Earnings Pace Picks Up Later Today With Chipotle, Netflix Expected To Report

On the day Amazon AMZN founder Jeff Bezos launches himself into space, most investors would probably be happy just to see the major indices pick themselves off the carpet after yesterday’s meltdown.

Early on, it looks like they might get their wish. Major indices rebounded overnight after the worst day in 10 months, with some of the “reopening” stocks that got pounded yesterday showing signs of a “turnaround Tuesday.” The key could end up being what happens after the first 30 minutes of trading. Spillover from the overnight session may carry things higher at first, but then we’ll see if there’s any continued momentum for the rest of the day. 

Two of the factors that helped lead things down yesterday popped up just a bit this morning, which may be why stocks turned green in pre-market trading. The 10-year Treasury yield climbed a fraction but remains below 1.2%, and crude oil also made a tiny move higher but is still trading below $67 a barrel. Weakness in yields and crude yesterday were seen by some as signals of possible slowing economic growth. 

It also helps to see Big Blue—IBM IBM—reporting a strong quarter after the close yesterday. The company beat analysts’ estimates on top- and bottom-lines, and the CEO said IBM sees continued signs of strength in the cloud market and customer demand. Shares are up more than 3% in the pre-market. Travelers TRV also had a good quarter and saw shares rebound, which may be sending positive vibes.

As we’ve talked about before, the “buy the dip” mentality appears to remain in place. People, like sports teams, tend to keep running the play that’s been working, and lately, it’s worked a lot. We’ll see if it picks up some momentum. But remember: past isn’t prologue, and complacency and trading are like oil and water. 

Volatility, Delta Variant, Earnings Among Things to Watch

After a day like yesterday it’s arguably fair to say we’re far from out of the woods. First of all, when the market takes a smack in the face like that there are often reverberations for days or even weeks. Volatility is a little lower this morning, but the Cboe Volatility Index (VIX) is still above 21 after falling into the mid-teens recently. Anything above 20 could signal worries of turbulence ahead, though it’s probably constructive that VIX never got anywhere near 30 yesterday. 

Also, the Delta variant of Covid—which appeared to help trigger much of yesterday’s selling by speculators—hasn’t gone anywhere. Yesterday’s U.S. caseload was the highest daily count since early May, according to media reports. Major indices fell in Asia overnight but rose in Europe. 

Earnings season officially started last week, but will accelerate in the days to come. This afternoon and tomorrow morning are expected to bring results from Netflix NFLX, United Airlines UAL, and Chipotle CMG, among others. Those three could give investors a well-rounded look into how factors like higher prices, the Delta variant, and reopening are playing into consumer preferences. With Netflix, subscriber adds will likely be a key focus, while travel numbers take a front seat on UAL. 

Though the real earnings-palooza doesn’t start until next week, 76 S&P 500 companies are scheduled to report this week. Texas Instruments TXN and Intel INTC are expected in the coming days, bringing Tech into the picture. Hopefully, earnings can give the market back its upward momentum, particularly if CEOs can paint a positive picture of the future.

Meanwhile, bitcoin (BTC) fell below $30,000 this morning. Many people were looking to BTC to be like gold, meaning something that gets bought in times of crisis. But the gold/BTC correlation wasn’t as strong yesterday as people thought it might be. 

Getting Technical

Pardon the technical language ahead, but it’s important to understand if you’re going to get a handle on the market this week.

Yesterday’s downward move sent the S&P 500 Index (SPX) below its 50-day moving average at times. That level stood near 4240. On the positive side, the SPX managed to find some buyers down below and came back to close above the 50-day. That can often signal a little upward momentum on a day like Monday, but it wouldn’t be surprising to see at least one more test of the 50-day, which has been a key support level all year. 

And speaking of technicals, there’s an old-school indicator—one from Charles Dow’s original technical toolset—that might point to continued pressure ahead: Transports. When the Dow Jones Transportation Average ($DJT) crossed below the Dow Jones Industrial Average ($DJI), it was seen as a sign of weakness to come. If you look at the chart below, you can see that $DJT topped out in May and continued to trend lower, even as the major indices—including $DJI—racked up fresh highs. One day doesn’t constitute a trend (nor does one indicator), but sometimes these old-school data points can help confirm the underlying trend.      

