keying off the 200-day moving average in the S&P 500 currently at about 3,100 verses 3,250 or-- or so where we are, so certainly more there. And likely a bit more than that in the NASDAQ, which really have gotten ahead of itself. Again, you know, when you think about it, we have been in an environment where the VIX has hovered in and around 30 essentially since March.

And-- and when you back that out, you know, that's part of why the markets advanced as much as they did. But when you're thinking about how much the market should correct, you know, a normal sort of 5% to 10% correction in the S&P 500 was appropriate in a VIX environment of called 15 to 20. We're in a higher volatility environment. Probably means more pullback, in our view.

ADAM SHAPIRO: Julian, I'm-- I'm curious, though, for people trying to make, you know, long-term plans, because these ups and downs short term never, you know, work well if you get panicky. You're worried about higher inflation, you like golden commodities, but you're also overweight the energy sector. If I've got that correct, why overweight energy?

JULIAN EMANUEL: Well, energy is one of those places where if you look at it, again, in our view, nothing really moves in a straight line. And if you look at these last 2 and 1/2 years, you can make the argument very easily that nothing moves in a straight line. First off, you know, energy is now around 2%, 2 and 1/2% of the weight in the S&P 500.

And, you know, the whole idea that, you know, you've de-risked in terms of the different investment paradigm for ESG, we think that's very well known in the market. And part of our view is that you are going to have a cyclical recovery next year as you get medical improvements with regard to the virus. And in that kind of backdrop, as we've seen, the-- the last several months have been much more about a manufacturing renaissance than a services recovery, and that plays well into energy as well.

ADAM SHAPIRO: And on that, we say, Julian Emanuel, thank you, BTIG's Managing Director and Chief Equity Derivatives Strategist. All the best to you.