Travel Stocks Lose Momentum In Pre-Market After Leading Yesterday's Sharp Rally

Key Takeaways:

• The market takes a pause as stock indices lose ground in pre-market trading
• Fed meeting gets underway today, so volume might be lighter
• Several earnings reports due after the close, including Chewy and GameStop

(Tuesday Market Open) A day after making it back to even for the year, the market appears to be taking a pause as investors reflect on this amazing rally and the Fed gathers in Washington.

Stocks ticked lower in pre-market trading as a more cautious tone took hold, with selling seen in some of the travel-related stocks that drove things higher yesterday and gold pushing higher. Some selling today might be a little warranted considering the recent strength of this rally. At some point, people just take profits. If the S&P 500 Index (SPX) can hold 3200 today, it would probably be viewed as a victory.

Bonds are up again today after last week’s selloff, and volatility is gaining some ground. European indices are all lower this morning, too. The 10-year Treasury yield couldn’t hold 0.9% yesterday and is back down to 0.83% this morning, though it remains a lot higher over the last few sessions. Bond buyers are starting to return, though it might have to do with people setting themselves up ahead of the Fed meeting.

We’ll have to keep an eye on the 10-year because Financials have come out to play lately and the Russell 2000 Index (RUT) has also done well thanks in part to strength in mid-sized banks. We’ll see if that lasts. It’s worth noting that caution began to show up even yesterday, as gold and volatility rose even amid the strength in equities. Gold surged above technical resistance at $1,700 an ounce.

The Fed meeting that starts today and ends tomorrow could possibly mean lighter-volume trading, though volume was pretty strong in recent days as the market rallied. Typically, volume and market moves tend to be lighter as a Fed meeting begins, and until very recently, the futures market predicted almost no chance of a rate move tomorrow.

You can never say never, but there’s almost no chance the Fed would surprise anyone and conduct a stealth rate hike. The futures market at CME Group Inc CME does show the chances of a hike at around 16%, which is probably just noise.

A couple of earnings might be worth watching after the close, including Chewy Inc CHWY and GameStop Corp GME. These two are ones a lot of analysts see benefitting from the shutdown.

One Word For Rally: “Stunning”

Many analysts were expecting this to be a very rough recovery following the SPX’s 35% plunge from all-time highs in February and March, but the move we’ve had from three-year lows posted in March is absolutely stunning.

What’s also stunning is how the market continues to just climb and climb despite the economy still being in pretty messy shape. Last Friday’s jobs report came in far better than almost anyone probably expected, though no one would call a 13% reading on unemployment good. There’s definitely a dichotomy taking place between the market and the rest of the economy. A lot of Americans continue to suffer, and that’s not necessarily ending soon.

That said, stocks often provide a forward view. Arguably, the rally into the jobs report reflected investor belief that the jobs situation wasn’t as bad as everyone said. Turns out stocks were right, and most (if not all) the analysts were wrong.

Now we’re seeing airlines, casinos, resorts, rental car companies, and most amazingly, Boeing Co BA, all soaring. So maybe that’s the market telling us there’s a real recovery going on in the travel industry that just hasn’t shown up in the data yet. You can be skeptical about that and say this is all speculation—and you might end up being right. However, if you write it off that way, you risk being as wrong as all of those analysts were about the jobs report.

On A Cautionary Note …

One thing that might keep some investors cautious is the way this rally is being driven without any earnings yet to support it. Earnings season is still more than a month away, and Q2 could be a disaster for bottom lines, for want of a better word.

The argument some make is that Fed policy matters more right now than earnings (see more below) and that most people have already worked in the likelihood of 2020 being a dumpster fire for company results and things potentially getting better in 2021.

It’s important to monitor what the Fed says tomorrow about the economic picture, and also to take a look at the so-called “dot-plot” of where Fed officials see rates headed in the future. This will be the first dot-plot since the pandemic really shut things down. We’ll talk more about all this in tomorrow morning’s report.

In the meantime, it’s incredible to see the turnaround in “outdoor” stocks, meaning stocks of companies that do best when people get back outside from the shutdown. The leading sub-sectors of the S&P 500 last week were oil and gas drilling, department stores, and airlines. These are the same sub-sectors that got taken to the woodshed back in March. As we noted, BA has been absolutely astonishing in its comeback lately, raising hopes that there might be some good news soon on the regulatory front related to the grounded 737 MAX. That remains to be seen.

It’s never “safe” to say anything about the markets. With that caveat out of the way, it does seem somewhat safe (for now, anyway), to say that if airlines and department store stocks are doing well, the rest of the market is likely to also be in good shape. Health in these sectors reflects a re-emerging economy.

