Crazy Night: 'Buy The Dip' Mentality Evident As Market Storms Back From Overnight Spook

Key Takeaways:

Wild overnight session as administration spooks market with China trade comments.
Two elements continue fighting it out in the market to stay at home vs. optimism trade.
New home sales, PMI data both due this morning, but earnings calendar light.

(Tuesday Market Open) The overnight sessions are getting crazier than the daytime ones.
It was the second wild night in a row, this time thanks to a little communication issue about the China trade deal. Stock index futures tanked when a White House official spooked the market with his comments about the deal being “over,” then came roaring back when President Trump clarified it’s still on.

Which brings to mind that old movie quote, “Over? Nothing’s over until we decide it is!” Including the stock market rally, apparently, which continued in pre-market trading after the dramatic evening hiccup.
It does go to show just how sensitive people are to any hints about a breakdown in trade with China, now that we’re nearly six months out from the agreement. This isn’t the first time this month, remember, that worries about China trade helped torch the market.

The crazy ranges in stock index futures trading overnight also could tell you how nervous this market is. Another potential takeaway is that once the “buy the dip” mentality starts, it grabs on very quickly.

Volatility spiked in futures trading at the Cboe as the China issue flared, then flattened out over the following hours. It might be worth keeping an eye on the Cboe Volatility Index (VIX) today for any potential aftershocks that could make Tuesday’s session more choppy than usual, though it looks like things have calmed down.

With that overnight session out of the way, stocks begin the day with the Nasdaq (COMP) back above 10,000 and the S&P 500 Index (SPX) up more than 42% since its March 23 intraday low.

Meanwhile, in more important news, UK Prime Minister Boris Johnson said he’s going to allow British pubs to open again. Cheers! Or should that be, “Cheers, mates!”

Yin And Yang Continues

There’s a bit of a tug-of-war going on in the market the last few sessions, with investors optimistic on the one hand about signs of life in the economy even as they worry about rising virus caseloads. Basically, the search is on for who’s going to be the winners and who’s going to lose when things get back to “normal,” and you can see that in the daily fight between “stay at home” and “reopening optimism” stocks.

With concerns about the virus still front and center, the “stay at home” trade came back to life Monday. That put new vigor into stocks like Apple Inc AAPL, Amazon Inc AMZN, Adobe Corporation ADBE, Walmart Inc WMT, and Zoom Inc ZM.

Meanwhile, airlines, resorts, and casinos mostly moved lower. Cruise lines sank after another downgrade, and some analysts suggest their stock price recovery was a bit too far, too fast. The fact that all cruise lines last week extended their “no-sail” order until Sept. 15 was a big blow.

Similarly, after finding some lift in late May and early June, the airline sector hasn’t been able to gain much altitude over the last few weeks. Maybe that’s a sign of investors starting to realize it could be hard for profits to return with flights still far from full.

With nerves a bit on edge about the virus, gold again kicked into high gear Monday and pushed through technical resistance at $1,760 an ounce. As noted here yesterday, the 2020 high of $1,788 isn’t far away. A slumping dollar index, which fell about 0.5% back toward 97 on Monday, could be helping fuel investor interest in gold.

While the major indices did post gains yesterday, some of that early optimism faded a bit, which you can arguably see in the COMP outpacing the SPX. It was COMP’s seventh-straight positive session. A lot of the COMP strength has come from the $1 trillion market cap club, meaning AAPL and Microsoft Corporation MSFT, both of which forged new record highs Monday. AAPL is getting a lift, it appears, from its developers conference going on this week. The tech giant used the conference to unveil the latest version of iOS, its mobile operating system. It also said its new Mac computers will no longer use Intel Corporation INTC chips.

Tech stocks, which dominate COMP, had the best Monday of any sector, and Financials—sometimes seen as a bellwether for overall economic demand—came in last on the scoreboard. Bond yields barely moved.

Remember, the biggest tech stocks can exert a very heavy impact on the major indices. In a healthy market, it’s best to see strength across many sectors at a time. That said, seven of the 11 S&P 500 sectors posted gains Monday, so it wasn’t all big-tech.

Also on the plus side, crude appears to finally be getting some traction. After closing below $40 a barrel every session for well over three months (the first time that’s happened since 2004), the front-month U.S. crude contract finally clawed back to close above that big round number Monday.

Stronger crude could reflect a growing demand for transportation. Automobile traffic is now back to about 90% of its pre-crisis levels, according to some media reports, after dropping to as low as 50% in early April. While that data sounds encouraging, it’s actually kind of bittersweet. People are out on the roads for vacation instead of flying, it appears.

