Shuffling The Deck: Major Indices Get Another Boost From $DJI Shakeup, China And Virus Optimism

For most of the summer, analysts have been saying plenty of money remains on the sidelines and that for many investors, “There Is No Alternative” (TINA) to putting that cash into stocks. 

So far, it feels like the people who said that might have been onto something. The elevator keeps rising this morning as the S&P 500 Index (SPX) entered the day up nearly 5% so far this month and above 3400 for the first time ever. Optimism surged as coronavirus cases fell below 37,000 yesterday compared with above 60,000 a day in July and news arrived of U.S./China trade talks taking place. The talks were “constructive,” a U.S. official said. Asian and European stocks rose. 

A shakeup in the Dow Jones Industrial Average ($DJI) could also potentially drive some buying today in the stocks newly added to the index. More detail on that below. 

And finally, a bit of selling hit the Treasury market. The 10-year yield flirted with 0.7% this morning, up about five basis points. This could be a sign of investors shifting some money out of fixed income, though it doesn’t follow that the cash necessarily goes into stocks. If anything, this strength in yields might give the Financial sector some help today.

Not everything is ideal for an all-points rally, though. First of all, Nasdaq (COMP) futures are actually off a bit, continuing the theme we saw yesterday when Tech took a back seat to the more cyclical and value sectors. COMP is heavily weighted toward Tech. 

You could say it’s not necessarily a bad thing for COMP to retreat a bit and let some other sectors take the baton. A rally with the most legs tends to be one where there’s participation across many sectors. Yesterday, more than 80% of stocks in the SPX rose. More days like that might put a dagger into the theory that this rally is all about the FAANGs. 

Second, we’re entering a period after this week when earnings fall off the map, potentially raising headline-sensitivity. The headlines today seem market-friendly but that won’t always be the case.

Heart of the Order: Salesforce, Toll Brothers Earnings in Spotlight

Investors got a little break from major earnings news Monday, but the week’s busy schedule resumes starting this afternoon. Salesforce.com, Inc. CRM and Toll Brothers, Inc. TOL are expected to take the spotlight after today’s closing bell. Later this week we’ll get retail earnings back in full force. 

Salesforce earnings now get more interesting after news late yesterday that the stock is being added to the $DJI along with Amgen, Inc. AMGN and Honeywell International, Inc. HON. It’s the first major $DJI reshuffle in a few years.

TOL and CRM, incidentally, both represent industries that have been going gangbusters during the pandemic—the cloud and housing. Last time out, CRM shares got hit after the company reported because analysts weren’t too excited by the company’s guidance. Having said that, revenue growth of 30% in fiscal Q1 looked strong, so we’ll see if that continued. 

Considering how much employers rely now on the digital environment, CRM is one company many analysts expect to do well. If the numbers don’t come in as hoped, it’s also a stock that could get punished. The thinking might be, if you can’t get it done now, when can you get it done? That said, there’s plenty of competition, and the recession might be affecting some companies’ spending decisions. All this needs to be taken into account. 

Housing data last week could be a hard act to follow, but that’s TOL’s assignment. Back in late May when we last heard from TOL’s executive team on their previous quarter, they indicated that demand had been improving. The company struggled in its fiscal Q2 due to the pandemic, so we’ll see if and how well business came back in Q3 as the housing market got energized. TOL’s executives might be able to give a close-up view of where luxury home demand fares in this current environment. 

Sector Shuffle? Not So Fast

The week began with some positive signs for the overall market, mainly because sectors besides Tech got some attention. Energy, Financials, Materials, and Industrials all made progress Monday in a broad rally, while Information Technology ended up being one of the worst performers of the day after a hot start.

Before anyone gets excited thinking about sector reshuffling, remember that we’ve all been duped before. One day of this shouldn’t convince anyone that there’s a trend, though if the virus news continues to be positive—as it was Monday—then stocks that would benefit from reopening might keep getting some bids. 

Also, remember that some of the strength in Energy reflected crude climbing due to tropical storms in the Gulf of Mexico. This will probably be worth monitoring over the next few days to see where it tracks along the coast. Even if it doesn’t end up causing much damage to Gulf oil platforms and refining facilities, it’s a reminder that hurricane season is back. That might mean some seasonal strength getting baked into crude. 

The counter-argument is that crude demand remains pretty weak due to the virus-related recession, so even a major storm that takes out production for a few days might not have the same impact as in a normal year. 

