Market Overview

Twitter Swings To Strength As Company's Most Famous User To Unveil Tax Plan

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Send out a tweet: Twitter earnings beat estimates. Meanwhile, a tax reform announcement loomed in Washington after two days of sharp market gains to record or near-record highs.

Twitter Inc (NYSE: TWTR) shares jumped 10% in pre-market trading after the social media company exceeded Wall Street analysts’ earnings and revenue expectations. More importantly, perhaps, average monthly active users climbed 6% from Q4, the company said. It’s good to see these results, but one quarter does not a company make. TWTR needs to show some consistency.

One active Twitter user is President Trump, and he’s also in the market’s eye today. Two months after promising the country a “phenomenal” tax plan, Trump plans to unveil some details. Media reports suggest a possible 15% corporate tax, and an opening for companies to repatriate foreign earnings. It doesn’t look like the so-called “border-adjustment tax” opposed by many retailers will be included. Enthusiasm ahead of the announcement fueled some of Monday and Tuesday’s gains.

The part of the tax plan investors may want to watch most closely is repatriation, which gives companies that hold money overseas the opportunity to bring it back to the U.S. and possibly re-invest it here. Overall, it could be wise to be a little cautious as the tax plan comes out. It’s not necessarily a panacea for the world, and it could be difficult for reality to match expectations.

Earnings season scoots by pretty quickly. By the end of this week, a big enough portion of S&P 500 (SPX) companies will have reported to give investors a pretty good sense of overall Q1 results. To date, the numbers look good, but there’s a lot more to come in the days ahead. On the earnings front this morning, PepsiCo, Inc. (NYSE: PEP) beat Wall Street analysts’ expectations, and last night Chipotle Mexican Grill, Inc. (NYSE: CMG) posted stronger than expected earnings. So far, most of the big consumer companies have done well.Amgen, Inc. (NASDAQ: AMGN) reports after today’s close, and tomorrow morning a big group of heavy hitters steps to the plate, including American Airlines Group Inc (NASDAQ: AAL), Ford Motor Company (NYSE: F), Union Pacific Corporation (NYSE: UNP), and Dow Chemical Co (NYSE: DOW). Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL) and Amazon.com, Inc. (NASDAQ: AMZN) come to bat Thursday afternoon.

Amid all the earnings, it’s easy to lose sight of key economic data. But we did get more confirmation of strength in the housing market Tuesday when the government reported March new home sales at a seasonally-adjusted annual rate of 621,000. That was above the Wall Street consensus of 590,000, according to Briefing.com, and a step up from 587,000 the prior month. In total, new home sales rose nearly 6%.

More data later this week include durable orders on Thursday morning and Chicago PMI on Friday. Analysts forecast that durable orders rose 1.2% in March, Briefing.com said.

The U.S. dollar rose slightly vs. the euro and yen early Wednesday, and European stocks fell. In Japan, the Nikkei had a big day, rising more than 1%. Oil prices traded slightly lower, hurt by signs of growing U.S. supplies. The weekly U.S. government stockpiles report comes out later Wednesday.

From a sector perspective, financials and consumer discretionary did well again Tuesday. But materials took the checkered flag. Materials is typically a sector that does well in a growing economy, so perhaps Tuesday’s action could be a sign of investor confidence that the so-called “soft patch” marked by weak economic data over the last month might be transient.

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Where Did Volatility Go?

After waking up recently from its winter hibernation, the VIX appeared to blink at the spring sunlight and go back to sleep. VIX — the most closely watched volatility measure — fell well below 11 early this week just a few sessions after climbing above 16, and is now at the lowest level for this time of year since at least 2004. Often volatility eases in the summer, but usually it doesn’t start this early. VIX put in its low for the year just below 10 back in February, so that could be the level to watch. And volatility being rather “volatile,” it could swing back up pretty quickly if more geopolitical tension starts to take shape. So don’t get complacent.

Watching 2.3% in 10-Year

The former long-term technical support level of 2.3% in the 10-year Treasury yield now looks like a key pivot point that could be a good proxy of investors’ collective nerves. Earlier this month, yields fell below 2.2% for the first time since last November. That slide partly reflected geopolitical concerns, but weak economic data didn’t help, either. Now that stocks have turned around, yields pulled themselves back up, reaching 2.33% early Wednesday. Check which direction the yield goes from here, as that could indicate market sentiment. A test of recent highs near 2.6% might be another signal of risk aversion declining, but a yield near 2.3% or below suggests a more cautious stance.

One More Thought On “Sell in May”

Yesterday we noted some reasons why the old, “Sell in May and go away” saying might not be so relevant this year. But that doesn’t mean not to pay any attention. Past isn’t precedent, but historically the months from May to October tend to be a time of weaker performance, and investors shouldn’t take anything for granted, especially after the run stocks have had since last November. Sam Stovall of CFRA notes that the so-called “non-cyclical” sectors like consumer staples and health care have historically done better in the May through October stretch, while cyclicals like consumer discretionary and industrials have tended to perform best from November through April.

Posted-In: Analyst Color Earnings Bonds Commodities Previews Forex Restaurants Treasuries

 

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