Home Cooking

If you’re shopping for a home, your prospects could finally be improving. That’s of course if you haven’t been economically victimized by the pandemic that’s sadly put so many out of work.

For those still hoping to get a fresh set of keys, Monday’s existing home sales report for May might have delivered some cheer. While sales fell almost 10% from a month earlier and were below expectations—not a great takeaway—the positives came below the main headlines. Existing home supplies increased and price inflation eased.

It’s true that May did represent the 99th-straight month of year-over-year price increases for existing homes, but the percentage gain was just 2.4%, down from 7.4% in April and 8.1% in March. There’s also now a 4.8 month supply of existing homes on the market, up from around three months back in February.

With mortgage rates remaining at record lows, maybe existing home sales can start ticking up from here. When people buy existing homes, that often means trips to big-box stores for home renovation projects and new appliances, so we’ll keep an eye out for that in the coming months, especially when retailers like Home Depot Inc HD and Lowe’s Inc (LOW) report later this summer.

Also, new home sales for May are due soon after the open today. The Wall Street consensus is for a seasonally-adjusted annual rate of 635,000, according to Briefing.com. That would be up slightly from 623,000 in April.

Technically, the SPX appears to be in decent shape after falling below 3090 support early Monday and then coming back to close above 3100. That kind of move usually is associated with buying interest, and the “buy the dip” trend seems like it’s still around. Looking up from here, the 3130 level has been a technical challenge lately for the index and might still be one.

CHART OF THE DAY: IN OR OUT? Few charts illustrate the dichotomy of this year’s market better than this year-to-date comparison of the New York Stock Exchange’s Arca Airline Index (XAL—candlestick) and the Nasdaq 100 (NDX—purple line). In the fight between staying in and working (or playing) on the laptop or taking a flight, indoors is the big winner so far. Data Sources: NYSE, Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Looking at the Bright Side: Toward the end of last week and over the weekend, focus centered on negative virus news and overlooked some positive developments. For instance, there’s been a lot of improvement in major cities like Chicago and New York that were early hot spots, and now those cities are starting to reopen more. The question is whether they’ll also have setbacks the way areas in the southern U.S. seem to be having now. The answer might not be known for a couple of weeks, because that’s how long scientists say it can take for cases to show up after exposure.

Even if this current caseload jump is more than a bump in the road, you can hopefully take some solace in knowing that doctors appear to have a lot more tools to deal with it than they did three months ago. Certain treatments seem to be having a positive impact on survival rates, for instance, media reports say. The caseloads are rising in some states, but the overall daily death statistics are about one-third of the peak, according to the Institute for Health Metrics and Evaluation (IHME).

Embracing Volatility As A Line Of Defense: One puzzle last week was seeing volatility move higher at the same time as stocks climbed. Usually, these go opposite directions. Maybe what’s happening is some investors going long on stocks and buying volatility for protection in case of a sudden market flinch due to pandemic news. That particular trade appeared to lose steam on Monday, with the VIX dropping quickly down to around 32 after finishing the old week near 35.

A lower VIX sounds positive if you’re bullish on stocks, though keep in mind that a 32 reading isn’t low by any stretch of the imagination. The historic average is closer to 20, and it’s even dropped below 10 at times in recent years. Those days don’t seem to be coming back too fast, with so much uncertainty about how the economy could respond to the pandemic. A higher VIX generally indicates more chances of sharp moves ahead, so the takeaway for investors could be to stay vigilant.

CD Maturing Soon? Some people forget to check their CD’s maturity date and then receive a notice that they’ve been rolled over into a new rate. With that in mind, now might be a good time to take a look if you own any CDs. If you do check your bank’s latest offer, you probably won’t be happy with the rates. Even the best-yielding five-year CDs now pay well under 1%, according to Bankrate. A year ago, you could find five-year CDs yielding more than 2%. That said, it’s important to consider keeping an emergency fund, and a CD can be a great place for some of that money (though some CDs do charge a penalty for early withdrawal). So even if the yield is low, that doesn’t necessarily represent a game-changer for the average investor. Also, even at today’s rates, CDs still pay more than cash in most savings or money market accounts.

Anyone seeking higher yields for their cash should consider their risk tolerance based on individual circumstances and goals. If you do have extra cash and want a better yield, some places to conceivably look could be dividend-yielding stocks (the SPX has a dividend yield of around 2%) or some of the higher-rated corporate bonds. Keep in mind these investments can be a lot riskier than cash, and it’s important to keep about six to 12 months of cash around that you can easily access in an emergency. That’s not necessarily going to be the case if your cash is tied up in a stock or a bond.