Airline Shares Jump As Stimulus Agreement Offers Relief, While Nike Up On Earnings

Buy the rumor, sell the news. That appears to be the theme this morning after the Senate and administration reached a massive, historic stimulus deal.

Yesterday’s amazing rally relieved some of Monday’s pain. Now investors will learn if the market can put together two green days in a row, something they haven’t seen since mid-February. If that happens, it won’t mean the worst is necessarily over. However, it might give some investors a little more enthusiasm about venturing in to buy dips. So far, that strategy just hasn’t worked during what’s been the worst month for the market since 1987.

Futures were all over the place overnight as the market doesn’t seem to know quite what to do with the news from Washington. A lot of it might have been built in already, so this could be a “feel your way” kind of trading session. A “strange” day, if you will. This is an unprecedented stimulus package. 

Truth be told, even a day where things don’t necessarily go up but also don’t collapse might be welcome enough for most investors. A little calm period seems way overdue, but you can’t count on it. Cboe Volatility Index futures (/VX) are actually on the rise this morning.

Targeted Stimulus

Hopefully, once the stimulus package takes effect or even before that, it will help major indices build a base. How will investors know that’s happening? It’s when the moves overnight get smaller. In this scenario, we could still be down, but not limit-down, and start to have a more predictable range throughout the day with support and resistance.

Airline stocks are jumping in the pre-market hours as the package offers $50 billion in loans to that struggling industry. It also would send checks to many Americans and their children and provide loans to small businesses. Hospitals and corporate America also get help. 

The $2 trillion stimulus isn’t a fact on the ground yet, by the way. The House still has to approve it and the president still has to sign it. The bill isn’t a panacea, but it could provide a little more time for the country to fight the virus and make sure businesses and workers have resources to continue this forced social distancing much of the country is experiencing.

It’s great that the deal got done, but the question is when will people get back to work? A lot of financial pundits are getting asked that, but it’s really a question for medical professionals, not financial professionals. If you’re reading the news, it’s important not to put too much weight on a market pundit’s view of how long this might last. It’s truly a healthcare question.

Nike Beats; Micron Earnings Ahead

The beat of the market goes on even amid the upheaval. Nike, Inc. NKE reported strong earnings yesterday after the close and its shares rose more than 8% in pre-market trading. Executives on the company’s call talked about how they’re seeing a “recovery” in China and now have a “playbook” for other countries. The company is also seeing strong digital sales growth in the U.S. and says consumer demand remains strong.

The big earnings news to watch today is Micron Technology, Inc. MU, a semiconductor firm that also might provide investors insight into the situation in Asia as well as address how demand is shaping up for the microchips that provide the underpinnings of so many electronic devices. 

Fed officials are also out there talking. St. Louis Fed President James Bullard told CNBC this morning that after this unprecedented shock, he expects the economy to boom again. So that could give people a little more confidence.

Finally, a Record to Enjoy

It's been a month of records, many of which haven't been the good kind.

But Tuesday’s record jumped to the top of the charts as the largest one-day point gain ever for the Dow Jones Industrial Average ($DJI). A 2,100-point climb for the $DJI took the hallowed index back above 20,000, a psychological level it crumbled below last week for the first time in more than three years. On a percentage basis, the gain of more than 11% was the biggest one-day rise since 1933. 

As often noted here, the $DJI isn’t necessarily the best way to monitor overall market performance because it consists of just 30 stocks. On the other hand, at times like these, it’s often the biggest elephants in the room that people watch most closely for direction. 

If you want a broader picture, the S&P 500 Index (SPX) climbed more than 9% Tuesday, just a little bit behind the $DJI. It was also good to see the battered Russell 2000 Index (RUT) of small-caps join fully in the celebration. It’s suffered more than some other indices, down 34% year-to-date vs. 24% for the SPX. That could be because small companies are often thought of as having less protective padding to fight through a recession.

Looking at other developments today, investors could be watching the weekly U.S. crude production and supplies report as crude prices remain near two-decade lows. Because it’s weekly, not monthly, the weekly supply is a data point that has a chance of delivering a bit of “news from the front lines,” so to speak, about how the economy is reacting to the crisis.

Same goes tomorrow morning for weekly initial unemployment claims. That number surged last week to 281,000, from 211,000 the week before. “Initial claims have held below 300,000 for 263 straight weeks, yet that streak seems destined to end,” market research firm Briefing.com noted. Some analysts say new claims are likely to climb above 1.5 million. 

From Garage Sale to Darlings in a Day

From the way things went Tuesday, it’s pretty easy to make a guess which industries investors expect to benefit from fiscal stimulus. Retailers, airlines, and resort companies placed high on the leaderboard amid a wide embrace of the firms whose stocks got devastated over the last month.

One of the most amazing performers was L Brands, Inc. LB, whose shares shot up nearly 40% after losing two-thirds of their value since mid-February. News of note affecting the stock? Not much to be found. Just stimulus hopes, it appeared. 

Delta DAL, American Airlines Group, Inc. AAL and United Airlines Holdings, Inc. UAL all rose more than 20% yesterday. Though the final “i’s” and “t’s” had yet to be dotted on the fiscal stimulus package as of yesterday’s session, it’s probably fair to say cruise lines, airlines, and resorts all could receive help. 

Chevron Corporation CVX had a rare great day for an Energy stock after saying it won’t cut dividends. The dividend picture is probably one that Energy investors are watching closely, since many firms in the industry are highly leveraged. Energy was among the sector leaders Tuesday, along with Industrials and beaten-down Financials. The 10-year yield didn’t get much traction yesterday despite stocks rallying.

