Market Overview

Walmart Earnings Look Strong Across the Board, But Home Depot Down After Missing on EPS

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Investors lifted the hood on results from Walmart Inc (NYSE: WMT) and Home Depot Inc (NYSE: HD) this morning a day after the market’s best session in six weeks. The diagnosis? Half and half.

Starting with the good news, WMT shares got a 4% pop in pre-market trading thanks in part to an incredible surge in sales almost across the board. The most impressive number? Same-store sales up 10% in the quarter, led by strength in food, consumables, health, and wellness, and some general merchandise categories. The company’s results beat analysts’ estimates on both top and bottom lines.

E-commerce sales also looked pretty amazing with 74% growth in the quarter. That’s a lot of superlatives, but arguably this is an earnings report that deserves them. WMT is obviously positioned well to take advantage of a situation when millions of people are stuck at home and determined to stock up on basic goods.

One question heading into WMT’s earnings call could be how the company apparently managed to keep expenses from taking off despite a big staff bonus program and other extra costs.

Moving along to HD, same-store sales also impressed, growing more than 6%. Revenue easily beat analysts’ expectations, but earnings per share came up short as the company had to deal with rising costs during the crisis. Shares of HD—which had been on a nice run over the last month—stepped back about 1% in pre-market trading.

There wasn’t much in the way of stepping back yesterday as the major indices had their best days since early April on hopes for a vaccine and positive remarks about the economy by Fed Chairman Jerome Powell.

We’re not done with Powell yet, by the way. He speaks today to the Senate Banking Committee at 10 a.m. ET. Powell has made clear the Fed has more arrows in its quiver despite all it’s done to date, and it wouldn’t be surprising to hear that again today. It also wouldn’t be surprising if he tells the Senate that more fiscal help is needed. The House passed another stimulus bill last week but political pundits say the legislation is unlikely to get much of a look from the Senate.

Major indices pressed the pause button ahead of Tuesday’s opening bell. It wouldn’t be shocking to see a bit of profit-taking after yesterday’s huge rally, especially with Powell on tap. His words have soothed the market lately, though he’s also caused goosebumps now and then over the course of his tenure.

Chips, Small-Caps Helped Lead Monday’s Surge

The day starts with the S&P 500 Index (SPX) hanging out at levels not seen since early March after it punched through key resistance on Monday (see more below). The Nasdaq (COMP) is at its highest point since late February, going back to the days right as the crisis began. With Monday’s charge, the COMP is now up about 3% year-to-date.

The COMP got a lot of help Monday from an amazing surge in the semiconductor space, where the Philadelphia Semiconductor Index (SOX) rose 5%. That came after a little softness late last week that related to fears of more trade tension between the U.S. and China. While the trade war seemed somewhat forgotten Monday, don’t be too quick to count it out as a possible bearish factor down the road.

Looking more closely at the chips, Nvidia Corporation (NASDAQ: NVDA) remains one of the leaders and set new highs Monday. Meanwhile, some of the darlings from last year, including Advanced Micro Devices Inc (NASDAQ: AMD), are doing well but not back to their 2020 highs. The same is true for Intel Corporation (NASDAQ: INTC) and Texas Instruments Incorporated (NASDAQ: TXN).

NVDA reports this week, which might be generating some of the enthusiasm. It’s benefiting from strong sales of processors for cloud data centers and gaming PCs, Investor’s Business Daily reported.

The COMP and SPX weren’t the only major indices getting a boost yesterday. The Russell 2000 (RUT) small-cap index rolled up 6% gains, which could be seen as a positive sign because smaller stocks tend to do better when investors have more confidence in the U.S. economy.

Don’t forget bonds, either. Yesterday featured the 10-year U.S. Treasury yield leaping about 10 basis points to near 0.74%. That’s close to the top of its recent range. Higher yields tend to indicate more investor optimism.

Homebound Stocks Struggled to Start Week, and that’s a Good Sign

The market’s performance Monday reflected firmness in some of the non-stay-at-home companies like cruise ships and airlines that would presumably benefit if reopening proves successful. Obviously, news about possible progress in a vaccine, along with some signs that reopenings in certain states might not be causing new cases to flare up set the stage for Monday’s rally.

Some of the stocks that struggled a little bit Monday were the stay-at-home stocks, including Alphabet Inc (NASDAQ: GOOGL), Netflix Inc (NASDAQ: NFLX), Kroger Co (NYSE: KR), Clorox Co (NYSE: CLX), and Amazon.com Inc (NASDAQ: AMZN). The fact that these stocks didn’t get bids and airlines and cruise ships did might tell you that people are willing to take a little more risk. The market might be starting to reflect the reality that some states did start to reopen. With airline passenger numbers ticking up and some restaurants reopening, investors could begin to say, “Oh, OK, this is what demand may actually look like.”

