Stock Indices Struggling to Build on Tuesday's Record Highs

Equity index futures are mixed as investors try to process surprising developments in the Virginia and New Jersey gubernatorial races. Republican candidates made some surprising gains, which can sometimes happen in mid-term elections. The developments bring questions of how the Democrat party will react to the results considering their infrastructure and climate change legislation.

Investors may also be hesitant ahead of today’s Fed announcement. The Fed is expected to discuss its tapering plans and the possibility of rate hikes in 2022. Look for my Fed reaction this afternoon.

Also, this morning, the ADP Nonfarm Employment report was much higher than expected. This could be a good sign for Friday’s Employment Situation Report and could give the Fed more confidence in their taper plans.

In earnings news, Lyft LYFT was up 14% in premarket trading. After Tuesday’s close, the company announced better than expected earnings and revenue. The company was projected to report a loss but instead reported a nickel per-share profit.

R. R. Donnelley & Sons RRD announced that it’s merging with Atlas Holdings. The news prompted a 40% rally in the stock before the opening bell.

Short Covering

Short sellers are in the news once again with Bed Bath & Beyond BBBY. The company is up more than 50% in premarket trading after announcing an e-commerce partnership with Kroger KR to sell its houseware. The news pushed the stock higher, but Investors’ Business Daily reports that the price is also benefiting from short-covering.

Short covering appeared to help rental car company Avis Budget CAR price climb after announcing much better-than-expected earnings and revenue. The announcement triggered buying that caught short-sellers off guard. The shorts scrambled to close their positions, which drove the price of the stock up 218% before retracing in the afternoon session and closing 108% higher. The excitement appears to be waning because the stock is down more than 10% in premarket trading.  

The Avis development pushed the Dow Jones Transportation Average ($DJT) index 6.88% higher. This event can act as a word of caution on how one or just a couple of stocks can skew the performance of an index.

Other stocks rallied on their earnings announcements too. Arista Networks ANET was up 20%, Estee Lauder EL was up 4%, Pfizer PFE was also up 4%, Under Armour UA was up nearly 14%, and Zebra Technologies ZBRA was up almost 8%. The news helped the S&P 500 (SPX), Dow Jones Industrial Average ($DJI), and Nasdaq Composite GIDS to new record highs.

Gasping for Breadth

On Monday, the Russell 2000 (RUT) rallied more than 2% to test its 2021 high. The rally looked to be the surge of market breadth investors have been looking for. However, on Tuesday, the index failed to follow through and resistance around the 2350 level appears to be holding for now.

Market breadth is a sign of investor sentiment. Widespread buying can be a sign of bullishness. Narrow buying can be a sign of bearishness or at least hesitancy. The Russell 2000 is an index of 2,000 of the smallest publicly traded stocks. When investors are bullish, they tend to invest more in smaller companies because they’re willing to take on the risk. However, when investors are bearish, they tend to stick with the bigger and more reliable stocks.

Yet, there’s still hope for the bulls on the breadth side. The NYSE advance/decline (A/D) line has broken to new highs, suggesting that the majority of stocks traded on the NYSE are advancing or rising. The A/D line gives equal weight to each stock, so larger stocks don’t usually skew the results. However, the higher listing requirement for the NYSE does tend to attract more established companies. 

CHART OF THE DAY: FRESH BREADTH. The Russell 2000 (RUT—candlesticks) appears to be testing resistance. Compared to the S&P 500 using the relative strength indicator (green), the Russell 2000 has been weak since March. However, a divergence could be emerging with higher lows on the relative strength line. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results. 

Divergence Emergence: My technical analyst friends often talk about how momentum tends to lead price. Like throwing a baseball in the air, you can see it begin to slow and anticipate the change of direction. Similarly, technical indicators, like relative strength, can help signal potential changes in momentum when divergences appear.

A bullish divergence occurs when the indicator appears to be bullish, but the price is trending bearish, or neutral. A bearish divergence occurs when the indicator appears to be bearish, but the price is trending bullish or neutral. 

The Russell 2000 has moved sideways since March, which was reflected in the declining relative strength line. Recently, the relative strength line has started to create higher lows, which suggests that momentum could be changing. However, the bulls need to gather more strength to break resistance.  

Housing Fire Sale: More bad news for Zillow ZG as the stock price fell more than 10% on Tuesday and is down another 15% in premarket trading. The real estate platform company, turned housing speculator, looks to sell 7,000 homes for $2.8 billion to institutional investors. According to Bloomberg, the company got overextended and bought too many homes just as the housing market was starting to soften.

One analysis of 650 Zillow-owned homes showed that two-thirds of them were priced lower than the purchasing price. Business Insider reported last week that the company was selling 64% of its homes in the top five markets for less than what the company paid for them with 93% of its homes in Phoenix, Arizona.

Competitor Opendoor OPEN fell 14.7% on Tuesday despite no immediate news. Investors could be concerned about a Zillow contagion or that Opendoor may have similar pricing issues.  

Getting Real: Housing market data tends to come in a little slower, but as of September, it appears it was cooling off a little. The St. Louis FRED reported that the current housing supply across the United States was back to normal ranges in September. While realtor.com reported that listings were averaging about 10 days longer in September than they did in June, and the average listing price was about $5,000 off the summer’s high.

While local housing markets could vary greatly, generally speaking, the housing market in the United States appears to only be a bit slower when compared to earlier in the year. Most metrics on realtor.com were still higher on a year-over-year basis.

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

Image by David Vives from Pixabay