Earnings Parade Continues This Week With Amazon, Alphabet, PayPal And Others

Last week’s volatility and market disruption can take a long time to settle down, so strap in.

The new month starts with Wall Street in an unfamiliar position: Down for the year. Friday’s selloff accelerated a turnaround that began earlier in the week, putting a red mark on the major indices’ January performance.

Heading into Monday, the S&P 500 Index (SPX) was down 1.1% so far in 2021, with the Nasdaq (COMP) off 1.4% and the previously high-flying Russell 2000 Index (RUT) down a sharp 5%. Keep things in perspective, though. The SPX is up about 66% from last year’s lows, and nothing can climb forever without a break. 

Despite all the wild action last week and so much uncertainty about what would happen—even with the inner workings of the market itself—the market rallied back overnight, and trading seems to be going normally this morning. There may be margin restrictions from some firms, but otherwise it looks like typical trading.

Like Ringing A Bell: Volatility Not Necessarily Departing

Some of last week’s turbulence and volatility survived the weekend into Sunday night and early Monday. If you were watching the futures market, maybe you noticed how the major indices were down sharply last night before reversing course and charging higher ahead of the opening bell. Usually when there’s trading like we saw last week, it doesn’t get right back to normal, so you probably shouldn’t expect that.

Instead, this volatile trading is like a big bell ringing—the reverberations can last a while. More volatility is almost certainly ahead, along with the chance of some dramatic swings back and forth. Anyone planning on trading the market right now should consider taking extra caution and possibly keeping trade sizes smaller than normal. 

Volatility is slightly lower this morning but that won’t necessarily last. The Cboe Volatility Index (VIX) is still well above 30, compared with the historic average near 20. 

There’s also a strange relationship going on early today with volatility down but bonds up. In addition, the bond market is on the rise even while stocks rallied an amazing amount from their lows overnight. There’s a disconnect between the bond and the equity market at the moment, so we’ll have to see what the outcome is. It’s not like the bond market is exactly flashing caution, but bonds and VIX being up reinforce the chance for volatile trading. 

It’s a big earnings week and we’ve got a lot of data coming, too, including Friday’s monthly jobs report. Two FAANGs—Alphabet Inc GOOGL and Amazon.com, Inc. AMZN—step up to the plate tomorrow afternoon. The hits keep coming. 

Then there’s the elephant in the room. Anyone paying any attention at all knows about the focus on short squeezes that brought fame (and some fortune) to stocks like GameStop Corp. GME and AMC Entertainment Holdings Inc AMC. There’ve been disruptions all over the world, and now the stock market is feeling some disruption and a change of tone. The short squeezes certainly had a lot to do with it. The way people interact with the market is a little different than in the past.

There’s a storm of a lot of things coming together leading to a disruption in the market overall. These kinds of disruptions occur every 10 or 12 years and the market has always survived them. 

Despite the disappointing end to last week, try to keep things in perspective. The SPX is still up 13.5% in the last three months, and remains around 3.5% below this month’s all-time highs. If a market correction is defined as a 10% decline from the high, we’re not even halfway there yet. That might feel reassuring in one sense, but it should also mean caution. There could be more weakness ahead if this downturn is going to become a correction, which can’t be ruled out. 

The argument against that is there just hasn’t been a lot of interest among investors to really push the market down over the last few months. Every time the SPX dropped to its 20-day moving average since Nov. 1, it met new buyers in what became called a “buy the dip” trade.

Last week the SPX actually did fall below the 20-day and then ended slightly below the 50-day moving average near 3716 (see chart below). The question heading into this week is whether any technical support in that area holds, or if selling picks up. 

Earnings Parade Still Gathering Steam

It’s kind of interesting that all this happened at a time when you could point to some actual positive developments in the background. Microsoft Corporation MSFT and Apple Inc AAPL both reported earnings that are about as solid as it gets and this week brings Alphabet Inc GOOGL and Amazon.com, Inc. AMZN. Other big names penciled into the earnings lineup this week include PayPal Holdings Inc PYPL, Alibaba Group Holding Ltd BABA, United Parcel Service, Inc. UPS, and Peloton Interactive Inc PTON. 

The PTON report could be interesting for insight on how the company plans to handle things once people get back to normal following the pandemic. PTON has done well with everyone stuck at home, but will demand remain this strong once people are comfortable going back to the gym?

The UPS earnings are probably worth a close look for what they might say about the consumer economy, especially considering the quarter included the holiday season. Speaking of which, AMZN earnings could give clues into holiday sales, too, as well as a look at how AMZN’s cloud growth did in a very competitive environment where Amazon Web Services (AWS) remains the leader. MSFT’s cloud growth was huge in its recent quarter. 

PYPL could be interesting for what, if anything, they have to say about cryptocurrency. Penn National Gaming, Inc PENN is another one to look out for this week with so much interest in the gaming sector since we all got sent home.

CHART OF THE DAY: FINDING NEW SUPPORT. After bouncing off its support of the 20-day moving average (yellow line), the S&P 500 Index (SPX—candlestick) broke below it on Wednesday and has traded below it since then. It’s now moved down to its 50-day moving average (blue line) and closed just a hair below it at 3714.18. It’s too early to tell if this will be the next support level but it’s something to keep an eye on. 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.

Lots of Numbers: Data-wise, investors might want to keep their eyes open this morning for the latest on construction spending and the ISM manufacturing index. The manufacturing sector has generally had a good performance lately, and the ISM headline number last time out was the highest since 2018 at 60.7%. The employment index also grew. Analysts expect the headline number to be just a bit lower for January at 60.1%, according to research firm Briefing.com.

The big data gorilla this week is employment on Friday. Jobs are always the number one number to watch, and last month’s report was disappointing. A lot of the losses were in just one sector, however—with Leisure and Hospitality positions falling by nearly 500,000 in December. We’ll dig more into expectations for the January report later this week. 

Technical Picture: The two big numbers to watch this week could be 30,000 in the Dow Jones Industrial Average ($DJI) and 3700 in the SPX. The two indices flirted with those levels late Friday, and the $DJI ultimately closed just below 30,000. If they hop back above those levels today and manage to hold on, that would probably be seen as a technical victory that could suggest a little recovery ahead.

Longer-term technical support is in a range between 3633 and 3695, according to research firm CFRA. This is where the “buy the dip” crowd meets a test: Will they still want to buy the dip after the main crunch of earnings season ends and the world continues to stumble trying to fight the pandemic?

A Second Look at J&J Data: The vaccine data from Johnson & Johnson JNJ released on Friday initially got a fish-eye from some investors because it generally wasn’t as strong as the vaccines already on the market. That was the initial reaction, anyway. As analysts and investors had time to give the data a closer look, they actually found reasons to be positive. Some said the lower efficacy might not be a huge deal considering the logistical convenience of having just one dose for JNJ’s vaccine vs. two doses for others. Then there were analysts and vaccine experts quoted in the media saying that JNJ’s efficacy was generally better than we get from those flu vaccines most of us take each year. 

Let’s put this whole thing in context: If anyone had told you a year ago when the virus first hit that a year later there would be two effective vaccines available and two more—JNJ and Novavax, Inc. NVAX—possibly available soon—it would have been considered pretty improbable. We’re a long way from out of the woods, but the JNJ data aren’t necessarily a reason for enthusiasm to fade. JNJ said it would file for regulatory approval soon, and the vaccine’s efficacy appears to meet the efficacy goals outlined by the U.S. Food and Drug Administration.

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