So much for “spillover.”
Last week’s late recovery didn’t extend into Monday’s early hours, with overnight trading showing red. Caution, seen pretty clearly a week ago, appears to remain a factor, with bonds getting a slight lift and the 10-year Treasury yield slipping just a bit. Volatility also surged in the pre-market hours after relaxing into the weekend.
There just isn’t the confidence of a few weeks ago, particularly in the Technology sector, and that’s what’s weighing. We’re at a fork in the road in terms of inflation, rates, and “back to work.” Can reality meet expectations when people go back to the office? Investors are afraid to commit, and who can blame them with so many question marks spinning around.
For now, there’s caution and continued back and forth between value and growth. There’s no great catalyst at the moment.
One other possible reason for initial weakness today could be some data earlier Monday out of China showing April retail sales rising less than some analysts had expected. Now, 17% doesn’t seem too shabby when you see it, but expectations were for 24%. The number was also a smaller rise than seen in March. On the other hand, China’s industrial output rose almost 10%.
Sticking with numbers for a minute, we’re 91% of the way through earnings season, and 86% of S&P 500 companies have beaten analysts’ earnings estimates, according to research firm FactSet. Earnings growth has been an amazing 50.3%. That’s the strongest growth we’ve seen since 2010, when Wall Street was exiting the financial crisis. It’s also way above the 23% growth analysts had anticipated. Makes you wonder if some of them might be going back to their white boards to reassess Q2 earnings expectations.
On the less positive side, 175 companies mentioned the word “inflation” on their earnings calls, FactSet noted. That’s the most since...once again, 2010. Only Q2 2018 came close in recent years. With last Friday’s University of Michigan Sentiment report showing consumers also have inflation on their minds, it seems pretty clear that this is a topic Wall Street is going to continue wrestling with, no matter how “transitory” it ends up being, to use the Fed’s word.
An old hand hit the headlines today as AT&T T announced a planned merger of its WarnerMedia division with Discovery (DISCA). Under the proposed combination—which still needs regulatory approval—T’s CNN, HBO and the Cartoon Network would be placed alongside those of Discovery’s HGTV, the Food Network, and Animal Planet. The idea could be to compete better with Netflix NFLX and Walt Disney DIS, according to media reports.
Retail Gets Its Week
The coming days look a little dull on the data front. The housing market is scheduled to be a big feature, with April housing starts and building permits numbers expected on Tuesday and April existing home sales data due out on Friday. Fed minutes are on Wednesday (see more below). However, the dominating factor this week is probably going to be retail earnings, with a host of the big boxes preparing their reports.
Just when you think earnings season is over, a big week looms as major retailers open the books this week (see more below). Home Depot HD and Lowe’s LOW could offer more insight into high lumber prices and the general housing market, while Walmart WMT, Foot Locker FL, Target TGT, TJX TJX, and Kohl’s KSS, Macy’s M, and Ralph Lauren RL could shed more light on the state of the U.S. consumer.
Outside of retail, it also could be interesting to see whether Hormel Foods HRL has anything to say about inflation and whether Deere DE has any comments on agricultural markets or infrastructure plans from Washington when those two companies report.
Friday’s Positive Vibes Fade
Bulls looked like they’re trying to wring out some positivity in the markets, judging from how last week finished off. People still might have their minds on inflation, but the market appeared to be calmer by Friday, which could be a general reversion after some extreme moves.
One sector doing well into the end of last week was retail. The amount of money people are spending in the retail space is up, and April retail sales announced Friday morning looked pretty good. As some analysts noted, the data came in flat vs. March and missed Wall Street’s expectations, but March was such an amazing month thanks to stimulus checks that it’s a pretty big accomplishment just keeping up with that.
With a push toward the reopening theme and the Centers for Disease Control and Prevention (CDC) suggesting it’s OK for the vaccinated to rip off the masks, reopening stocks looked like they were starting to come back into favor late last week, so it could be interesting to see if that spills into the new week.
Some people gave “reopening” stock DIS a fisheye on Friday because its earnings showed streaming subscriptions missing market forecasts. On the other hand, it was nice to see theme parks showing solid demand. That’s a reopening business that could be a good barometer of how eager people are to go out and travel. If DIS is doing well on the theme park front this summer, maybe that means airlines and hotels also are doing well.