Another technical trend to watch is in the crude market. Front-month crude futures took out one key support level on Monday and came close to falling below a second down near the 100-day moving average. For crude, it was the worst day in four months and slammed prices back to early-June levels. The Covid worries were one weight, and the OPEC+ agreement to bring more crude back on the market was another.

Banks, Energy Playing Defense

So-called “cyclical” sectors like Energy and Financials didn’t just start falling Friday and Monday. They’ve been backtracking over the last month as concerns mounted about the strength of the economic recovery, even before this latest surge of Covid cases.

Financials recovered nicely last week thanks in part to a nice earnings performance from the big Wall Street banks, but yesterday’s collapse in Treasury yields put Financials back on the defensive. 

At the same time, investors have also started rolling into “defensive” sectors like Staples and Utilities that often move higher when economic expectations go down. That’s an interesting trend to monitor this week to see if it has some legs after an ugly performance by the major indices. The trend began before Monday’s particularly bad day on Wall Street. 

A few buyers also landed in Tech on Monday, which wasn’t a huge surprise. When you think back to last year, the stocks that often tended to do best in a Covid environment of low rates were the big growth names, many of which are in the Tech sector. The so-called “mega-caps” like Apple AAPL and Microsoft MSFT, along with the chip sub-sector of Tech, had massive gains in 2020 as people worked from home. It’s important to watch these two, in particular, for possible signs of direction in the coming days.

There’s no guarantee this current Covid outbreak will be anything like last year’s, and hopefully, that won’t be the case. Even so, it feels like investors are pricing in an element of caution, which could help explain the continued strength in the U.S. dollar recently as well as the fall in U.S. government debt yields. 

CHART OF THE DAY: MOVERS AND SHAKERS. The Dow Jones Transportation Average ($DJT—purple line) has been particularly weak in recent months, even more so than the Dow Jones Industrial Average ($DJI—candlestick), which took it on the chin Monday. Some technicians see the $DJT—which is made up of railroads, airlines, and freight haulers—as a leading indicator of general economic strength and weakness. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

After Big First Half, Prepping For More IPOs: Although the market for special purpose acquisition companies (SPACs) cooled off a bit from the Q1 frenzy, traditional initial public offerings (IPOs) are on a tear this year. Several new ones began trading last week alone, and CNN reports that grocery firm Instacart, eyeglasses seller Warby Parker, fintech firm NerdWallet and Walmart WMT-backed Indian e-commerce company Flipkart also could go public in the next six months. More than 200 IPOs have started trading this year, according to research firm Renaissance Capital. That’s up more than 200% from a year ago. These companies raised more than $70 billion, providing proof to some analysts that lots of investors are still out there looking for fast growth.

Inflation Still Out There: With Covid now back in the headlines, let’s not forget the other factor that helped drive stocks down recently—inflation. A Wall Street Journal survey last week showed economists on average now expect inflation—excluding volatile food and energy components—to be up 3.2% in Q4 from a year before. They forecast the annual rise to recede to slightly less than 2.3% a year in 2022 and 2023. That would mean an average annual increase of 2.58% from 2021 through 2023, putting inflation at levels last seen in 1993. Core inflation rose on average just 1.7% annually between 1995 and 2019, by comparison. 

The worrisome thing is that consumers are starting to feel this in their pocketbooks already, at least judging from last week’s Michigan sentiment data. The expected year-ahead inflation rate moved up to 4.8% from 4.2% in June while the 5–10 year expected inflation rate moved to 2.9% from 2.8%.

Crude Faces Tough Path: After a big drop like crude suffered yesterday, it can sometimes take a while to come back. For instance, after crude’s 7.5% decline on March 18, it didn’t recover to close at its March 17 level until April 29. Past isn’t prologue, but it does seem like crude has a few things to work through here if it’s going to make a run back toward recent highs above $75. At its lowest level yesterday, it was down nearly double-digits just from last Wednesday. It’ll be interesting to see the weekly U.S. stockpile and production numbers tomorrow. Last week saw a rise in gasoline stocks, raising questions about demand strength. We’ll see if that continued.

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

Image by Andrés Rodríguez from Pixabay