Market Overview

Big Earnings Day As Honeywell, Procter & Gamble, Schlumberger Among Those Reporting

Big Earnings Day As Honeywell, Procter & Gamble, Schlumberger Among Those Reporting

A glimmer of hope surfaced overnight in the form of promising coronavirus treatment results from a Gilead Sciences, Inc. (NASDAQ: GILD) study, but people shouldn’t get carried away.

Though the medical news is exciting and the market obviously loves it, some analysts expressed caution. They noted it was a study with no control group, meaning no untreated group of similar patients given a placebo. It’s also partial data, not final results. That doesn’t mean it isn’t worth noting, only that it probably takes more information to really move the needle. GILD expects additional data to become available next month, Reuters reported.

Whether or not additional data shows efficacy, it’s amazing to see just how much the overall market is responding to any good news right now. It’s possible evidence that more of a “risk-on” attitude permeates Wall Street after last month’s incredible flight toward safety. GILD shares recently rose double digits, and Boeing Co (NYSE: BA) shares rose sharply as the jet-maker said it plans to reopen production at its Seattle plant. That means 27,000 people coming back to work, which is great news.

The market also seems to be getting a lift from President Trump presenting a plan last night to reopen the economy in three stages.

More disappointing, but hardly unexpected, were some data that appeared overnight. Chinese Q1 economic growth slid 6.8%. It was the first economic shrinkage acknowledged in official statistics since 1976. No real surprise there, and it does reflect some pretty dramatic measures China took to slow the virus. What’s going to maybe be more interesting is to see what Q2 growth does, now that the country is reopening the economy. Anyway, the news doesn’t appear to be having much impact on the market. 

In crude, there was a contract roll-over last night and it’s interesting to see the June CME crude contract (/CLM20) trading near $25 a barrel and barely down for the day. The old May contract expires Tuesday and is more than $6 below the June. Seeing the June contract take the baton with this kind of premium arguably is a sign of economic hope, because higher crude prices in the future suggest firmer global demand. Contracts even farther out are well up into the mid-$30s. This could be a relationship to keep an eye on over time. 

Another thing to potentially keep an eye on today is Apple, Inc. (NASDAQ: AAPL), which got a big downgrade from Goldman Sachs Group, Inc. (NYSE: GS). So far, it doesn’t appear to be affecting shares.

It’s been a good week so far, if we can hold this. Last week we had a synthetic Friday (on Thursday) due to the holiday, and things went well. But Fridays have been interesting lately. The last hour of the session could be where things get volatile, and also check to see if there’s profit-taking right out of the gate. From a technical perspective, it would be good to see the S&P 500 Index (SPX) hold 2850 by the close. 

Healthy Check-Up

Considering the nature of the global crisis, you might expect the Healthcare sector to be a robust performer. It was exactly that on Thursday, topping the sector leaderboard with a bigger than 2% rise. 

Abbott Laboratories (NYSE: ABT) delivered firm Q1 results this week and generated some excitement with its coronavirus testing kits and the stock rolled to new 52-week highs. Something to keep in mind about testing in general, whichever company you’re looking at, is these tests tend to be on the cheaper side and may not be big revenue contributors in the great scheme of things.

However, if companies can find a way to meet what’s expected to be huge demand, they might make up in volume what they lack in price. A company like ABT arguably has the manufacturing bandwidth and financial strength to take big advantage of this, so that’s something to consider watching. Johnson & Johnson (NYSE: JNJ) could have a similar scenario addressing the coronavirus vaccine business. 

No Punishment For Guidance Withdrawal

Another thing investors saw with earnings this week is companies like ABT and others pulling their guidance. The economic picture remains too cloudy for anyone to risk giving out numbers now only to change them later and confuse investors. In normal times, a company pulling or declining to give guidance would raise a red flag about possible internal or industry problems. That’s not necessarily the case now because there’s one big global challenge affecting everyone. 

Having said that, companies may come under pressure to distribute clearer roadmaps by Q2 earnings season when hopefully the horizon is less foggy. That may be easier for some industries than others, with travel and tourism, Financials, and retail maybe among the ones that could have more challenges than others given the nature of their businesses. 

Thursday’s choppy session ended up on the positive side of the ledger for most major indices, but the small-cap Russell 2000 Index (RUT) continued to struggle as investors worried about the impact on smaller businesses and regional banks (see more below).

On Sunny Days, Technology Rolls Up Big Gains

As on a lot of recent up-days, Technology found plenty of buyers Thursday, led by some of the big bruisers like Microsoft Corporation (NASDAQ: MSFT) and, Inc. (NASDAQ: AMZN), as well as chip-makers including Intel Corporation (NASDAQ: INTC) and Advanced Micro Devices (NASDAQ: AMD). Many investors appear to be listening to analysts who talk about the importance of finding big names with enough liquidity to possibly weather this situation. As pointed out in a note Thursday, it’s almost a “Darwinian” approach playing out among people in the markets.

