Market's Win Streak May Be In Jeopardy As Dollar Gains, WMT Comes Up Short

Retail earnings take center stage today as Wall Street re-opens after a long weekend, and Treasury bond auctions also get underway. Pre-market trading pointed to possible sharp losses amid renewed strength in the dollar, potentially putting the six-day winning streak in jeopardy.

As this new, shortened week begins, some questions hang in the air. Among them, did the tepid December and January retail sales data seen last week reflect a slowdown in consumer spending that might reflect in retailer and department store earnings? The first answers could come today with Home Depot Inc HD and Walmart Inc WMT reporting, though we probably won’t get a complete picture until next week after some of the big department stores report.

As it is, WMT shares came under pressure in pre-market trading after the company missed Wall Street analysts’ estimates for earnings per share. That’s despite WMT coming in above expectations on revenue and growing its same-store sales. E-commerce sales growth slowed from the prior quarter at just 23%, down from 50%. However, a lot of that was planned, WMT said, as it works to grow  the business. The company says it expects e-commerce sales to grow 40% this year. WMT’s bottom line appeared to see an impact from initiatives such as employee bonuses and higher pay.

One possible silver lining from the WMT earnings: Stores like WMT tend to do better when times are rough. Back in 2009 and 2010, WMT and other discount retailers thrived. As the economy improves, some shoppers tend to move up to the next level of stores, so let’s wait and see how Target Corporation TGT did last quarter.

On the other side of the coin, Home Depot’s quarter looked solid as the company continues to take advantage of an improving economy and weather-related opportunities. HD beat analysts’ expectations on both the top- and bottom-lines. Same-store sales gains grew nicely, a possible sign that many people are opening their wallets to spend money on remodeling projects.

Also on the corporate front came news that grocery chain Albertson’s is buying Rite Aid Corporation RAD. This appears to be driven by the same forces that led to media reports recently of Walgreens Boots Alliance WBA being in talks to buy AmerisourceBergen Corp. ABC. There’s more consolidation as companies try to get vertical in the space.

Though earnings and other company developments dominate the headlines this morning, another potentially major event getting underway is a U.S. Treasury bond auction. The Treasury is auctioning about $260 billion in debt this week, and 10-year bond yields scampered back up above 2.9% early Tuesday, perhaps reflecting some concerns about potential light demand for the auction. We’ll see.

Among other questions hanging over the market this week, one is whether geopolitics and squabbles in Washington, D.C., could have an impact. To some extent, this question got answered last Friday when the market gave back nearly all of its early gains after headlines about new indictments in the Russia case hit the tape. If you remember back to last spring, when the probe began in earnest, there were some shaky days in the markets. Fear of uncertainty is perpetual on Wall Street, so any more noise out of Washington or new signs of rising Middle East tensions (some of which surfaced over the weekend) could play outsized roles, especially once the regular tick tock of earnings season winds down in early March.

Another question that lingered over the markets last week and continues to is how long this period of elevated volatility might last. Though VIX fell from heights of 50 posted in the immediate shock of this month’s sell-off, it still hasn’t gotten much below 20, and seems to be sticking around even as the market recovers around two-thirds of its losses. Early Tuesday, it powered back above 20 as stocks struggled in pre-market trading.

VIX barely ever got even into the teens most of last year, so as long as it’s up at these levels, there’s a sense that the craziness might not be over yet. It typically takes two or three weeks to plough through these high-volatility times, and this week is the third in the cycle.

Meanwhile, the dollar clawed back after falling to new three-year lows Thursday. It appeared to be recovering a little early Tuesday and may have room to the upside, and that could be one factor that’s weighing on the stock market.

FIGURE 1: VIX STILL ELEVATED. The S&P 500 (SPX) cruised to a sixth-straight session of gains Friday, though just barely thanks to a late-day selling surge. At the same time, VIX (purple line) is down a lot from its highs but keeps hanging in at close to 20, so choppiness might continue. VIX stormed back above 20 early Tuesday. Data source: CBOE, Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Not Freaking Out

If the average American was consumed by the stock market dive of early February, it didn’t appear to show in consumer sentiment data released late last week. The University of Michigan preliminary sentiment report for February jumped to its second-highest headline level since 2004, at 99.9. That was up from 95.7 in January and 95.9 in December. People surveyed barely mentioned Wall Street, which makes you wonder whether all the focus so many investors spend on stock prices is really shared across most of the economy.

“Stock market gyrations were dominated by rising incomes, employment growth, and by net favorable perceptions of the tax reforms,” said Richard Curtin, chief economist of the survey, in a press release.  “Indeed, when asked to identify any recent economic news they had heard, negative references to stock prices were spontaneously cited by just 6% of all consumers.”

Spend Some “Minutes” on Data

There’s not much in the way of numbers to contemplate this week, with existing home sales early Wednesday about the only data of note. What might dominate the picture instead is the scheduled release of the Fed’s January meeting minutes at 2 p.m. ET tomorrow. If you recall, January was the last meeting presided over by former Fed Chair Janet Yellen, and rates remained the same. That meeting took place Jan. 31, just before the bottom fell out of the market. Arguably, some of the downturn in stocks could have reflected concern about the chance of a more hawkish Fed.

The Fed’s statement at the time, read, in part, “Market-based measures of inflation compensation have increased in recent months but remain low.” By adding that “measures of inflation have increased in recent months,” one school of thought suggested the Fed might have been signaling that more than three rate hikes could be on the table this year, some analysts said at the time. Tomorrow’s minutes could provide more insight, and it might be interesting to watch yields in the interest rate complex to see how they react. Investors might want to spend a few “minutes” combing through what the Fed had to say to get a better picture of how Fed thought leaders see inflation progressing over the coming months and what inflation measures the Fed is watching in particular.

Optimism Meter is Running

If you want to get a sense of investor optimism, it sometimes helps to look at sector performance. As Briefing.com pointed out, “In general, cyclical sectors, which tend to do well when the economic outlook is favorable, outperformed their countercyclical peers” over the last week. Technology led all sectors with a gain of 5.8%, and overall, the week’s gains took all three major indices back above their 50-day moving averages, arguably a constructive technical indicator. Stocks go into the week about 5% below the all-time highs posted Jan. 26.

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