Homebuilders Hammer Away After Tuesday's Rally As Yields Tick Lower

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(Wednesday Market Open) Equity index futures pointed to a higher open in premarket trading as investors look to build on yesterday’s gains.

However, Netflix NFLX could be a drag on stocks after disappointing investors late yesterday.

Potential Market Movers

After Tuesday’s close, Netflix (NFLX) reported better-than-expected earnings but a major miss on revenue. Additionally, the company lost 200,000 subscribers in Q1 causing the stock to fall more than 20% in extended-hours trading. The most bearish insights came from Netflix as the streaming media giant disclosed problems within their own customer base.

The move in NFLX was felt by Disney DIS and Roku ROKU which respectively fell 3.16% and 6.66% in sympathy during extended-hours trading. Investors seem worried that streaming subscriptions will continue to fall in a post-pandemic world. If you haven’t reevaluated your pandemic picks yet, it may be time to reassess those holdings.  

Big Blue, aka International Business Machines IBM, announced better-than-expected earnings and revenues after Tuesday’s finish, prompting a 1.77% rally in after-hours trading. IBM also offered forward earnings guidance “at the very high end” of its previous forecast. The company stated that it expects the stronger dollar to be headwind for the company’s future earnings growth.

Consumer staple stock Procter & Gamble PG, reported that it beat on earnings and revenue estimates and raised its sales outlook and rallied 1.66% in premarket trading. PG has been hit hard by higher input costs but has demonstrated some pricing power by passing these higher costs to the consumer.

Moving over to health care, Abbott Labs ABT also beat on top and bottom line numbers, but the stock dropped 2.90% before the opening bell. ABT benefited from strong demand for its COVID-19 tests and a rebound in medical device sales. However, the company maintained its full-year earnings forecast.

After today’s close, Tesla TSLA will release earnings. With so much news surrounding Tesla founder and CEO Elon Musk and his bid for Twitter TWTR, investors will likely be watching closely. 

After the open, investors will get further insights into the housing market with the existing home sales report. A good report could help homebuilder stocks build on yesterday’s momentum. Also, the crude oil inventories report will provide further signals on oil prices.

The back and forth in commodities has been, in part, a battle between large hedgers, those that use the products, and large traders, those that speculate on price. However, last week, large traders started cutting exposure to commodities which could result in less volatility if the trend continues. Of course, there’s always the risk of something else popping up. For example, last week, Libya’s largest oil field went offline and is still negatively affecting the price of oil.   

Growth stocks could find a bid this morning because the 10-year Treasury yield (TNX) was down 33 basis points ahead of the market open. The Cboe Market Volatility Index (VIX) is near 20 again, showing that investors are gaining confidence. With yesterday’s rally, lower yields and rising confidence, the path of least resistance may be higher for stocks.

Reviewing the Market Minutes

Bulls appeared to have a surge of confidence Tuesday as an increasing number of analysts suggested that the United States reaching peak inflation in March. This belief appeared to be punctuated by oil futures falling 5.7% to $102 per barrel. The International Monetary Fund (IMF) lowered its 2022 global growth outlook to 3.6% in 2022 and 2023 which may have prompted the selloff in oil.

However, the bond markets don’t appear to agree that peak inflation has been hit just yet as the 10-Year Treasury yield (TNX) rose another 51 basis points to 2.913%. The 10-year yield is now testing 2018 highs.

The 10-year yield tends to be correlated with the 30-year mortgage rate. But that didn’t appear to bother the homebuilding stocks yesterday because the S&P Homebuilders Select Industry Index rallied 3.76% on the day. Investors seem emboldened by higher March housing starts and building permits numbers, but notably, the largest increases came from permits for multifamily units, while single-family home permits declined.

The major indexes closed higher with the Nasdaq Composite ($COMP) rising 2.2%, the S&P 500 (SPX) up 1.68%, and the Dow Jones Industrial Average ($DJI) gaining 1.49%. The rally was fairly broad with NYSE advancers outpacing decliners a little more than 2-to-1. Additionally, the Russell 2000 (RUT) small-cap index jumped 2.04% and every sector except energy closed higher on the day. 

 

CHART OF THE DAY: BLUEBIRD FLY. Twitter (TWTR—candlesticks) has lost about 50% from its all-time high in February of 2021 to its recent lows in 2022. The stock jumped more than 27% on the news that Elon Musk had bought 9.2% of the company. If the company was sold to Musk at his offer price of $54.20, it would be a 54% premium over the day Musk started buying the stock. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Caged Bird: Elon Musk’s desire to snare Twitter TWTR has sparked confusion as the entrepreneur-turned-activist investor has had to feel his way through the process. First, there were questions about the way he filed with the SEC for his 9.2% stake in the company. Next, he looked like he was going to be a part of the company’s board of directors. However, he then changed his mind and decided to go the hostile takeover route by offering $54.20 per share to take the company private. Even this offer confused investors because a reference to an exercise price that included “4.20” —a number associated with marijuana use—prompted questions on whether the offer was legitimate or a hoax.  

If Musk walks away from the deal, he said he would sell his shares, which will likely push to the stock price back to its previous levels. However, Twitter’s board has already approved the use of the “poison pill” that will dilute the number of shares outstanding, which could also drive the stock price lower.

And these scenarios aren’t even touching on the legal battles ahead if investors feel Twitter’s board should have allowed them to vote on Musk’s offer. In short, this saga is likely to continue.  

Goose Bumps: Next week, Elon Musk’s first company, PayPal PYPL, will announce earnings. PayPal has also struggled in the last year and is currently trading 66% off its 2021 high. Like many other fintech firms, the company has struggled as the pandemic’s economic reopening has some consumers ditching online shopping for outdoor activities.

Visa V, which reports the day before PYPL, is also trading off its highs but by only 14%. Consumers appear to be picking up old spending methods, although they seem to be favoring savings to spending. According to CNBC, consumers are currently more likely to save a windfall than spend it. Hopefully, they aren’t putting all of those eggs in one basket.

Free Bird: The NCV Global Cannabis Stock Index and the American Cannabis Operator Index have declined more than 50% respectively over the last year. One problem the industry has is navigating federal and state laws governing their product. While 37 states have legalized marijuana for medical use and 18 of those states have also legalized it for recreational use, marijuana remains illegal on the federal level. Many banks have been unwilling to take on the risk of allowing cannabis-based businesses to use their services because of federal laws and the risks associated with them.

However, last week Senate Majority Leader Charles Schumer said he hopes to have the Cannabis Administration and Opportunity Act submitted to Congress by early August. Until the Federal government finds a way to legalize or loosen current restrictions, the cannabis industry is likely to struggle.

Notable Calendar Items

April 21: Philadelphia Fed Manufacturing Index and earnings from Philip Morris PM, Union Pacific UNP, AT&T T, and Blackstone BX

April 22: Earnings from Verizon VZ, American Express AXP, Honeywell HON, Newmont NEM, and Schlumberger SLB

April 25: Earnings from Coca-Cola KO, and Activision Blizzard ATVI

April 26: Durable goods orders, CB consumer confidence, new home sales, and earnings from Visa V, PepsiCo PEP, United Parcel Service UPS, and Texas Instruments TXN

April 27: Pending home sales, Earnings from Meta Platforms FB, T-Mobile TMUS, PayPal PYPL

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

Image sourced from Unsplash

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