The Nasdaq (COMP), which so many of those tech stocks call home, is actually up almost 7% year-over-year, and that includes a 30% plunge between mid-February and mid-March. It’s pretty amazing to look at that chart. 

While most major indices turned higher yesterday, the 10-year Treasury yield slipped to just over 0.6%, down from the mid-0.7% range last week, in a sign that some investors might be continuing to put their trust in bonds over stocks.

The SPX finished just a smidgen shy of 2800 on Thursday and looks to open well above that Friday. That’s a level to consider watching next week, too, because it represents approximately a 50% recovery from the March lows back to the February highs and could form an area of technical support.

CHART OF THE DAY: GETTING IN RANGE? For a while there a few weeks ago, it was hard to trade the market because volatility had the S&P 500 Index (SPX—candlestick) gyrating up and down like a jumping bean. Now that volatility has eased a bit, a trading range appears to be forming between the 20-day moving average down near 2570 (yellow line) and the 50-day moving average up around 2870 (red line). The 200-day moving average is the blue line just above 3000. Data Source: S&P Dow Jones Indices.  Chart Source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Taking a Long Look at Volatility: The Cboe Volatility Index (VIX) remained just above 40 by the end of the day Thursday, but it almost felt like nostalgia seeing the most major indices move less than 1%. They’ve already had more 1% or moves this year than they typically have in an entire 12 months, and investors might be getting tired of the whipsaw action. 

That said, when you see VIX at 40 or above, that’s double the long-term average, meaning we can likely expect volatility to continue at high rates over the coming month. After that, the VIX futures complex indicates that traders expect volatility to slowly ease but still not get back to near normal any time this year. VIX futures trade at above 30 through the October 2020 contract as of Thursday, falling to just below 30 for the November and December contracts. At this point, anything under 40 seems relatively mild compared to record-high VIX closes above 80 last month. Even 40, though, is still pretty thin air compared to when VIX traded near 12 earlier this year.

Remember, VIX is sometimes called the “fear index” because when the S&P 500 Index (SPX) comes under pressure, the demand for SPX put options increases, which often pushes VIX higher. The VIX is the market’s collective estimate of how much the price of the SPX might move up or down over the succeeding 30 days. So a VIX at 14.00 should be interpreted as a 14% annualized level of volatility.

Earnings Calendar Starts Filling Up Next Week: Today’s earnings included The Procter & Gamble Company (NYSE: PG) and Schlumberger Limited (NYSE: SLB), providing early looks at how one of the big Consumer Staples companies and a major oil field services company are weathering the crisis. Staples have generally been strong as people stock up, while oil fields languish as crude remained at 18-year lows toward the end of the week.

SLB shares got a nice boost in pre-market trading after narrowly beating analysts’ average earnings per share estimate. PG earnings per share beat Wall Street’s estimates, but revenue came in slightly below. 

Oil field service companies like SLB and Halliburton Company (NYSE: HAL) saw their shares ride higher earlier this month, but the last week has been tough. Like the cruise ship companies, fundamentals continue to work against any lasting rally. 

Honeywell International, Inc. (NYSE: HON) also reported results today. The calendar next week includes Netflix, Inc. (NASDAQ: NFLX), which made new 52-week highs again Thursday as streaming services remain appealing to many investors (and to many of us stuck at home in front of our screens). Other major companies due to report next week include IBM Corporation (NYSE: IBM), AT&T, Inc. (NYSE: T), Delta Air Lines, Inc. (NYSE: DAL), Visa, Inc. (NYSE: V), Eli Lilly and  Company (NASDAQ: LLY), and United Airlines Holdings, Inc. (NASDAQ: UAL). The following week, earnings really get busy. Things are just starting, so strap in. 

Smaller Banks Pressure RUT: Drilling down a little further, the weak consumer could be one reason the regional bank-heavy Russell 2000 Index (RUT) continues to lag the broader market. Investors likely are worried about the medium-sized and smaller banks’ huge exposure to small business and mortgage loans as the jobless rate climbs and stores and restaurants remain closed. It’s hard to see the RUT getting much traction even longer term, because so many analysts expect the recovery to be slow even once things start opening again. Many small businesses might go out of business altogether, and yesterday’s dramatically weak housing number could mean trouble for banks trying to make a living with mortgage lending. RUT is getting a boost in pre-market trading this morning, with CME's Russell 2000 futures contract (/RTY) having traded at its overnight limit, up about 5%.


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