Walgreen's Shares Fall As Earnings Miss, But Costco Same-Store Sales For June Impress

There’s not much direction on Wall Street this morning despite a slight downturn in weekly jobless claims. The market continues to sputter along ahead of earnings season, and might simply keep bobbing up and down on news of the day until earnings come along to provide more of an anchor. 

Weekly jobless claims of 1.314 million probably won’t be enough to move the needle too much. That number was slightly below analysts’ average estimate and down from a revised 1.43 million a week ago, which is definitely going in the right direction. However, the drop wasn’t too dramatic. Anything above one million a week was basically uncharted territory before this year.

With yesterday’s gains, the market’s risen six of the last seven sessions, and the Nasdaq (COMP) logged its 25th record close of the year. Not too shabby, especially when you consider the gains come along with daily jumps in virus cases across the country to all-time highs. This divergence is nothing new, and neither is asking if it can last. The answer? No one knows, because the virus is so out of anyone’s experience following the market.

We have an earnings sighting this morning. Dow Jones Industrial Average ($DJI) component Walgreens Boots Alliance, Inc. WBA reported a quarterly loss as prescription-filling lost ground. Shares dropped more than 3% in pre-market trading. Earnings per share came up short of analysts’ expectations while revenue was slightly above. 

The Wall Street Journal noted today that the pandemic has been challenging for drugstores, with patients putting off visits to doctors and other health providers. This also could be a challenge for big pharma and medical device companies, and might be reflected in Q2 earnings across that sector.

While drugstores struggled to get traffic, grocery stores continue to pack the aisles. Costco Wholesale Corporation COST reported an 11% rise in June sales, with same-store sales up more than 14%. E-commerce results went through the roof. The COST numbers looked great. You’d expect same-store sales to be up from a year ago, but that’s pretty amazing and it’s a good story.

The dollar has been on the decline lately, a notable exception to action in other so-called “safe haven” investments like gold and bonds, which keep moving higher. Weakness in the dollar might reflect overseas investors shying away at a time when the U.S. appears to be leading the world in a category no one wants to lead: New cases of COVID-19.

What a Wednesday! Retailers, Cruise Lines Revive

“Buy the dip” shows no sign of going anywhere. At least that’s how it looked Wednesday, when major indices bounced back very impressively from Tuesday’s sharp descent and lackluster trading in the pre-opening hours. Even the travel and retail sectors got a lift, with cruise lines showing signs of life and retailer Kohl’s Corporation KSS jumping 9% after receiving an analyst upgrade. 

The retail sector has had more than its share of problems due to COVID-19, as anyone watching this market could probably tell you. Still, there are some companies that seem to be situated a little better than others, and KSS might have advantages because its stores generally aren’t located in struggling shopping malls. Also, the firm making the upgrade cited what it said was a healthy balance sheet for KSS and more than 90% of its stores being open.

It’s important to remember that the retail sector, more than most, represents dozens of different stories. It’s far too complex to think of as one monolith responding to a single set of fundamentals. There’s going to be a drumbeat of retailers filing for Chapter 11 over the coming months, but within a slew of losers there are going to be some winners. Veteran investors typically look closely at individual balance sheets in this space for a sense of who’s well situated and who’s not. 

One thing interesting about the action yesterday was that only six of the 11 S&P 500 sectors actually recorded gains, led by Info Tech (what else is new?) and Consumer Discretionary. Still, no sector really fell out of bed except Materials, which dropped nearly 1.5% despite copper hitting five-month highs on what analysts said was optimism about Chinese demand. Dow, Inc. DOW was a laggard in that sector, and its 3% decline helped keep the $DJI from posting bigger gains. 

We’ve said again and again that the market remains extremely headline-driven and could stay that way into earnings season. On Wednesday, the key headline appeared to come from St. Louis Fed President James Bullard telling CNBC that he’s optimistic on a recovery. U.S. unemployment will likely decline to below 8% or “maybe even 7%” by the end of the year, Bullard said, according to a Reuters report.

It’s apples vs. oranges from the Fed lately, because earlier this week comments from another Fed official sounded pessimistic and helped push stocks lower. Another Fed speaker, Raphael Bostic, is scheduled to speak at midday. 

