Direction Hard To Find As Market Keeps Chopping Ahead Of Key Jobs Data

Looking for direction this week? Consider buying an atlas, because the market isn’t providing much.

Up big on Monday, down sharply yesterday, and mixed today. It’s a choppy pattern, and we’ll discuss lower down why this might be happening. Meanwhile, it’s a morning without big catalysts, because most of the major news this week comes tomorrow and Friday when we get jobs data. World stocks rose today, so it looks like the U.S. market may be taking up the mantle. 

There’s not much in the way of guidance from key indicators like volatility and bonds early today, either. Volatility is up slightly, and the 10-year Treasury yield popped up a few basis points to 1.46%. It’s not carved in stone, but the market seems to be a little more relaxed about yields as long as they don’t make any sudden moves higher like last week. Consider watching 1.5% as a possible indicator. Any move above that could get people worried again, but it’s a level that’s been hard to get through.

The reopening stocks are back in focus, with some of the airline and casino stocks up in pre-market trading. Yesterday’s announcement by the administration that more vaccine supply could be available sooner seems to be helping this segment of the market. Crude is another thing to watch, up about 2% after getting slapped around a bit and falling below $60 yesterday. It’s back above $60 now. 

Tuesday featured a disappointing turnaround from Monday’s exciting move higher, including an ugly close that saw major indices end near their lows. Consumer Discretionary and Tech both took a beating, but just about every sector finished in the red. 

The pressure didn’t discriminate, denting some stocks that had soared on Monday. For instance, both Zoom Video Communications Inc ZM and Apple Inc AAPL—two of Monday’s best performers—hit the skids on Tuesday as investors seemed to adopt a more risk-averse stance. Whether this continues later into the week is anyone’s guess, because things have been fluctuating so much lately. 

After Monday’s Big Meal, Tuesday’s Appetite On The Light Side

What did seem clear is that the appetite for fixed income outpaced hunger for growth on Tuesday, with the benchmark 10-year Treasury yield continuing to pull back and falling to a level nearly 20 basis points below last week’s one-year highs. Some of the better-yielding stock sectors like Utilities and Staples were also outperformers, though they still finished lower.  Volatility ticked up but the Cboe Volatility Index (VIX) didn’t climb above 25, remaining just below that. Keep an eye on VIX this morning, because another tick higher could spell more trouble for stocks. 

A couple things may be playing out here, including fear that yields—even though they seem subdued for now—could begin climbing again. This might be keeping many investors shy about jumping back into so-called “growth” stocks in a big way.

There’s also mixed news on the pandemic front, with the Centers for Disease Control (CDC) warning earlier this week about a possible flattening in what’s been a rapidly dropping caseload. The new variants have experts nervous, and there’s also concern that some states might be reopening too quickly. 

It’s great that Johnson & Johnson JNJ has its vaccine approved, but it looks like supply is a bit limited for now. One interesting note was the Washington Post’s report that Merck & Co., Inc. MRK would help make JNJ’s vaccine. They’re normally rivals, but the pandemic is bringing them together for a good cause. President Biden sounded optimistic about this, saying it could mean enough doses for all U.S. adults by the end of May, moving up the target date. 

It sounds like a broken record to say it, but progress continues being made on fiscal stimulus, so that might be giving stocks a small lift today, too. 

Then there’s LYFT Inc LYFT, whose shares are up nicely ahead of the open after the company said it had its best week for rides since the pandemic lockdown began, according to CNBC.

On the other hand, it’s disheartening to hear news of more event cancellations. For instance, Crain’s Chicago Business reported that the International Housewares Association canceled its  Chicago trade show for the second straight year. It had been scheduled for August. Stuff like this makes you wonder how long things might take to get back to normal, considering that’s five months away. 

Home On The Range?

It also feels like there’s a reassessment going on in the market. Especially in the Tech sector where some valuations were coming into question. So it’s not surprising to see people taking some money off the table in Tech recently, especially with the bond market in flux.

In addition, a trading range might be developing between the S&P 500’s (SPX) 50-day moving average—down near 3815 and a level the SPX has bounced off of several times on recent lower moves—and all-time highs up near 3960 (see chart below). We’ve been wobbling back and forth in this territory basically since early January, almost two months now, despite much better than expected Q4 earnings. 