Airlines had a banner day Monday, and the Dow Jones Transportation Average ($DJT) is getting close to the highs it registered back in January before the pandemic wreaked havoc. Though airlines led the $DJT Monday, the force behind most of this year’s comeback from March lows has been delivery companies like United Parcel Service, Inc. UPS and FedEx Corporation FDX. Also, Union Pacific Corporation UNP recently forged a new 2020 high. 

Passenger airline traffic is up lately, a good metric to consider watching for hints of overall economic reopening. U.S. commercial air travel rose about 9% on Sunday compared with a week earlier. though traffic was still down about 67% year over year, Barron’s reported.

As the rally continues, it’s important not to let any outsized gains lead to greed. Remember to stick with your plan. It could mean shifting some money between sectors if, for instance, recent gains have exposed you more to a certain stock or sector than you’d initially planned. Or it could mean shifting some money from equities to fixed income.

Also, consider that two of the leaders in this rally—Tesla, Inc. TSLA and Apple, Inc. AAPL—will be completing their splits later this week and early next and investors are now past the date when new buyers can be shareholders of record and see their share counts multiplied. While past isn’t precedent, sometimes buying interest cools off a little post-split. However, AAPL and TSLA seem to make a habit of breaking old market rules. 

CHART OF THE DAY: HELP FROM A FRIEND:  The weakness in the U.S. Dollar Index ($DXI—candlestick) indicates that investor sentiment is still risk-on assets. Technology stocks have been attracting a lot of attention as seen by the Nasdaq Composite (COMP—purple line). Data source: Intercontinental Exchange, Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Attention all Personnel: Effective Monday, Aug. 31: Changes to the Dow Jones Industrial Average ($DJI): Salesforce (CRM) will replace Exxon Mobil (XOM). Amgen will replace Pfizer, Inc. PFE, and Honeywell will replace Raytheon Technologies Corporation RTX. The index changes were prompted by DJIA constituent Apple’s (AAPL) decision to split its stock four-to-one, which will reduce the index’s weight in the Information Technology sector. The announced changes help offset that reduction. They also help diversify the index by removing overlap between companies of similar scope and adding new types of businesses that better reflect the U.S. economy. At least that’s the intention, according to S&P Dow Jones Indices. It’s worth keeping an eye on shares of all these companies today, as trading could be high-volume. Any portfolio managers who try to track the $DJI will have to buy and sell these shares over the next few days to keep their funds tracking the index. 

Greenback’s Weakness Helping Tech: Even as the transports and some of the more cyclical sectors moved higher Monday, Treasuries didn’t lose much ground. The 10-year yield remains stuck right in the middle of its long-term range, closing Monday near 0.65%. The dollar index, another place investors sometimes go when they’re looking for potential safety (not that any investment is “safe”) seems to be rebounding slightly from recent lows below 93, but remains well below last spring’s peak. 

If the dollar remains weak, that could be another tailwind for growth stocks, implying solid overseas demand and investors taking more of a “risk-on” kind of attitude (since a stronger dollar often implies people moving away from risk, as we saw last spring). It’s probably no coincidence that the huge rally in Tech since then happened right along with the dollar falling. 

One other possible reason major indices keep rising could be all the headlines about markets making new highs. All-time highs never hurt in terms of getting people interested in the market. In this case, new highs could be helping generate new highs all by themselves.

Apple a Day Can’t Keep Doctor Away: investors shouldn’t take AAPL’s huge market cap and dizzying gains for granted. It’s easy to forget, but AAPL’s had some very rough stretches, and you don’t have to look back too far. After briefly topping $120 in late 2015, for instance, it steadily fell and didn’t get back to that level until early 2017, bottoming at $89 in May 2016. Putting money in AAPL is not the same as putting it in the bank. If you’re investing, have a plan and know what your goal is. Buying AAPL just because everyone else is doesn’t make much sense. If you buy it because you’ve done your research and believe the stock (already valued at historic highs) has more fundamental reasons to keep climbing, that’s a different story. 

In case you were wondering, Apple would hit a $3 trillion valuation at $701.59, or $175.39 once the stock split is completed on Aug. 31, Barron’s said. Also, even though it’s splitting, the new price—which would be around $125 at current levels—doesn’t exactly sound rock bottom. In the old days, it was the rare stock that traded that high because many companies would split when they approached $100. In 2003, Microsoft (MSFT) split its shares at just $48, which seems pretty incredible looking back.

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