Royal Caribbean Cruises Ltd (NYSE: RCL), Live Nation Entertainment Inc (NYSE: LYV), and Host Hotels & Resorts Inc (NYSE: HST) climbed double digits on Monday and were among the SPX leaders. United Airlines Holding Inc (NASDAQ: UAL), Expedia Group Inc (NASDAQ: EXPE), and Norwegian Cruise Line Holdings (NYSE: NCLH) were also in the top 10.

Apple Inc (NASDAQ: AAPL) and Walt Disney Co (NYSE: DIS) also started the week with a bang as the companies detailed reopening plans. Meanwhile, the Energy sector got a big injection of optimism as crude prices pushed back above $30 per barrel for the first time in over a month.

It’s unclear if this resiliency can continue. However, to break through in a credible manner, it’s likely all states will have to reopen or more signs of a successful vaccine come forward. It’s likely that yesterday’s vaccine news spurred hopes for a smoother reopening that might benefit some of the travel and entertainment companies.

Another factor that could help determine resiliency this week is the continued flow of retail earnings. As noted yesterday, it’s a good chance for investors to take the industry’s pulse and see just how healthy or unhealthy the patient is two months into this crisis. While some of the companies with big internet presences seem to be doing OK, it’s the brick-and-mortar firms that came into the crisis in trouble and saw things get worse that make some analysts worry.

Speaking of which, Kohl’s Corporation (NYSE: KSS) really took it on the chin in Q1. The company’s earnings report this morning showed a net-sales drop of nearly 44%. Despite that, shares moved a bit higher in pre-market trading after a strong day Monday. The good tidings for KSS were that more than half of its U.S. stores are back open.

On another front, volatility had moved up last week but ticked lower Monday, with the Cboe Volatility Index (VIX) moving back below 30 again as stocks roared. Though volatility is edging lower lately, one thing that’s a bit worrisome is seeing these huge swings in the major indices return.

The Dow Jones Industrial Average ($DJI) was down 500 points intraday during a session last week and rose more than 900 points on Monday. That brings memories of that wild period between late February and early April where it was so hard to trade, though it’s worth noting that VIX was well above 70 then and it’s below 30 now. Let’s see if things calm down here and allow the major indices to establish some ranges.

CHART OF THE DAY: MIND THE GAP: The S&P 500 Index (SPX—candlestick) is trading in a narrow gap between the 20-day moving average (red line) and the 200-day moving average (blue line). A break above or below either line could generate buying or selling momentum, depending on which line gets broken. Data Source: S&P Dow Jones Indices. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Yearning for Yield: Investors who want more yield might want to take note that the average dividend yield of the SPX recently stood at around 2%, compared with a yield of less than 0.7% for 10-year Treasury notes. At the same time, CD and money-market yields keep scrambling down the cliff toward levels last seen during the height of the 2008 financial crisis. Increasingly, investors aren’t finding ways to grow their savings outside of more risky endeavors like stocks and corporate bonds.

Ultimately, the question is whether the current yearning for yield among long-term investors starts to bear fruit for some of the higher-yield sectors like Financials and Staples. At this point, a yield of 3% to 4% could start to sound pretty good compared to cash yields that in some cases can’t even keep up with current low levels of inflation. Corporate bonds are also paying comparably high yields compared with bonds and may see increasing interest from investors.

Homework Time: The flip side for anyone thinking about some higher-yield areas like corporate bonds or stocks is a little homework because these investments tend to carry a lot more risk than, say, buying a CD. Companies can default, leaving bondholders to possibly shoulder losses. Dividends can and are disappearing in this Covid-19 crisis. If you’re considering dividend-yielding stocks or a corporate bond, consider doing some research to get a sense of whether you can depend on those dividends to continue. Also, the stocks and bonds that deliver the highest yields sometimes hold the most risk, meaning you could be hit with a double-whammy if the company lowers its dividend even as its stock goes into a downturn.

How do you assess risk? Check company debt loads, listen to or read the transcripts of their latest quarterly calls with analysts to get a sense of what professionals are asking executives about, and examine the latest quarterly Securities and Exchange Commission (SEC) filings by the companies. Here are some ideas of how you can learn more about a possible investment by poring through its filings.

“Holy Grail” of Technical Resistance Broken: Another positive factor Monday was the SPX’s break above resistance at around the 2940 level. That’s been the holy grail in terms of going higher. The market had really struggled to get above it, including earlier Monday when it clawed past and then failed again.

While you can’t rule out another test to the downside of 2940 in days to come, Monday’s close well above that level arguably reflects a burst of technical strength that could pull in more buyers or cause some shorts to cover. The key might be a few consecutive closes above that to confirm it’s not just a one-day wonder. It’s also worth noting that a few sellers jumped in very late Monday to pull the SPX back from session highs to close near 2954, another level where some analysts had seen resistance as it’s right near the 100-day moving average.

The 200-day moving average for the SPX stood just below 3000 going into the week, and it could be interesting to see if that gets tested. Above that is a zone of resistance between 3028 and 3090, according to research firm CFRA. Support is seen at 2856 and below that at 2828, CFRA said.

TD Ameritrade® commentary for educational purposes only. Member SIPC.


This week's economic calendar. Source: Briefing.com

 

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