Costco Shares Come Under Pressure Despite Strong Earnings, Same-Store Sales

(Friday Market Open) It’s often said that markets climb a wall of worry. Well, it feels like there’s a lot to worry about this morning, and that’s slowing the long rally heading into the weekend.

A weaker tone took hold overnight as investors awaited the administration’s latest words on China. The talk has been heating up and today we might find out what sort of action—if any—the White House plans to take at President Trump’s news conference.

Depending on what President Trump announces and any counterpoint China takes, things could get nastier pretty fast in their relationship and scramble an already struggling global economy even more. This nervousness could be reflected in crude being down this morning and people coming in to buy bonds.

Compounding the uncertainty, Fed Chairman Jerome Powell is scheduled to speak at 11 a.m. ET today. It’s not a formal speech, just what’s called a “conversation” with a moderator at Princeton University. Still, you never know what Powell might say that’s potentially market-moving.

In addition, this is the last day of the month, which sometimes means a little profit-taking and possible higher volatility. Cboe Volatility Index futures (/VX) crept above 30 early on. Yesterday saw three-day winning streaks snapped for the Dow Jones Industrial Average ($DJI) and S&P 500 Index (SPX) and a five-day victory streak ended for the Russell 2000 Index (RUT). Bonds are higher this morning as caution creeps in.

Investors are punishing Costco COST this morning despite revenue that beat Wall Street’s expectations and a comparable sales rise of almost 8%. One issue might be that competitors like Walmart WMT and Target TGT had double-digit same-store growth. Also, COST’s comparable sales fell in April, and the company had higher expenses as it paid out overtime and implemented safety measures.

It looks like COST benefitted from people stocking up during the crisis, so maybe there’s some concern that sales got pulled forward and might not be as strong with the economy now reopening on so many fronts. On an interesting note, 4% fewer people visited COST stores but spent an average of 9.3% more per transaction.

Salesforce CRM shares also took a licking in pre-market trading as the company beat earnings forecasts but trimmed their forecast.

Can We Hope for a “Turn-Around Friday?”
That was an ugly close yesterday, no doubt about it. Luckily, there’s still a day left this week and month to see if the market can leave a better taste in our mouths heading into the weekend.

The Philadelphia Semiconductor Index (SOX), Apple AAPL, and Microsoft MSFT were among those hardest hit late Thursday by the China fears, though they’ve all generally managed to do pretty well throughout the combined crisis of last year’s trade war and this year’s pandemic.

The other thing that possibly tripped up stocks late yesterday might have been thoughts that the market has just come too far, too fast. It’s the end of the month, and sometimes investors and money managers take the opportunity to reassess when they arrive at these kinds of junctures. Also, it’s a time when you often see profit-taking. That’s why you can’t necessarily rule out another ugly close today.

A Merry May, at Least for Wall Street
Even if things skid a bit, it’s hard to get too disappointed about the way May went. Both the $DJI and SPX managed to consolidate the sharp gains they made in April and move above areas of key technical resistance despite a constant background of horrible data and some rough earnings reports. As of Thursday’s close, the SPX had advanced 4% in May and was back above 3000 and above its 200-day moving average for the first time since early March.

Some of the sectors that had revived in recent days, like Financials and Industrials, hit the dirt on Thursday as investors headed back into more cautious sectors like Utilities and Staples. That went counter to May’s encouraging trend that saw Industrials, Communication Services, Financials, Energy, and Materials all climb double-digits since April 30. When you see these sectors outpacing the “defensive” ones like Real Estate and Utilities as well as Information Technology—the market’s favorite security blanket the last few years—it can suggest many investors see light at the end of the pandemic tunnel.

Whether they’re right remains to be seen, and June could be a month that goes a long way toward providing some answers. The pandemic still rules the roost, as anyone who saw the devastating jobless claims yesterday would probably acknowledge. While some jobs appear to be coming back, that’s not too evident yet in the numbers. Without jobs returning, sentiment could remain on the mat. That’s a terrible situation not only for those without employment but also for consumer demand that drives so much of the corporate earnings picture.

After climbing more than 35% combined in April and May from the late-March lows, it wouldn’t be too surprising to see a bit of a “June swoon,” especially considering that summer is historically a weaker time for the markets. That said, there’s still a lot of money on the sidelines, and investors probably don’t have many other great choices right now if they’re looking for yield. The bond market still shows no real sign of giving up ground in a way that might make yields there more attractive to investors.