Investors lately seem to be grabbing onto optimism wherever they can find it, which helps explain how we’ve come back more than 40% from the March lows. More help came yesterday from the “mega-caps” as Amazon.com, Inc. AMZN, Apple, Inc. AAPL and Microsoft Corporation MSFT kept chugging along.

Watching the RUT for Clues

The gains aren’t spread evenly since March, but over the last month things have been pretty neck-and-neck between the S&P 500 Index (SPX) and the small-cap Russell 2000 (RUT), both of which are up about 5% since then. That’s a good sign for anyone bullish, because a healthy RUT is often associated with broader market gains—especially for domestic stocks, which dominate the RUT. 

Back in May, the RUT led the SPX for a while at a time when so-called “value stocks” began to get some love from the Street. That phase didn’t last too long as investors embraced cyclicals over value through most of late June. If value stocks are coming back—and the 1% gains in the beleaguered Financial sector Wednesday were a promising sign—that might be what it takes for the major indices to take another stab at their post-crisis highs above 3200. 

Still, one day isn’t a trend. Financials remain beaten down pretty badly as they approach key bank earnings next week, and analysts anticipate a pretty abysmal Q2 reporting period for the sector. Investors should consider watching which parts of the market lead over the next few days. If Financials and small-caps continue getting a bid, maybe that’s the sign of another sector shuffle taking place.

CHART OF THE DAY: MOVING “RUT” ALONG: Though the small-cap Russell 2000 Index (RUT—purple line) has lost a bit of ground to the S&P 500 Index (SPX—candlestick) over the last week or so, it’s mostly been keeping pace pretty well with the larger caps in the SPX. Yesterday saw the RUT post slightly better gains than the SPX, harkening back to late May when a rally in the RUT helped key a wider rally in “value” stocks. We’ll have to wait and see if this continues. Data Sources: FTSE Russell, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Technically Speaking … From a technical perspective, yesterday’s action in the SPX looked pretty constructive. The SPX made its lows relatively early on, testing an area of technical support some analysts had pegged near 3130 and bouncing right back. The close well above 3150 put the SPX back on what in normal times might be a positive track.

However, trading has been pretty thin lately, so you can’t necessarily depend on technical indicators to provide too much direction. Basically, we’ve been in a relatively tight trading range between 3000 and 3150 over most of the last month, and at least up until now there hasn’t really seemed to be much buying interest above that or selling interest below it. 

So we might stay parked here for a bit unless there’s a major new catalyst. But remember: Next week, banks are set to kick off what will be a barrage of earnings releases over the next few weeks. With expectations already discounted substantially, anything positive could lead to a renewed test of the highs for SPX. But if executives were to, for example, paint a less rosy picture than what’s baked in, we could certainly retest recent lows.

Still in Dry Dock: By now, it’s no secret that the ship has left port on that little bounce for cruise line stocks back about a month ago. Continued delays in getting back out on the high seas put the kibosh on many investors’ hopes, though cruise lines remained net-buys among retail investors tracked by the June TD Ameritrade Investor Movement Index® (IMXSM). The problems for cruise lines go well beyond just getting ships in the water. These companies have to burn a lot of cash to maintain their boats, and now there’s a special task force on cleanliness. Beyond that, everyone is likely to be ultra-conservative because they don’t want someone to get sick on board and file a lawsuit. This industry really needs a piece of good news, and it’s hard to see where it might come from in the short-term. It may take a couple weeks of cases going down around the country to get people optimistic again about getting back onboard this particular sector.

Back in the Game: One thing the market seemed to draw some enthusiasm from early this week was legendary investor Warren Buffett’s first deal since the pandemic. Dominion Energy, Inc. D agreed to sell its natural gas assets to Berkshire Hathaway, Inc. (NYSE: BRK-B) for $4 billion in cash.

Buffett, as most investors probably know, has a big stash of cash that hasn’t exactly been burning a hole in his pocket lately. When Buffett doesn’t buy, it can cause concern about his confidence level, which is closely tracked since he’s the “Oracle of Omaha.” This deal might have helped ease some minds. Sometimes when the market sees Buffett’s hand going to his wallet, a tight M&A picture can loosen up a bit.

Good Trading,
JJ
@TDAJJKinahan

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