Crude managed to finish the old week just above $65 a barrel and stayed just above that early Monday, but still hasn’t made a real push back toward the 2021 high right below $68. Every time it gets above $65, it feels like sellers come in. If it does push higher and breaks out, how far can it go? Other commodities such as lumber and corn were pulling back late last week.
The theme a lot of people are focusing on is how value is outpacing Tech, but the Tech sector showed signs of life Friday. Seagate Tech STX, a chipmaker, did see a big move, for instance.
An Eye On VIX And Commodities
Then there’s volatility. After popping up to above 28 at the height of last week’s market jitters, the Cboe Volatility Index (VIX) managed to finish Friday back below 19. Its historic average is near 20, by the way, and it jumped back above that early Monday.
This reversal could be pretty significant. A couple of years ago we’d often see a pop in VIX going into the weekend, but this was the opposite. It deflated going into the weekend, which could mean there’s simply less demand for protection against downside market risk, a bullish signal. However, we still have the Middle East situation, and that could be a spoiler. So there’s still a lot going on and you can’t take this rally into the weekend for granted.
For instance, the Nasdaq 100 (NDX)—which includes most of the big Tech stocks—closed lower Friday for the fourth straight week. You wonder what it might take for that to come back. In addition, the commodities side might be finally taking a breather after roaring ahead for months. Lumber and corn both got hit going into the weekend. The S&P 500 Index (SPX) and Dow Jones Industrial Average ($DJI) are both down three of the last four weeks.
With the weekend over, we’ll see if this downturn in commodities becomes a larger trend. They coincide well with the equity move back up, so which one is the tail and which one is the dog? Or in other words, which one helped the other?
HART OF THE DAY: GOLD’S IN NO RUSH. After bottoming out below $1700 per ounce, gold futures (/GC—candlestick) have moved up above $1800. /GC looks like it’s trying to break above the 38.2% Fibonacci retracement level which sits at $1828. The past couple of times it did that, price pulled back. Will it do so again this time? Data source: CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Essential Apples And Non-Essential Oranges? Big box retailers—typically the last major segment to report earnings each quarter—are about to take center stage, beginning with Walmart (WMT) and Home Depot Tuesday. One thing to keep in mind this time around—and this will likely be more important next quarter—is the standard year-over-year comparisons might get a bit wonky, and vary from company to company. Recall that last spring, some retailers—particularly those based in shopping malls—shut their doors while other “essential service” retailers such as WMT, HD, Lowe’s, Target, and major grocery chains—remained open. This created quite a dichotomy as the essential retailers burst at the seams while their shuttered brethren languished in lockdown. When comparing quarterly and year-on-year figures (and any guidance that may come from executives in the coming quarters), make sure you know which side of the lockdown a retailer fell.
Technical Picture Assessed—What To Watch In SPX: So basically, bulls seemed to take a victory lap into the weekend, but can the market break out of this long-term range between roughly 4000 and 4200 for the S&P 500 Index (SPX)? It’s been kind of stuck there since early April.
An interesting level on SPX is 4180, a level that has acted as support and resistance. We kind of hung out at this level and just below it recently, and the market wasn’t able to break above it at Friday’s close, finishing about 7 points under. Keep an eye on that level as Monday’s trading continues. Closes above that could stir up some more buying momentum, potentially.
It’s also worth noting that for once, those technical support levels everyone talks about held pretty nicely when tested in the middle of last week. The 50-day moving average for the SPX, near 4063, didn’t get taken out, and that appeared to inspire some of the buying Thursday and Friday. A lot of people like to say technicals don’t mean anything, and they got some traction with that back when Covid hit and the markets dropped like a rock through every “support point” analysts could chart. This time, though, the chart people won the day, apparently.
What’s The Fed Thinking? The best way to get insight into what the Fed is thinking comes Wednesday afternoon with the release of minutes from the Federal Open Market Committee’s (FOMC) last meeting. What they said about the data they’re seeing and what it represents could give things a new spin. Of course the last meeting was well before the recent inflation data.
Early last week all we talked about was inflation, but that seems like a long time ago. Those big inflation readings had some people talking about interest rate changes possibly happening as early as Q4. By the end of the week, with the 10-year Treasury yield back at 1.63%—or basically in the heart of its recent range—it seemed a bit harder to believe any imminent changes would be happening on the Fed front. Monitor the minutes when they come out Wednesday for a better view.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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