Retail Stocks Trading Lower on Weaker Black Friday Numbers

After Friday’s Omicron variant sell-off, things were looking pretty bleak for investors, but stocks rallied back on Monday. The Nasdaq Composite GIDS led the way, recovering its losses completely and adding a little more for good measure. However, the S&P 500 (SPX) and the Dow Jones Industrial Average ($DJI) were unable to recapture their losses. But the rebound has gone foul as equity index futures are pointing lower Tuesday morning.  

One warning the market gave yesterday was the fact that the rally was not broad-based. The NYSE only saw 54% of its stocks advancing, while the Nasdaq experienced 57% of its stocks declining. Many smaller stocks also failed to bounce back; the Russell 2000 (RUT) small-cap index dropped another 0.18%.

According to Briefing.com, technology stocks were among the strongest, returning 2.6% on the strength of semiconductors. The PHLX Semiconductor Index SOX rallied 4.1% on the day thanks in part to Lam Research LRCX, which closed the day 6% higher. Outside of chipmakers, Twitter TWTR rallied in part on the news that CEO Jack Dorsey would be stepping down and that current Chief Technology Officer Parag Agrawal will replace him. Another Jack Dorsey company, Square SQ is rallying on the news in premarket trading because Mr. Dorsey will be able to focus on the company.

Investors appear to be taking profits on Tuesday morning in the face of some uncertainty around the COVID-19 Omicron variant despite President Joe Biden’s assurance that shutdowns wouldn’t be part of the plan to battle the variant. Instead comments from Moderna MRNA and Regeneron REGN CEOs expressing concern on whether or not their vaccines would be effective against Omicron appear to be prompting the selloff.

Another issue that appears to be weighing on investors is that Fed Chair Jerome Powell and Treasury Secretary Janet Yellen are scheduled to testify before the Senate banking committee today. Chair Powell’s earlier comments have been a little bit negative towards inflation and the new variant. Investors are hoping to get some clarification on how the variant will influence the Fed’s actions.

Financial stocks are also pulling markets lower because the 10-year Treasury Yield (TNX) had fallen to 1.43% in premarket trading. The lower yield means a lower net interest rate spread. In other words, the difference between borrowing to saving is lower for banks and cuts into their profitability.  

Retail stocks are trading lower as Black Friday and Cyber Monday results come in weaker-than-expected. While brick-and-mortar stores saw a 48% increase in foot traffic compared to a year ago according to Sensormatic Solutions, but Adobe Analytics is reporting that consumers spent around $8.9 billion in Black Friday online shopping which was less than 2020. This marks the first time Black Friday e-commerce numbers came in lower from the previous year since Adobe begin tracking online shopping in 2012.

The housing market saw a sudden rush to buy in October. The pending home sales report came on Monday, showing an increase of 7.5%, which was well above the projected 0.9%. The news didn’t seem to help homebuilders. The S&P Homebuilders Select Industry Index ($SPSIHO) closed only a tenth of a point higher.

Omicron Variant or Oil Cycle

Oil prices (/CL) fell hard last Friday as news of the Omicron variant caused a ripple of panic through the markets. However, on Monday, when more investors returned from holiday, oil bounced back a little and regained some of its losses. But the seasonal cycle of oil suggests that oil may not bounce back as quickly as other markets. This is because oil prices tend to be weaker in the fall and winter months.

According to the Trader’s Almanac, crude oil has historically traded in a seasonal cycle where it tends to be weaker from October to February, and then in February, it tends to hit a bottom and strengthens through the year until August. Of course, this historical tendency isn’t a guarantee of future results, but it is helpful to be aware of these cycles. And, while you may not have noticed the seasonality of crude prices, chances are you’ve noticed gas prices often rising as the Memorial Day weekend draws nearer, which is a phenomenon related to this cycle.

PGM Capital wrote about the seasonality of crude prices in 2018. It stated that the reason for the seasonality is because 80% of the oil consumption occurs in the Northern Hemisphere and particularly in the United States. When winter comes around, people are less likely to drive as much and therefore demand falls. So, while many assets might rally depending on the severity of the Omicron variant, oil may not do as well, at least in the short term. 

CHART OF THE DAY: OIL CHANGE. Crude oil prices (/CL—candlesticks) and the 10-year Treasury Yield (TNX—pink) tend to move together. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results. 

Greasing the Yields: The 10-year Treasury Yield (TNX) often moves with oil prices. This means if oil prices follow their seasonal cycle, yields may also be lower for a little while. Lower yields should help bond prices and mortgage rates. However, the possibility of the Fed speeding up its tapering plans could be a spoiler for those hoping for lower rates. The Fed has been buying bonds to keep yields and interest rates low. If it buys fewer and fewer bonds, then yields could rise along the curve.

Sector Switch: Lower oil prices could be a drag on energy stocks because lower oil prices mean lower profit margins. However, if oil prices stay low and yields/interest rates follow, then technology stocks could benefit. Over the last year, I’ve repeatedly talked about how interest rates affect the way investors value stocks and how technology stocks tend to do better when rates are low. This may be one reason why the tech-heavy Nasdaq Composite appears to have recovered quicker from the variant news.

However, this potential drag on energy stocks and a potential boost for technology stocks may only last as long as oil prices follow the seasonal cycle. If oil prices start to turn bullish in the first quarter, then yields could rise again, and tech stocks could weaken.

Checking the Oil: So, with so much based on oil prices, what are the experts saying about them? On Monday, J.P Morgan analysts were projecting that oil could hit $150 per barrel in 2022 because of the lack of OPEC capacity to meet the demand. But not all analysts agree with the projection. Last week, Barclays analysts raised their 2022 oil price projection from $77 to $80, which was basically saying that they think oil prices wouldn’t move higher than they already were because oil was a little over $80 at that time. Back in June, Bank or America analysts were projecting $120 in 2022. With these kinds of projections from the experts, it can be difficult to get a read on where oil prices could be headed in the short and long term.

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

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