Some analysts suggest that anyone considering a venture back into the market be careful stepping in to buy companies dependent to some extent on government stimulus for an improval of fortune. We’re not talking any specific names or industries here, but it’s always important to do a little fundamental homework into a company’s core strengths and weaknesses if you’re making a long-term stock purchase.

The concern about cruise lines and airlines is that this crisis might have some long-lasting effects. Cruise lines already had a fair share of issues before the coronavirus, and even if the disease ended tomorrow, arguably not many people would likely celebrate by booking a cruise. These companies may have problems longer term.

For airlines, the biggest long-term effect is probably going to be many business trips cut and more meetings on video-conference. People might decide they don’t need to go halfway across the world four times a year. Instead, they may go once and rely on video the other times. This trend, if it happens, could be tough on hotels, too, but very good for video-conferencing companies.

Tech Continues to Shine, but Market Remains Headline-Sensitive

Speaking of tech, the Information Technology sector rallied like it was Feb. 18. Major names like Apple Inc. AAPL, Microsoft Corporation MSFT, Nvidia Corporation NVDA, IBM IBM, and Micron (MU) appeared to be trying to make up for lost time, or in this case, a lost month. It was the second-straight day of strong performance for the tech sector, which continues to outpace most others.

There was a lot of positive sentiment Tuesday, but people should remember this is a headline-driven market. Amid the fiscal stimulus headlines, the coronavirus picture here in the U.S. doesn’t seem to be getting better. New York Gov. Andrew Cuomo announced that the hard-hit state’s efforts to smooth out the caseload curve aren’t working. That’s troubling. How would the market have acted Tuesday if Cuomo’s warnings were at the top of the headlines instead of just a sidebar?

Last Wednesday was a real washout. So was Friday. Monday wasn’t too good, either. Last Thursday and this Tuesday did turn out positive. However, the lows have been getting lower as have the highs. Bad days have outnumbered the good.

All this needs to change for the market to start finding its way out of the woods. At this point, just getting back into the proverbial woods in the first place might be helpful, because a 30% plunge in one month indicates that things are digging in amid the roots. 

Volatility Doesn’t Take a Day Off

Through all this, volatility remained stubbornly high. The VIX stayed above 60 for most of the day Tuesday. Typically, when stocks rally as much as they did, volatility steps back a bit more than what we just saw, though no one expects it to just dissipate quickly in the current environment.

Some other relationships also weren’t making lots of sense, either. For instance, why did shares of Walmart Inc. WMT and Costco Wholesale Corporation COST barely rise Tuesday while Target Corporation TGT shares gained? This isn’t adding up. People are shopping at all three, so why these three stocks should be perceived so differently in a crisis is kind of a head scratcher.

Tuesday’s fierce rally might have felt good for investors getting used to selloffs, but barring a surprise slowdown in virus cases, stable price action might be the best thing investors can hope for now. It’s very hard to assess where on the charts the major indices might find support or resistance when we keep seeing these wild daily swings. For those who keep an eye on the technicals, the SPX close above 2400 might have been meaningful, a day after it dropped below 2200.

CHART OF THE DAY: TREASURY YIELDS PRACTICE SOCIAL DISTANCING: If you look

back a month or even a couple of weeks on this one-month chart of the 10-year Treasury yield (TNX—candlestick) vs. the five-year Treasury yield (FVX—purple line), you can see they were basically in sync, with the FVX even holding a slight premium to TNX at times—a situation called “inverted.” Over the last week or so, the TNX has built a pretty solid premium to its shorter-term cousin. While trends are hard to analyze due to the crazy markets and government/Fed intervention lately, it might be worth watching to see if the TNX continues to gain vs. the FVX, sometimes a sign of economic confidence among investors. Data Source: Cboe Global Markets. Image source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Chairman of the Bored: Just anecdotally, TGT, WMT, COST, and other retail brick-and-mortar companies might be the beneficiaries of boredom. People want to get out of their homes because they’re naturally sociable and want to interact. Going out to the store means a chance to walk down the aisles and feel like things are a bit more normal, though it’s important to remember that authorities across the country are urging people to stay home, aside from urgent needs. Once the crisis passes, maybe the brick-and-mortars might seem a bit more enticing than shopping online, at least for a while. It seems hard to believe this crisis would really change the overall trend toward electronic commerce.

Working with a Net: Though technical support levels didn’t provide a cushion on the way down, there are some areas still worth noting if you’re trying to figure out where things might go from here on the charts. The cycle low so far for the SPX is Monday’s bottom at just below 2192. That happens to line up with some closing weekly lows hit in late October and early November 2016 right around the time of the last presidential election.
The news Monday that all the gains since the election got erased might have signaled a buying area for some investors. If things do fall further, the Brexit vote low just below 2000 from June 2016 is another potential point to watch. Below that, the February 2016 low of 1810 that marked the bottom of the 2015/2016 market hiccup might come into play. Above where we are now, 2700 in the SPX could mark resistance, as it represents a trendline between the February 2019 and May 2019 lows and also rests near the 61.8% retracement level of the rally from December 2018 to February 2020.

Follow the Money? The Fed is buying corporate bonds for the first time, which might soften some of the concerns seen last week about high leverage among companies. Still, if you’re looking for yield and thinking about corporate bonds, it’s something to consider approaching carefully even with the Fed now venturing in. Generally, corporate bonds are considered a bit less risky than company shares. That said, when a company struggles, you’ll often see it begin the process of suspending interest payments up the capital structure. Eventually, if things get bad enough, a company might declare bankruptcy and bondholders might not get back their investments.

Some analysts say if corporate yields start to come down, it could be another sign of a little stability developing around the market. For any real relief, though, what probably needs to come down is the coronavirus case count. Unfortunately, that keeps growing.