It’s also a safe thing to say that when more sectors go up together, it’s a healthier market than when one or two highly-capitalized sectors do great and the rest of the market slogs along or falls. That was the situation early in this rally when tech-led everyone. Now, Information Technology is taking more of a back seat while others lead. Look at Monday’s results as a good example. While Energy led with better than 4% gains, every sector rose, and many gained 1% or more. Materials and Tech brought up the rear.

This widespread advance may not last for long, so it’s important to monitor the situation and see if the wealth continues to be shared. Any sign of tech once again running ahead while everyone else dawdles would possibly be a warning.

Back in the Pool

Retail investors got busy in May, according to the latest reading of the TD Ameritrade Investor Movement Index® (IMXSM). It increased to 4.35 in May, up 11.54% from its April score of 3.90. The IMX is TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions, and activity to measure what investors actually were doing and how they were positioned in the markets.

In May, we started to see optimism really take hold of the markets. Clients were future-focused in their equity buys—as we saw the ‘optimism trade’ take hold in terms of the actual or soon-to-be reopening of state economies—feeding hope of a quick recovery. Combine this with news around potential coronavirus vaccine developments, along with a slowing of cases, and it looks like TD Ameritrade’s clients used this news to step up their exposure to the market for the first time in four months.

Some of the popular names retail traders bought during the period, according to IMX, included Southwest Airlines Co LUV, Walt Disney Co DIS, General Electric Company GE, Wells Fargo & Co WFC, and Norwegian Cruise Line Ltd NCLH. One company that had been popular got on the sellers’ list this time around as investors tracked by IMX net-sold shares of Tesla Inc TSLA during May.

CHART OF THE DAY: RE-ENERGIZED. The Energy Sector (IXE—candlestick) was already in a blue funk before the COVID-19 pandemic rocked the S&P 500 Index (SPX—purple line), but when the economy shut down, crude oil—and the sector in general—took it on the chin and were slow to recover. But recent economic optimism, plus a new OPEC+ agreement in the works, Energy lapped the field Monday, advancing 4.3%. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Paging Powell: The Fed has said it wouldn’t touch rates until inflation moves back toward the Fed’s longstanding 2% target. The question is, what if inflation starts to rise due to an improving economy even while unemployment stays high? Even if we’ve reached the worst of the job losses (not necessarily the case), it seems like unemployment levels could take years to get back below 4%, if they ever do. However, if the Fed is right in its previous forecasts that the second half of 2020 could bring far better economic growth, inflation’s return can’t be ruled out, especially with rates still extremely low.

All this could be the subject of discussion tomorrow when this week’s Fed meeting ends. That’s when investors should consider listening closely to what Fed Chairman Jerome Powell sees ahead for the economy, and what he makes of last Friday’s amazing but also surprising payrolls report.

Do Valuations Matter? Speaking of the Fed, a debate rages about whether this rally is justified when it seems so closely linked to the central bank’s actions. It certainly appears to have caught many fund managers by surprise, and even Warren Buffet sold airlines ahead of the big surge in those shares. Many agree that the Fed adding trillions of dollars to its balance sheet is the main reason for the stock market’s 40% comeback from late March. What they’re worried about is how this rally has affected valuations, with the SPX now trading at around 25 times projected 2020 earnings per share. That’s historically high, and a stratospheric price-to-earnings (P/E) ratio has historically been linked to market peaks—for instance, the dot-com collapse of 2000.

On the other hand, the old adage, “Don’t fight the Fed,” could be making valuation-based investing less important right now, as many investors seem to believe the Fed will be right there anytime the market falls. In the long run, earnings drive stocks. That hasn’t changed. For the moment, however, these are extraordinary times. Fighting the Fed proved to be a losing battle in the years after the 2008 financial crisis, and so far the same has been true in the wake of COVID-19 and its stunning impact on the economy.

Investor, Know Thy Investments: Biotech shares have outpaced the broader market in recent weeks, as optimism about vaccine research grew in May. As much as that news helped, caution could be warranted in this space. Investing in one of those stocks is not what investing in Eli Lilly And Co LLY or Johnson & Johnson JNJ was a year ago. People should try to become more educated whenever they’re investing in something that has an extra element of volatility in it. That knife cuts both ways pretty quickly.

The same arguably goes for Boeing Co BA, which is getting a lot of interest right now. General Electric Company GE, which makes jet engines, is probably enjoying some benefit from the BA rally. Any bad news on the regulatory front could quiet things down pretty quickly. The underlying message? New trends and innovations often create winners and losers among stocks and sectors. But in this market, there’s no such thing as a riskless layup.

This week’s economic calendar. Source: Briefing.com
TD Ameritrade® commentary for educational purposes only. Member SIPC.