"Stay at Home" Stocks Still Rule the Roost as Nvidia, Microsoft, Apple Start Week Firmly

Key Takeaways

• The early focus remains on reopenings, worries about new Asian virus cases
• Crude gets a lift from Saudi plan to cut production further
• Consumer prices dropped 0.8% in April, in line with analysts’ expectations

(Tuesday Market Open) Without many directions from overseas markets or new developments, U.S. stocks look like they’ll continue taking the path of least resistance Tuesday. Lately, that’s been higher, and pre-market trading pointed to more gains.

Fresh catalysts are hard to find, which means we could see things drift up as reopenings seem to be going fairly well. This morning’s U.S. inflation data and testimony to Congress on COVID-19 from Dr. Anthony Fauci are the main agenda items. Consumer prices for April came in this morning at a negative 0.8%, in line with analysts’ expectations.

It’s kind of like deja vu all over again, as the pace of reopenings and worries about new cases in Asia dominate the news cycle today. Kind of similar to yesterday, when stocks ended up trading both sides of the ledger before closing mixed. Reopenings seem to be going fairly well so far, but it’s obviously a small sample size. As long as that continues to be positive, it’s possible investors will continue to buy stocks. However, if cases start to increase, look for signs of people selling.

Crude prices jumped 5% this morning, possibly getting some assistance from Saudi Arabia and some neighboring countries saying they’ll cut production even further. With crude now above $25 a barrel and the Cboe Volatility Index (VIX) rapidly moving below 30 so far this week, it looks like crude and VIX might catch each other. Who would have thought that a month ago when VIX was way above 50 and crude was heading down to ultimately below-zero on the day of the May contract closing.

Monday’s flat S&P 500 (SPX) close felt kind of bittersweet. While the SPX did recover from losses at the open, the finish near 2930 came after a failure to hold session highs above 2940. The SPX continues to struggle with what might be technical resistance in the 2940–2950 region, and some analysts think a close above 2950 is needed to help squeeze some of the shorts and give the index a quick boost.

It could be tough for the SPX to develop that kind of momentum if the Financial sector continues to lag and if the market can’t find fresh positive catalysts. With earnings in a lull and data not really too exciting this week, maybe stocks could find themselves in a holding pattern. That looked like the case for many sectors on Monday, with one huge exception.

Couch Potatoes Ruling the Roost

Stuck at home? So is the stock market, and that’s not necessarily a bad thing for investors who positioned themselves to ride this particular wave.

The tide continued to roar Monday for so-called “stay at home” companies of all sorts, from cyber-security to semiconductors to gaming to big tech to data centers. This helped keep the Nasdaq QQQ on top of the major indices as it continues to benefit from all the tech stocks that call it home.

Some of the leaders Monday included Nvidia Corporation NVDA, Activision Blizzard Inc ATVI, Apple Inc AAPL, Microsoft Corporation MSFT, Zoom Video Communications Inc ZM, and Netflix Inc NFLX as the COMP rose about 0.8% for its sixth-straight positive close. AAPL is getting back near its all-time highs, and NVDA posted a new all-time high Monday.

Basically, if you can use it to work or get other things done from home, it was up to start the week. What’s getting left behind again are the sectors that do better when people are out and about, like Materials, Financials, and Industrials. All those sectors fell 1% or more Monday as the market basically bifurcated.

It was a bit of a conundrum seeing Financials flop Monday despite a nice rise in bond yields. The 10-year Treasury yield climbed above 0.7% and is now about 10 basis points above last week’s lows ahead of a large auction this week. The track of the 10-year remains a pattern to watch for potential insight into investors’ economic hopes. The yield hasn’t gone above 0.75% since April 13, so that could be a psychological resistance level. Could a push through that send a positive message through to the bank stocks? It’s anyone’s guess.

Materials and Industrials haven’t gotten much of a bid recently as hopes for some sort of U.S. infrastructure passage have faded. Worries that there might not be more fiscal help from Congress could be weighing on this sector. DuPont de Nemours Inc DD and Caterpillar Inc CAT were among the big names not having a good Monday. In the bank sector, JP Morgan Chase Co JPM continues to have trouble getting much traction above $90 a share, an area it’s been circling around for weeks.

Tomorrow brings producer prices for April. The consensus is for a 0.5% decline in the headline number, according to research firm Briefing.com. However, analysts expect just a 0.2% decline in core prices, which strip out volatile energy and food. Big drops in energy prices might skew the data, though it’s worth noting that wherever deflation is coming from, it’s not a constructive thing for the economy.