This could indicate that some investors may have built in positive expectations heading into earnings season and now are looking for a new catalyst before adding to longs. On the other hand, “buy the dip” seems to be holding its own, with the chart showing how the SPX has bounced right back every time it’s hit its 50-day MA the last three months.

All this time, the closely watched 200-day moving average has been creeping up for the major indices, but remains at historic discounts to where the market is trading—a possible factor playing into the cautious stance some are taking. The SPX is more than 12% above its 200-day MA, which sits near 3460, while the Russell 2000 Index (RUT) of small caps is still 33% above its 200-day MA of 1703. These premiums are down a bit from where they were a couple of months ago, but remain at levels where some analysts feel a bit nervous about possible overbought conditions.

Despite the market’s apparent inability to sustain a rally for more than a day or two, the SPX remains up 3% year-to-date, and the RUT is up 13%. The Nasdaq (COMP) is up nearly 4%. These aren’t bad results considering we’ve just started the third month of 2021.

CHART OF THE DAY: RANGE-BOUND SPX. This three-month chart of the S&P 500 Index (SPX—candlestick) shows how closely its stuck to its 50-day moving average (blue line), bouncing off of it several times on dips lower (including last week). On the other hand, there doesn’t seem to be much appetite to push the SPX back up to test recent all-time highs, so the index appears pretty range-bound for now. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Countdown to Payrolls: Today and tomorrow could have investors on the edge of their collective seats waiting for Friday morning’s February payrolls report. Before that, we get weekly jobless claims tomorrow. 

Last week’s claims number was surprisingly low (for the pandemic era) at 730,000. But wait, because that light figure might have been influenced by harsh weather in Texas that kept many people indoors and probably away from the unemployment office. Wall Street analysts expect tomorrow’s claims number to be similar at around 725,000, but be ready for a possible bearish surprise if we get any kind of a post-storm surge. 

The payrolls data have been pretty disappointing since last fall, with job growth actually falling in December and then barely climbing in January as pandemic-related lockdowns took a bite out of the economy. That might have changed a bit in February, based on what analysts are thinking ahead of this Friday’s report. The average estimate is for jobs growth of 200,000, up from 49,000 in January, according to research firm Briefing.com. We’ll talk more tomorrow about specific things to watch for in Friday’s report.

Forward March: We often say the market is “forward looking.” That can work for it, or against it. In the second half of 2020, optimism that better times could come thanks to vaccine progress helped markets reverse their Q1 losses. That led to annual gains few would have forecast in March when the economy and market were deep in the red, but many of those who saw gloom and doom back then probably weren’t looking forward enough. This year, the shoe might be on the other foot. Consider that many analysts have their end of the year SPX price targets in the 4,000 to 4,200 range. The midpoint of that is just 9% above where 2020 closed. It’s also only about 200 points away, or 5%, from where the SPX is now. That would imply we’ve already seen half the gains for the year, and it’s barely March.

While 9% SPX growth is roughly the long-term annual average, it might disappoint some investors who’ve gotten used to double-digit annual gains over the last half a decade or so. But people need to remember, the big gains last year built in better earnings expectations for 2021. Improved index performance would need to see Q1 and Q2 earnings come in even better than analysts expect, because in the end, earnings drive markets. Not 2021 earnings, in this case. If first half 2021 earnings surprise to the upside (like Q4 earnings did),  analysts would likely ramp up their 2022 earnings expectations. See, the market will be looking forward again. 

Low Expectations: Since we’re talking earnings, it was disheartening early this week to see companies like ZM and Target Corporation TGT flash positive quarterly results and have their stocks get hammered anyway. It could speak to positive numbers already being built into the market, resulting in a “buy the rumor, sell the fact” scenario. It’s definitely a pattern to remember going into the next earnings season, because we’ve seen it over and over again so far this year. Perhaps it’s best to keep expectations low, at least for stock market reaction to quarterly reports. Prepare for the worst but hope for the best, as they say.

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

Photo by Saulo Mohana on Unsplash