Market Overview

Costco Earnings On Tap After Close As Investors Mull Strong Toll Brothers Results

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Costco Earnings On Tap After Close As Investors Mull Strong Toll Brothers Results

Today’s data barrage begins with the latest look at unemployment claims and another check on Q1 economic growth. It’s been an incredible week of gains so far in stocks, so we’ll see if the market can draw more energy from the numbers or if the data turn out to be a drain. 

Jobless claims remained stubbornly high at about 2.1 million, about where analysts had expected and down from the worst levels a month ago but not the kind of number that necessarily delivers a lot of optimism. That’s a number that hopefully starts to decline next month as the economy reopens, but we’ll have to wait and see. 

The government’s second estimate for Q1 gross domestic was negative 5%, a little below the minus-4.8% consensus on Wall Street and a little worse than the first estimate, which was also negative 4.8%. From what many economists are saying, Q1 was just the opening salvo, with Q2 declines expected to be far worse.

The key earnings report to consider looking at this afternoon is Costco Wholesale Corporation (NASDAQ: COST), a big-box store that could have benefited from consumers stocking up as the crisis flared. If that’s what people are thinking, it’s not really showing up much in the stock, which has basically treaded water for a while. 

Today’s data calendar is a little light following the host of numbers early on. Tomorrow brings another surge of data with the University of Michigan sentiment, Chicago PMI, and Personal Consumption Expenditure (PCE) prices. Remember, the Fed typically watches PCE prices pretty closely as a measure of inflation. Analysts expect a 0.6% decline for April, according to research firm Briefing.com.

Global stocks had a mostly higher tone overnight as many followed the U.S. lead and European shares gaining some strength as the European Commission considers a new stimulus package. More turmoil around Hong Kong capped gains on that market as they have a few other issues going on there. The war of words between China and the U.S. is starting to heat up a bit, and as we noted yesterday, neither economy is as strong as last year when both were able to weather a long trade war.

We’ll see today if the retail sector and travel companies can keep up the amazing momentum they’ve had to start the week. A lot of this appears driven by the “optimism trade” as investors place their hopes on people getting out and shopping as stores partially open across the country.

3000 Reasons to Celebrate

You often hear that “the third time’s the charm.” That may be true for some things. However, it only took two tries this week for the S&P 500 Index (SPX) to close above 3000 for the first time since early March and for the Dow Jones Industrial Average ($DJI) to close above 25000. 

In moving solidly higher Wednesday after some shakiness around midday, the SPX also closed above its 200-day moving average for the first time in nearly three months. That’s a positive technical signal that some analysts believe could bring more momentum into the market. On the other hand, some Wall Street observers note that stocks have come a long way already and might need additional catalysts to keep heading higher.

Remember, the market is already priced pretty high from a historical perspective at about 18.5 times anticipated 2021 earnings, according to research firm CFRA. The average since 2000 is 16.5. Fed funds futures are still pricing in negative rates. Still, the thinking on Wall Street might be “don’t fight the Fed,” and the spread between the SPX dividend yield and the 10-year Treasury yield remains near historic highs. When stock dividend yields are so high compared with bond yields, it can sometimes end up sending more funds into stocks. 

What’s nice to see this week is a bit of broadening, meaning more sectors outside of Information Technology getting a bid as some investors seem to be rotating into “value” stocks (see more below). This includes those that were among the worst hit by the virus, like Financials and Industrials. The transportation sector also is making a nice comeback, though you could argue that the travel industry part of that sector is still in pretty deep trouble. 

Wednesday was a little like Tuesday in that you had the Financials and Industrials leading and everyone else in their wake. Still, all 11 sectors finished higher after nine of the 11 finished up on Tuesday. The Nasdaq Composite (COMP) had a pretty amazing comeback in the second half of Wednesday’s session after being down sharply early in the day. The positive takeaway here is that many investors seemed eager to buy the dip, Briefing.com noted.

Another positive takeaway came after yesterday’s close as home builder Toll Brothers, Inc. (NYSE: TOL) reported earnings that beat analysts’ estimates and pointed to some hopeful trends in the housing market. Shares jumped more than 8% in pre-market trading. 

Buying the Dip Even as Caution Still Stalks

Gains for all the major indices definitely accelerated into the close yesterday, with most of them hitting their highs for the session toward the very end of the day. This kind of momentum at the end of a session can sometimes spill over into the next day’s trading, though it also might have some investors looking to take a little profit as the shortened week approaches an end.

