Department Of Good News: Lennar Earnings Look Solid, SPX Still Within Long-Term Range

October is off to a shaky start and the slide continues this morning, but let’s keep things in perspective. We’re not even two days into the month, and Halloween is a long way off. Let’s not scare ourselves too early.

Instead, you could look at October as a month where we still have a lot to be optimistic about. Talks with China start next week. Earnings season is getting close and could offer a welcome break from all the noise that’s distracted many investors from what arguably matters most: corporate results. The market is only about 3% below its all-time high.

Consider taking a breath and remembering the 2800 to 3000 range we’ve been talking about for the S&P 500 Index (SPX). We’re coming off the high end of that range and heading down, and there seem to be a few more cracks on the surface. That said, we’re still in the middle of that area.

Yesterday’s disappointing U.S. manufacturing data remain in focus, and it isn’t necessarily the only negative. U.S. auto sales also looked weak in September, U.K. construction PMI slumped, and there were growth warnings from Germany’s leading institutes. Brexit jitters continue to weigh on European markets, too. Global stocks took it on the chin.

Looking for some good news? How about results from home builder Lennar Corporation LEN. The company reported a big earnings beat today, easily surpassing third-party consensus estimates on earnings per share and revenue. Deliveries rose 7% and new orders rose 9% in Q3, the company said. Of course one earnings report from the sector isn’t the whole story, but it does follow earnings from KB Home KBH that also featured a solid rise in orders. So maybe we’re onto something here. 

A couple more Fed speakers are scheduled today, and people might also be on the lookout for quarterly delivery numbers from Tesla Inc TSLA. It all builds up to jobs data at the end of the week.

Rough Start, But Some Silver Lining

There’s no getting around it: Yesterday’s ISM U.S. manufacturing Purchasing Managers’ Index reading of  47.8% for September—the lowest since June 2009—wasn’t necessarily what you want to see if you’re bullish here at the beginning of Q4. It’s the second month in a row where PMI contracted. August construction spending growth of 0.1%, also announced Tuesday, wasn’t that impressive, either.

While there are potential silver linings (more on that below), investors apparently weren’t thinking much about those in the immediate aftermath of the PMI news Tuesday. Sectors like Energy, Industrials, Financials, and Materials got hammered, small caps weakened, and bonds rolled up gains amid a pullback in Treasury yields. 

Maybe cooler heads could prevail today if investors remind themselves that yesterday’s reading was only a bit below its lowest level seen during the mini-recession of 2015/2016. It bounced back from that level pretty strongly then and conditions improved in 2017. Also, some of the falling global PMI numbers have started to stabilize a bit lately, and futures at the CME now show higher odds of an October rate cut (see more below).

It’s also kind of interesting how some parts of the market kept their heads above water a little better than others yesterday despite the negative tone. There wasn’t a huge sell-off in Technology, for instance, as Apple Inc. AAPL and a few of the semiconductor stocks actually stayed in the green a lot of the day. Typically on a day like Tuesday you’d see Technology take more of a hit because it tends to be a sector people don’t embrace when they’re cautious, but it was one of the better performers Tuesday (still down for the day, however).

Utilities and Staples were two of the better performers, along with bonds, as some investors appeared to get more cautious. Stocks did come off their lows for a while late in the session, but another round of selling in the last hour pushed the SPX back down. Typically, that’s not a good sign from a technical perspective.

Also from a technical perspective, the SPX ended Tuesday right around a long-term support level that some see between 2930 and 2940. The finish also took the SPX down to below its 50-day moving average, a technical move that some analysts might see as significant. The 100-day moving average is near 2924, and might represent another technical support area.

Meet the New Q4–Not the Same as the Old Q4

A Q4 start like yesterday’s is bound to get some people nervous, worried that maybe we’re seeing a repeat of last Q4’s flop. While you can never discount the possibility of another sell-off, one big difference this year is the rate picture.

A year ago, the Fed had just raised rates for a third time in 2018, and was making it pretty clear a fourth hike might be necessary in December (which ended up happening). The tightening rate situation then, combined with a big plunge in the previously high-flying FAANG stocks, really helped put a dagger into the rally.

This time around, rates are falling, not rising, and the market isn’t as reliant on the fortunes of just a few big companies the way it was then. That can sometimes be a healthier situation, though again, it doesn’t necessarily shield us from potential softness. The rally since January has been pretty widespread, with Technology a leader but also with participation from lots of other sectors. 

