Disney, Beyond Meat And Video Game Makers All Set To Report As Firm Tone Continues

Maybe last week’s pause refreshed the market a little.

There’s a positive tone on Wall Street early Tuesday following Monday’s late recovery. Crude continues to advance, and that seems to be providing the fuel. With the exception of Japan, overseas indices all advanced overnight and some of the “horsemen of risk” like bonds and gold retreated.

So what’s going on here? There’s a line of thought that strength in crude reflects hopes for growing energy demand as some U.S. states start to reopen. California is the latest, though it’s just taking a few steps like allowing curbside pickup at retail stores. There’s a long way to go, but as we’ve been saying, people seem relieved to have a more normal life around the country, and you see that correlation with crude having a good day.

When investors focus on “green shoots” like individual states coming back, it often gets reflected in the Information Technology sector. Same thing when investors get pessimistic. The large-cap tech stocks like Amazon.com, Inc. AMZN and Apple, Inc. AAPL that got sent to their rooms without dinner last week are the same ones starting to show a little strength now. Also, airline stocks—which got hammered yesterday—appear to be getting a bounce this morning. 

If the S&P 500 Index (SPX) moves higher, it could start to meet a zone of resistance between 2856 and 2882, which research firm CFRA calls an “inflection point” that the SPX wasn’t able to stay above last week. If a move above that is accompanied by a rise in volume, that would probably give people more faith in the market’s strength.

Focus Shifts to Disney After Close

Data today are a little thin except for the ISM non-manufacturing index this morning right after the open (see more below). Instead, focus is likely to shift to a couple of key earnings reports after the close as The Walt Disney Company DIS and Activision Blizzard, Inc. ATVI open their books. DIS has fallen significantly more than the broader market over the last three months, losing about a quarter of its value amid concerns about the company’s theme parks and movie business. 

The stock got downgraded yesterday by MoffettNathanson as an analyst there said the “economic impact on the company will be longer than most anticipate, especially given the risks of a second wave of infections after reopening,” MarketWatch reported. Later today, maybe investors will learn if DIS executives can deliver any kind of counter-narrative that might inspire more optimism in the land of the mouse. 

There are a few other interesting earnings reports later today, too, even if they’re not necessarily going to move the market. For instance, Beyond Meat, Inc. BYND is on the calendar. This could be worth monitoring, especially on the heels of the things going on with meat packers where some plants are shutting down due to the virus. So consider hearing what BYND has to say about whether they see any demand shifting toward their product—or away from it, considering the number of their restaurant partners that have dialed back their menu offerings during the "curbside pickup" era. 

Electronic Arts, Inc. EA joins ATVI on the earnings front this afternoon. We’ve heard about the “stay at home trade” in terms of streaming companies, but not so much from video game makers, so stay tuned.

Three Fed speakers are out there today, but with rates frozen at nearly zero and unlikely to move anywhere for a long, long time, it’s unclear what any of them could say that might influence the market. 

Earnings could remain in focus early tomorrow as General Motors Company GM and Carnival Corporation & PLC CCL report. Both had targets painted on them by the pandemic, with cruise lines getting especially beaten up but car companies also suffering weak sales the last two months.

Speaking of cruise lines, a headline flashed soon before the open today that Norwegian Cruise Line Holdings, Ltd. NCLH included a remark in a financial disclosure statement that there’s “substantial doubt” whether it can continue as a “going concern.” Shares are down nearly 9% in pre-market trading. 

Monday’s Late Reprieve

Until the last hour, yesterday was about as exciting as watching paint dry. 

The market had opened lower and basically stayed around the same position most of the session, with the exception of some positive moves in Nasdaq (COMP) as Information Technology revived a little after slumping last Friday.

Then came the final hour, and boom! A very impressive rally that spread across nearly every sector. Energy led, but Technology, Materials, and Utilities also performed well. It was especially good to see the tech sector come back after it led the way down on Friday. Remember, however, that some of the biggest tech companies can sometimes have an outweighted impact on the major indices. It’s important to keep tabs on whether a rally spreads to other sectors, too. 

While Monday’s gains didn’t make up for huge losses the previous session, they did help arrest a two-day slide and maybe put the indices into a better technical position.

Specifically, the SPX slid below the psychological 2800 level during Monday’s session but then closed above a key support level at 2830, which also was where it closed last week. To get more technical for a second, yesterday’s close was also slightly above the 61.8% retracement level from the mid-February high to the late March low, so settling above that could be meaningful. A second close above there would reinforce this perception of technical strength, but we’ll have to wait and see. 