A lot of people have already jumped back into stocks, while many others might be on the sidelines waiting to see what comes next. When the SPX hit 2940—a key technical level—earlier this month, it might have gotten some investors nervous, thinking they had missed the move.

While Tuesday and Wednesday’s trading obviously looked very strong, many people remain cautious about putting money to work. You can see some of that caution in the bond market, where yields just keep refusing to budge much higher and stayed below 0.7% for the 10-year Treasury note on Wednesday.

Getting above 3000 and above the 200-day moving average are both nice victories, but things could get a bit more tepid as investors continue to eye progress on reopening. By mid-June, there’s likely to be a lot more data telling us how successful things have been, and that could be one of those reckoning points for the market.

Travel Stocks Take Flight

One area where we’ve seen consistent buying interest from retail investors over the last few weeks has been the travel industry. This includes airlines, cruise ships, and Boeing Co (NYSE: BA). At the beginning of this crisis, more people seemed attracted to popular stocks like Facebook, Inc. (NASDAQ: FB) and Apple, Inc. (NASDAQ: AAPL). Over the last few weeks, however, there’s been growing interest in Financials as we’re seeing people in the “optimism trade.” 

BA shares jumped Wednesday amid bad news for the company’s employees as BA announced thousands of job cuts. Many of these are involuntary. The move is far from unexpected when you consider their competitors in the commercial aircraft and aircraft parts industries are cutting production. BA is reducing production of its 787 and seems to be more focused on the 737 MAX. This is where a lot of their focus is likely to be in the summer and fall as they try to get it back into service. 

More bad news made its way out of the travel industry overnight as American Airlines Group, Inc. (NASDAQ: AAL) announced it expects to reduce management and administrative jobs by 30%.

Now that the SPX has pushed past technical resistance at the 200-day moving average near 3000, more resistance might rest near the 3080 level, analysts said. Support could be back near 2954, a one-time resistance point that got eclipsed last week.

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CHART OF THE DAY: GAINING GROUND: Though the Dow Jones Transportation Average ($DJT—candlestick) and the Russell 2000 Index (RUT—purple line) haven’t recovered as much from the March lows as the S&P 500 Index (SPX—blue line), both are gaining on it over the last couple of weeks as investors seem more optimistic about the economic reopening and venture beyond “stay at home” stocks. Data Sources: S&P Dow Jones Indices, FTSE Russell Indexes. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Popular Trade Fades: “Stay at home” stocks like some in Information Technology and Healthcare get the rug pulled out to start the new week. Semiconductors trailed the overall market Tuesday, for instance, and the tech-loaded Nasdaq (COMP) fell sharply early Wednesday before recovering later as the stay-at-home trade seemed to fade. 

While no one likes to see their shares lose value, this shift away from stocks that led the rally in April and most of May could potentially be healthy if it moves investors away from their concentration in five or six of the biggest tech names. A handful of tech mega-caps can probably lead things higher for only so long before the whole thing breaks down, as we saw in late 2018 when the “FAANG” stocks tired out and the whole market crumbled.

Where Crude Leads...Crude was a bit of a head-turner on Wednesday as prices fell sharply. Rumors of Russia considering easing its supply cuts, along with more tension between China and the U.S., might have been to blame, analysts said. Typically, stronger stocks have accompanied stronger crude over the last month or two. So if crude does hit a roadblock, it could be interesting to see if stocks lose some of their momentum.  Consider keeping an eye on crude to see which direction it heads from here. A move back below $30 a barrel could raise some eyebrows. Today’s weekly government stockpiles and production report, delayed a day because of Monday’s holiday, could be worth watching for any sign of lagging demand.

Banks Shine on Dimon: Banks had another winning day on Wednesday, and credit card companies got into the action as well. One highlight was hearing some cheerful words from JP Morgan Chase & Co. (NYSE: JPM) CEO Jamie DImon, who sounded optimistic about the economy. He said a “fairly rapid recovery” is possible. You might say Dimon is the “dean” of the banking industry. When he talks, the ripple effect often goes beyond JPM, whose shares rose pretty sharply Wednesday along with many other big bank stocks. Also, his words were arguably meaningful because Dimon is thought of by many market watchers as a straight shooter who wouldn’t mince words if he thought things weren’t going well.

Good Trading,

JJ

@TDAJJKinahan

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

 

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