Banks And Info Tech Lead Way In Sharp Rally Amid Hopes For Geopolitical Progress

After several days of geopolitical headwinds, a tailwind blew in Tuesday amid positive tidings on China trade and hopes of avoiding another government shutdown. 

All the major U.S. indices rose 1% or more, and the S&P 500 Index (SPX) breached key technical resistance at its 200-day moving average to post a new two-month high.

The double-dose of good news helped U.S. stocks show up green almost across the board after several sessions of malaise. Word that Congressional negotiators had reached a deal to potentially avoid a shutdown this weekend appeared to give things an initial boost. Later in the day, optimism about the potential for a looser deadline on a China trade deal appeared to strengthen the breeze at Wall Street’s back.

The SPX is now at its highest level since early December, and boasts a three-day winning streak, while the Dow Jones Industrial Average ($DJI) and Nasdaq (COMP) ride seven-week win streaks of their own. For the SPX, this was the first close above the 200-day moving average—which was near 2743 entering the session—since early December (see chart below).

As investors digested these new developments affecting two of the major global storylines, volatility eased and the dollar gave up some of its recent gains. However, other risk meters remained slightly elevated, as gold rose and U.S. Treasuries barely moved off of recent highs. From those indications, it might appear that at least some investors are keeping a little powder dry for now, perhaps because geopolitical events tend to change so quickly. The 10-year Treasury note yield remains under its year-ago level despite the recent strong stock rally, though a dovish Fed might explain some of that.

Some of the dollar and Treasury strength also could reflect influences from outside the U.S. economy. Economic weakness in Europe, Brexit concerns, and slower Chinese growth all might be behind a rise in “risk-off” activity.

There’s also the potential for things to turn on a dime with any of the geopolitical stories. Today, the news was good. Tomorrow, a headline could change the market’s positive tone. It really becomes about the story of the day. Any rumor on how China-U.S. negotiations are doing has the potential to color the entire tone of any given session. 

Banks, Tech Help Lead the Way

While those so-called “defensive” investments keep showing strength, the same could be said for some of the “risk-on” sectors in the U.S. stock market Tuesday. Info tech, materials, and financials were all among the leading areas, with materials apparently getting a boost from hopes that the early March deadline for a deal with China might get pushed back. Those hopes rose Tuesday when Bloomberg reported that President Trump was “open” to letting the March 1 deadline slide if the two countries are close to a deal by then. 

Stocks with strong gains Tuesday included Under Armour Inc UAA, which posted earnings and revenue that surpassed third-party consensus estimates, and Wells Fargo & Co WFC, which was among the leading big bank gainers. Also in financials, asset manager BlackRock, Inc. BLK bounced to a 3% gain after a long period of being taken out to the woodshed by investors. We’ll see if this can hold up.

UAA gave what appeared to be a good outlook, and also saw Asian sales rise sharply. That could potentially tie into a story that some market watchers started noticing last week, namely that some high-end customers in Asia are doing pretty well.

The financial sector posted big gains Tuesday, but has been a bit of a head scratcher lately. Rates rose on Monday and the sector did nothing. Rates barely budged Tuesday and the financials exploded, rising 2% to 4% in some cases. Maybe a little pent-up demand started to come in as China concerns loosened a bit. Still, it’s arguably been a frustrating sector for many investors over the last year or two.

Another sector that’s perhaps confounded some investors recently is homebuilders, which also had a pretty good day Tuesday. However, this sector might not be out of the woods yet, mainly because despite lower mortgage rates, homebuilding companies continue to struggle with higher costs that make it less profitable to build entry-level homes. Housing starts are way down, but overall home prices are up year over year. The average price of a home remains very high. 

Every FAANG stock except Facebook, Inc. FB rose Tuesday. The only sector to fall was real estate.

Back Above 200 For SPX

It might be interesting to watch over the next day or two whether the SPX can hold these gains above the 200-day average. It’s topped that technical level a few times in recent months, but never for long. An extended string of closes above the 200-day could potentially be another positive sign. With the SPX closing just a point above the 200-day on Tuesday, perhaps we’re at an inflection point. Last week, the SPX challenged the technical resistance here and then pulled back. Tomorrow and the rest of the week have the potential to show if investors are ready to push the SPX into higher ground above that mark.

Tomorrow sees release of consumer prices for January ahead of the open. Earnings season continues with Activision Blizzard, Inc. ATVI after the close today and Cisco Systems, Inc. CSCO after the close Wednesday. Shares of ATVI fell and then bounced back after the close Tuesday when the company’s revenue and guidance fell short of Wall Street analysts’ estimates.

Figure 1: ECLIPSING 200: The S&P 500 Index (candlestick) finally eclipsed its 200-day moving average (blue line) again Tuesday, by one point, closing above that level for the first time in two months. Some analysts might see this as a positive development from a technical perspective. 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.

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