Volatility also stepped back a little yesterday and the 10-year yield held its ground, both positive signs. 

Energy as a Leader?

The Energy sector seems to be getting some support from a healthier crude market, though crude prices aren’t high by any stretch of the imagination. Seeing the June crude contract close above $21 a barrel Monday and then climb above $22 early Tuesday could be a sign of a little demand starting to creep back. 

In fact, a U.S. insurance executive speaking on CNBC said Monday that traffic on the roads appears to be perking up. This could be because a few states are reopening or a case of “spring fever” taking hold among some of the shut-ins. Either way, it might raise demand for crude, but at the same time might raise concern about people not taking stay-home orders with as much urgency. 

If you’re feeling tempted—as some investors appear to be—to take a chance on the troubled Energy and airline sectors, it’s important to go in very carefully. This is still a really volatile situation, and crude could possibly see pressure again over the next two weeks as the mid-month expiration of the June contract gets closer. Investors are already starting to roll into the July contract. 

Tomorrow’s weekly crude supply and production report from the U.S. government could give a better sense of how demand might be shaping up. Last week’s stock build was a little lower than many analysts had expected, typically a sign of improved demand. Still, storage facilities are getting pretty full, which tends to pressure the front-month contract.

To expand a little on what we said above, investors need to consider treading extra carefully in the Energy sector and other ones like airlines that have suffered so much recently. Not every company is going to necessarily get through this. New bankruptcies could happen. Anyone who’s thinking about taking a flier should look closely at the particular company’s books to check on debt levels. Generally, it’s more likely that companies with less leverage have a better chance of getting through these tough times.

CHART OF THE DAY: ENERGY BURST: The Energy sector (IXE—purple line) is still down far more than the S&P 500 Index (SPX—candlestick) over the last three months. Still, Energy had a good day on Monday and appears to be gaining a bit of ground overall along with the rest of the market despite cratering earnings and crude still hanging out near $20 a barrel. Hopes of improved demand might play into this, but tomorrow’s weekly stockpiles report could shed light on whether demand is actually perking up. 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.

Boats and Planes: Retail investors apparently are looking to jump into some of the hardest-hit areas with their recent approach, according to fresh numbers out yesterday from TD Ameritrade’s Investor Movement Index® (IMXSM). The IMX is TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets. 

While the IMX as a whole fell to 3.9 in April (meaning investors tracked by IMX decreased their exposure to stocks during the month), it’s interesting to see what stocks they were buying. Some of the “net buys” included major airlines like United Airlines Holdings, Inc. UAL, Delta Air Lines, Inc. DAL, and American Airlines Group, Inc. AAL. Cruise line operators Carnival (CCL) and Royal Caribbean Cruises Ltd. RCL were also net bought. Boeing Co. BA saw net buying, and so did a couple of big banks and Exxon Mobil Corporation XOM. These are stocks you don’t necessarily expect people to go to at this time, and Warren Buffett didn’t help things any when he announced a few days ago that he’d gotten out of airline stocks.

The Whys and the Wherefores: The IMX seems to indicate that some retail investors think the country needs airlines, so they will come back. If that’s your rationale, you’d better have a long-term view because it’s hard to believe they’ll ramp up that quickly, and many of the airline executives are saying exactly that. Although the IMX showed clients lowering their overall exposure to stocks in general, the stocks they did buy (like airlines and energy) appeared to reflect where they believe consumer demand will return, although many of them may not be short-term plays. In other words, it looks as though retail investors are skating to where they think the puck is going to be, not toward where it is now. People are increasingly taking the long view with heavy buys in the Consumer Discretionary and Industrial sectors. 

At Your Service: About 77% of Americans now work in services jobs, according to the Labor Department. This morning, the services sector comes into sharp focus with the April ISM Non-Manufacturing Index. As we noted last week, it’s been service-based jobs that bore the brunt of the coronavirus lockdown. Many wonder how long it might take to get these service jobs—servers, stylists, office staff, and the various clerks and agents—back up and running. And will the demand return once they do? A few states have reopened, but in Illinois, for instance, a salon worker would risk losing his or her state license if they agreed to cut your hair right now. 

Those states that did reopen last week didn’t exactly see people breaking the doors down to get into stores, according to media reports. This suggests reopening could be getting ahead of demand, though we don’t know by how much. In March, the ISM services reading came in slightly above 50, which points to expansion but might have been lifted by some metrics getting out of whack due to the virus impact. This time around (and you may already have seen the number by the time you read this), the consensus is for a headline number of 38.5, according to Briefing.com. It last fell below 40 in the depths of the 2008 financial crisis.

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