Key Earnings Week For Consumer Sentiment, With Nike Among Big Names On Schedule

Instead of calming things down, the two-day break just seemed to add to the market’s problems after three red weeks in a row. 

It’s easy to point to possible reasons why futures fell off a cliff overnight, but three big ones stand out, all based on developments since Friday’s close. First of all, the death of Supreme Court Justice Ruth Bader Ginsburg means the political scene now seems more hostile, decreasing the possibility of a stimulus deal getting done.

Second and third are rising virus cases in Europe with word of more shutdowns there, and a published report by BuzzFeed about banks allegedly being engaged in money laundering.

To these primary factors, you could probably add seasonal weakness, sector rotation, valuation concerns, and pre-election jitters.  

What it ultimately comes down to is whether buyers step in on the dip. We could get an early answer. If there’s a wave of selling after the open, will the surf continue rolling in or will buyers look at things and sniff out some possible bargains? Remember back on Thursday and Friday, Tech shares did find buying interest late in the session. We’ll see if that pattern continues.

Volatility popped early Monday as futures took their punches. One thing to consider watching today is whether the Cboe Volatility Index (VIX) can finish below 30. That’s a level it’s flirted with but stayed under in recent weeks. Any move to 30 or higher might spell more near-term trouble for stocks. 

With this overnight plunge, the S&P 500 Index (SPX) is getting down to some levels that might be key for support. Going into September, research firm CFRA noted that the “bullish bias” would likely remain if the SPX stayed above a range between 3212 and 3259. It’s looking like it might test that level after falling under former support at the 50-day moving average on Friday. The level around 3240 is one where you might see some buying interest come in, if chart-watchers are right.

The 100-day moving average is still a bit far away at just below 3200, so about 2% below where futures were trading ahead of the opening bell.

Consumer Barometers Ahead

There’s no shortage of interesting earnings reports this week, with the list expected to include Nike Inc NKE, Costco Wholesale Corporation COST, Darden Restaurants, Inc. DRI, and Carnival Corp CCL. Even if only one of these consumer-related companies were reporting it would be worth mentioning. All four in one week seems like an embarrassment of riches for anyone trying to zero in on consumers. 

That means consumers outside the U.S., too, in the case of NKE. That company, which is expected to report after tomorrow’s close, is often a good barometer of Chinese consumer health, and retail sales in China actually climbed 0.5% in August but are down more than 8% for the year. With NKE and the other reporting companies, it could be useful to check in on earnings calls even if you don’t own shares or care a whole lot about their numbers, because restaurants, cruise lines, and grocery stores really reflect a broad slice of the U.S. economy. 

Consumer sentiment and retail sales here have been slow to rebound from the pandemic lows, but the economy needs strength here to really start thriving. Maybe these firms could give us some color. Are people booking cruises for the holiday season and beyond? Are people going out to restaurants more often? 

Last week stirred up a little hope that maybe Congress and the White House could cobble together a stimulus package before the election. A turbulent Washington weekend slapped that hope right back down. Between the election just six weeks away and a possible fight over a Supreme Court seat, there might not be much air left in the room for any coordinated efforts on fiscal policy. Perhaps some stimulus hopes had been built into prices and now is getting chipped away. 

This week is a little light on data. Key reports include existing home sales tomorrow and new home sales Thursday. Then there’s always the Thursday morning drama of initial jobless claims, which have been stubbornly high the last few weeks. Consensus on Wall Street early this week is for a slight drop, but we’ll see how it shakes out. 

Return Of The Techs?

There are a few things you can hang your hat on, including stocks like Tesla Inc TSLA, Peloton Interactive Inc PTON, and Zoom Video Communications Inc ZM all holding in pretty well on Friday despite Tech selling. With TSLA, there might be some fundamental backing for the rise, with a couple of analysts raising their price target and citing strong pent-up Model 3 demand. 

“Battery Day” Tuesday might also have given TSLA shares a more positive spin. Barron’s notes that the day “is a big day” for the stock, and CEO Elon Musk has Tweeted “Many exciting things will happen.”

Outside of equities, there wasn’t much in the way of cheer. Crude fell back toward $40 a barrel after a spike last week. Bonds are up, a possible sign of investors seeking potential “safety” there, though no investment is truly “safe.” Gold, on the other hand, is down sharply.

CHART OF THE DAY: BELOW AVERAGE. Though futures on the S&P 500 Index (/ES - candlestick) flirted with the 50-day moving average (blue line) earlier last week,  it wasn’t until Friday that /ES closed below it. This morning’s follow-through break seems to have put the 50-day solidly in the rearview mirror for the time being. Meanwhile, the 100-day moving average (pink line) looms about 2% below current levels. 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. 

Tech Perspective: The Nasdaq (COMP) can’t seem to catch a break lately. It fell Friday to new lows for the current correction it’s in, and traded at levels not seen since early August. All this might sound bad, and it certainly can feel bad if you’re watching your shares of Tech stocks getting hammered day after day. Still, let’s try to keep some perspective. The COMP was still up 20% year-to-date and up more than 60% from the March lows as of the end of last week. 

What does seem pretty obvious now is that the correction going on isn’t like the brief blip we saw in June, but might be more of a rotational shift within the market as people take profit and reinvest elsewhere. One question is whether this is related to the end of the quarter, which could mean there’s a chance of things getting better once October and earnings begin. Another question is whether this might reflect early jitters ahead of the November election and investors deciding they’re not comfortable with big exposure to stocks whose valuations had become historically high.

Something About September: Another factor at work here could be seasonal. Ask a lot of market veterans, and they’ll probably remind you that historically, September is one of the worst months for the market. In fact, the old saying, “Sell in May and go away” is based on ideas that May through September often tend to see worse market performance than October through April. Not that anyone should base all or necessarily any of their trading on seasonals, but it might be a little comforting to know that historically, we’re in a soft place on the calendar.

Earnings Exuberance Ahead? Maybe Not So Fast: If you were holding out hopes for a Q3 earnings rebound, research firm FactSet had some bad news over the weekend. It projects S&P 500 earnings to fall 21.8% year-over-year. Softness in the Energy sector plays a big role, with earnings there seen down more than 100%. Industrials, Consumer Discretionary, and Financials round out the bottom-four sector showings, FactSet said. 

Any silver lining? Maybe. Consider that last quarter, more than 80% of companies beat analysts’ estimates, and the stock market generally performed well during earnings season. The low bar of weak expectations can sometimes have its merits.

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

Photo by Thomas Serer on Unsplash