One Canary Took Wing This Month
Another thing investors probably shouldn’t ignore is the amazing May performance of the Russell 2000 Index (RUT) of small-cap stocks. While the RUT took a major blow yesterday, it’s up 11% so far this month, way better than the SPX. As we’ve been noting, small-caps can sometimes be a canary in a coal mine for the economy. If they keep putting on a show like this in June, that could send a positive signal even if larger-caps can’t find new traction.

This continues to be a headline-driven market, especially with earnings season basically done and so much worry around the virus. Any headline, good or bad, could trip things up or light a fire under the market on any given day, as we saw yesterday with some of the social media stocks like Twitter TWTR and Facebook FB getting slammed by word of an executive order from President Trump pertaining to the industry.

What faces investors next week? First of all, there’s the May jobs report coming up next Friday. Some might say this one isn’t as important as the one in early July, which will show more impact from reopenings. Still, any payroll report is bound to get a lot of attention in this stumbling economy, and the challenge could be trying to find anything positive to take home from it. We’ll talk more about that in days to come.

Next week also brings May auto sales and the ISM manufacturing index for May. The ISM fell to 41.5% for April, the lowest since early 2009. Every key index—including new orders, production, employment, and order backlogs—sank dramatically. With the May report this coming Monday, any improvement might be welcomed as a possible sign of life for the economy. We’ll have to wait and see.

CHART OF THE DAY: WHAT NEXT? This three-month chart compares the S&P 500 Index (SPX—candlestick) with its 200-day moving average (blue line) and 50-day moving average (red line). Note the 50-day fell below the 200-day soon after the SPX made its low in late March, but just recently has begun bending a bit back toward the 200-day. It took quite a rally to get the 50-day to move upward, so it will be interesting to see if the two lines can continue to converge and possibly cross over—which would be a bullish sign. 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.

Change of the Guard? The situation arguably looks a little healthier now if you’re someone who doesn’t like to see too much concentration in one area of the market. Going into the week, about 90% of stocks in the SPX were trading above their 50-day moving averages. As one analyst noted, when you see that happen historically, it’s often been a good omen for the year ahead.

What seems to be happening is a rotation by some investors out of the Consumer Staples, Technology, and Health Care stocks that put a charge into the rally, and into some areas that got less love recently like Financials and Industrials (at least until yesterday). You could look at this as a rotation out of growth and into “value,” to some degree, but it’s way too early to call it a trend. Value stocks are typically thought of as well-run and fundamentally sound companies whose shares have been taken down more than they deserve due to overriding issues in their sector or because many investors ran to embrace more “exciting” stocks elsewhere.

Flying Away: While you never want to see people lose jobs—especially when so many already have—investors seemed to view this week’s Boeing (BA) layoffs as good news for the company. No one likely needs to be reminded of how far BA’s shares have sunk, so the idea of cost-cutting might have gotten some people excited about the stock. However, this isn’t your “father’s BA,” to use that old phrase. It’s likely to be a more slimmed-down company in the future, which raises questions of whether market cap could ever return to the January 2019 highs from before the 737 MAX shutdown.

Also, If you’re hoping for good news about the airline industry, BA didn’t have much optimism to offer this week when it announced those layoffs. Instead, BA’s CEO talked about how it could take years for the industry to recover from the pandemic’s impact. Speaking of which, despite recent rallies for many of the airline stocks, most aren’t incredibly far off their March lows and continued to trail the broader market during this long rally. Anyone thinking of “bargain-hunting” by going after a beaten-down airline stock should understand the risk they’re taking, especially with those companies in the business that are most highly-leveraged. Some analysts continue to warn that bankruptcies can’t be ruled out, and it might be survival of the fittest.

Marching in Place: You might want to consider keeping an eye on the U.S. Dollar Index ($DXY) in the coming days and weeks, as well as the Cboe Volatility Index (VIX). If either start moving higher, it could be a sign of investor caution gaining ground. VIX managed to stay below 30 most of last week, down from highs above 80 at the peak of the crisis. It’s still not back to historical norms of around 20.

The $DXY, meanwhile, has been as steady as a rock for almost two months now, rattling around between roughly 98 and 100. If it leaves that range one way or another, it could tell us something about investor thinking. A drop in the dollar might suggest people are more willing to take a chance on less defensive investments and even on markets outside the U.S. It’s a higher dollar that would cause some investors to lose sleep.

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