Not Getting a Leg Up

We’re kind of in an earnings dry spell before the big retailers start reporting. Still, one company that opened the books early this week and could be thought of as a sign of the times was medical device maker Zimmer Biomet Holdings Inc ZBH.

We’ve seen a lot of headlines about how the Health Care sector has suffered from a lack of elective procedures like knee replacements as hospital resources get strapped by the pandemic, and ZBH executives offered more evidence. They talked about a deferral of procedures that they expect to continue in Q2, and have withdrawn guidance. Shares of ZBH were down Monday, but have rebounded very nicely from the March lows and are about halfway back to early 2020 highs.

Though ZBH didn’t seem to please investors with its results, it and other medical device firms like Stryker Corporation SYK and Medtronic PLC MDT could be decent barometers in coming weeks and months for a sense of whether hospitals are starting to emerge from the worst of the pandemic.

Other earnings are on the calendar later this week, including Cisco Systems Inc CSCO tomorrow afternoon and word from a couple of cruise lines on Thursday. Obviously that industry has been devastated, so hearing from executives could provide some clues about how and whether they expect any recovery. One positive is that millennials still seem interested in taking cruises once they start again, though the question is how older customers might feel.

Earnings pick up next week as some of the big-box stores head to the register. That includes Target Corporation TGT and Walmart Inc WMT.

Also on the calendar tomorrow morning: A speech from Fed Chairman Jerome Powell. That could be a chance to hear what else the Fed might have up its sleeve to help the economy recover. The title is “Current Economic Issues,” which leaves the subject matter pretty wide open, so be ready for any potential market reaction.

CHART OF THE DAY: PULLING UP THE SOX: Though you could argue there’s no direct relationship between the two, the recent trend toward lower volatility (VIX—candlestick) happens to correspond with a long upswing in the semiconductors (SOX—purple line). Less volatile times do sometimes encourage investors to put their money into traditionally higher-beta stocks like the ones in SOX. Data Sources: Cboe, Philadelphia Stock Exchange. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

VIX in the Mix: During a volatile period nearly a decade ago, The Wall Street Journal ran a cute headline: “No Quick VIX For IPOs.” It was true then and true today. When VIX is historically high, few initial public offerings (IPOs) tend to happen. Why not? Partly out of general economic concerns, which tend to rise along with VIX, and also because a choppy market can make it tough to figure out how to price things. That’s a huge challenge for anyone planning an IPO, and rough for the big banks that rely partly on IPOs for their revenue.

Only 35 companies went public in Q1, according to FactSet. That’s down 15% from Q1 2019 and off 35% from Q4 2019. Now comes word that online used-car seller Vroom Inc. has filed confidentially for an IPO it hopes to stage in June, MarketWatch reported.

One IPO isn’t a trend, but if you start to see more of them hatch, that could be an indication of growing confidence that the most volatile times might be behind us. One positive is seeing the VIX fall well below 30 yesterday as the trend continues lower for that metric.

No Guidance? Maybe No Problem: The improved spirits these last few weeks ironically correspond with an earnings season that’s seen more and more companies either pull previous guidance, decline to provide new guidance or both. You might be wondering how investors could be rewarding companies that do this, but if you think a bit deeper, it kind of makes sense. Investors seem willing to forgive some uncertainty when there’s so much up in the air surrounding the economy as a whole.

On the other hand, when companies do put guidance in these confusing times, people can often get skeptical. When a company says, “We don’t know, we’re leaving it to you to try and decide,” people often tend to be a little more optimistic. When companies put hard numbers to it, you have an opportunity as an investor to say, ‘There’s no way I believe in those numbers.’ And so the takeaway some people get is that the company can’t possibly beat those, and that tends to generate less enthusiasm.

End of May Could Mark an Inflection Point: A big test of the market’s optimism looms at the end of this month when a growing list of U.S. states prepare to reopen. At that point, we might find out that things can’t just return to normal the way some investors seem to expect. It goes back to the “middle seat” test we referred to a few weeks ago. When things open up, how long will it take for people to feel comfortable sitting in a middle seat on a plane, attending a festival, or going to a ballgame? It could be a long time until planes and stadiums are even close to being back where they were, even assuming virus cases start to drop.

Also, if businesses open, it probably won’t be all at once. They’ll likely be having a few people at a time to start and not the full crew. A big worry for the market is that there’s an assumption things can pick up right away, but it’s going to take a while for us to get going again. That could set things up for weakness in late May or mid-June. That’s the next real test for the market. Optimism meeting reality is what’s likely going to happen there.

Good Trading,

JJ

@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com

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