In fact, nine of the 11 S&P 500 sectors are up double digits this year, with seven up 20% or more. It’s usually a sign of market health when lots of sectors click at once and it’s not just the “Technology Show,” like we arguably had in parts of early-to-mid 2018.

More Data Could Give Fresh Perspective

Another thing to try to remember is that one day isn’t a trend. The market had been holding up pretty well before Tuesday’s data. We’re getting more data, with payrolls later this week. Meetings with China start next week. Then there’s earnings season, where you always have a chance of positive (or, to be fair, negative) surprises. There’s plenty of reasons you could look at things now and see reasons for optimism.

That said, it does seem pretty unlikely we’ll see the SPX rise much above 3000 or fall below 2800—basically its range over the last few months—without some kind of major move one way or the other on trade.

One note of pessimism Tuesday was concern that weakening employment conditions seen in the manufacturing sector might test the resilience of U.S. consumers, Briefing.com pointed out.

Another question is whether this number Tuesday might have an impact on analysts’ estimates for Q3 gross domestic product (GDP). We’re already seeing some people cutting back their projections. The Atlanta Fed’s GDP Now indicator dropped to 1.8% on Tuesday for Q3 based on the data. That was down from its previous projection of 2.1%.

October tends to be a volatile month, and Tuesday was a reminder of that. The Cboe Volatility Index (VIX) snapped back sharply to move above 19 for the first time in almost a month by Wednesday morning. The VIX spent a lot of time above 20 back in August before dipping to a mid-September low under 14. It might be awhile before we see that kind of low number again.

Shiny AAPL? Shares of Apple Inc. AAPL are off to a strong start this week after a JPMorgan Chase & Co JPM analyst team reiterated its "overweight" rating and raised its price target to $265 per share. The move put the iPhone maker's price back above $220, and its market cap is back above the $1 trillion mark (but still short of the market cap crown worn by Microsoft - Microsoft Corporation MSFT). To offer some perspective, AAPL shares started 2019 on the low print at $142. Since then it's been a 57% rally—on a company that at the time had a market cap of about $700 billion. 

Though the stock is approaching its all-time high, that doesn’t mean there aren’t potential headwinds. The good news is that AAPL seems to have right-sized its pricing strategy with the release of the new iPhone 11, and there's some buzz surrounding the Apple TV+ service. On the less positive side, AAPL and its fellow FAANGs have been in the regulatory crosshairs in recent months amid concerns over data privacy and a dearth of competition among "big tech" players. Plus, considering its reach into China in terms of both production and consumption, AAPL could potentially feel the impact of a prolonged trade war. 

Shiny Batteries? A lot of stocks are seen as barometers for the broader economy, but the same can’t necessarily be said of Tesla. It’s really more a barometer of how much demand there is among the well-heeled for fancy electric cars. Still, its quarterly production numbers still matter to the multitudes of investors who’ve been riding the stock downward lately. Word in the media is that TLSA could report Q3 deliveries sometime this week. The company told employees last week it’s targeting quarterly deliveries of 100,000 vehicles, but some trade media sources say it could fall a few thousand short of that.

Apparently, TSLA has started to offer some incentives to customers in an effort to boost orders, according to industry-watcher Electrek. We’ll see if that helped the company get over the hump in Q3. Shares remain down for the year to date, but remember, the stock typically sees pretty solid buying interest when shares fall back toward $200. Right now they’re near $244, and actually got a nice lift on Tuesday maybe in part on anticipation of the Q3 number.

Lemonade From a Lemon? Is there any potential silver lining for Wall Street after yesterday’s disappointing September manufacturing data? Potentially. First of all, it probably means better chances of a Fed rate cut later this month. Chances for a 25-basis point easing quickly jumped to 70% in the CME futures market by early Wednesday, up from 40% earlier this week. Lower rates could mean lower borrowing costs for companies, a possible spark to economic activity. Second, the weak manufacturing data gets followed almost immediately this Friday by an even more important read on the economy—the September payrolls report. At this point, analysts are expecting a stronger showing than the 130,000 job gains posted in August. A solid jobs report, if we get it, might wash away at least some of the bad taste from the PMI data. We’ll find out soon enough. Analysts now forecast that 150,000 new jobs were created in September, according to Briefing.com, but some are more optimistic and see more than 160,000 in job gains possible.

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