Stranger Things Do Happen As Netflix Surprises Investors

(Wednesday Market Open) The European Commission (EU) has asked its 27 member nations to reduce their natural gas consumption by 15% between August and March 2023. The announcement turned U.S. equity index futures from positive to negative.

Potential Market Movers

Russian energy giant Gazprom said it cannot fulfill gas contracts with the EU, which prompted a swift response from the commission. Russia appears to be striking back against EU sanctions by tightening gas exports. The commission said that Russian President Vladimir Putin is “blackmailing” EU members and “using energy as a weapon.”

It’s difficult to know how feasible the EU’s move will be as the group of nations are already experiencing energy shortages that have prompted the reopening of old coal plants and new construction on nuclear facilities. Additionally, Europe is experiencing a record heat wave which underscores the urgency of energy issues now and in a few months when the region could face a repeat of last year’s heating struggle.

Natural gas futures rallied on the EU news, rising 2.31% ahead of the opening bell. Major European stock indexes including Stoxx Europe 600, FTSE 100, DAX, and CAC 40 fell respectively by 0.10%, 0.27%, 0.50%, and 0.31%.

Asian markets are looking better.  Macao, China is reopening after being shut down for COVID-19. The news appears to be helping Las Vegas Sands LVS and MGM Resorts MGM as both stocks were up in premarket trading. The Shanghai composite was up 0.77% overnight.

Earnings season continues in the United States, and Netflix (NASDAQ: NFLX) made headlines on Tuesday. After the close, NFLX reported that it topped earnings estimates but missed on revenues. However, the metric that appeared to draw the most attention was that the streamer lost fewer subscribers than expected. Netflix also increased its forward guidance, saying it hopes that a new pricing model will drive subscriber growth. However, it also warned about potential currency headwinds. NFLX rallied 7.25% in after-hours trading.

Several companies are releasing earnings reports this morning and despite good results, some were losing ground in premarket trading:

• ASML ASML beat on earnings and revenue estimates but slashed its full-year sales forecast. Shares fell 2.5% before the opening bell.
• Abbott Labs ABT beat earnings and revenue estimates and boosted its forward guidance but lost 1.94% premarket.
• Biogen BIIB also fell more than 1% in premarket trading despite topping both estimates.  
• J.B. Hunt JBHT beat on earnings estimates but lost 2% before the open.  
• Baker Hughes BKR missed on top- and bottom-line numbers causing the stock to fall 5.74% before the opening bell. The company cited supply chain inflation behind the misses.

After today’s close, Tesla TSLA will announce earnings.

The housing market continues to show signs of slowing. MBA mortgage applications were down 6.3% last week as the average 30-year mortgage rate ticked higher. After the open, the existing home sales report will arrive.

Reviewing the Market Minutes

Investors finally got the broad-based rally they were looking for with NYSE advancers outpacing decliners 5-to-1 and the Dow Jones Industrials ($DJI), Nasdaq ($COMP), and S&P 500® index (SPX) climbing 2.43%, 3.11%, and 2.76% respectively.

A three-day slide on the U.S. Dollar Index ($DXY) appears to have been a catalyst for the rally because large multinational companies have been hurt by the strong dollar. In fact, Johnson & Johnson (JNJ) and IBM (IBM) fell 1.5% and 5.3% respectively despite beating analysts’ earnings estimates. The common concern appears to be that both companies cautioned that currency headwinds could be a drag on forward earnings. Nonetheless, investors weren’t afraid to embrace a little risk as they turned to small-cap and growth stocks. The Russell 2000 (RUT) small-cap index jumped 3.5%, closing above its late-June highs. The S&P 500 Pure Growth index rallied 3.29%. But they didn’t exactly leave value behind as the S&P 500 Pure Value index rose 2.66%, which speaks to the breadth of the rally.

Other evidence of breadth is that all of the S&P 500’s eleven sectors closed higher on the day. Industrials, energy, and materials were the top three performers.

WTI crude oil futures continued its support bounce, settling higher for the fifth day in a row at $100.72 per barrel for a session gain of 1.2%. Last week, WTI futures tested lows set back in March and April and has moved higher since. However, each day has experienced a lot of volatility, which suggests the bulls and the bears are in a bit of a battle.

CHART OF THE DAY: SCARED STIFF? The Cboe Market Volatility Index ($VIX—candlesticks) appears to have hit a wall around 24.35. A bounce higher would suggest a rise in fear and stocks falling. A break below would suggest an increase in confidence and stocks rising. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

CONTRARIAN INDICATOR: Contrarian investors try to zig when everyone else is zagging. Some contrarians use the VIX to try and identify extremes in market sentiment. Contrarians say, “When the VIX is low, it’s time to go. When the VIX is high, it’s time to buy.” For them, a low VIX is bearish and a high VIX is bullish.

However, “high” and “low” on the VIX have changed over time which complicates its use as a contrarian tool. For example, the VIX appears to have found support at its June low and April high. Some contrarians may view this level as the VIX being “low” despite the fact that are there are lower lows on the chart. Therefore, the VIX at this level could be viewed as a sign that the recent rally in stocks is about over.  

CONTRARIAN RALLY: BofA Securities released their monthly Global Fund Manager Survey findings on Tuesday. The report, which surveys nearly 300 global fund money managers, found that market expectations were at an all-time low and cash levels were at their highest since the 9/11 attack.

The survey also found that inflation and global recession were the two biggest risks causing managers concern. Recession expectations are at their highest level since May of 2020. However, to the contrarian investor, the best time to buy is when everyone else is bearish, which may have been at least part of the impetus behind yesterday’s rally.

The survey also identified other areas of exuberance as managers saw the most crowded trades as long on the U.S. dollar and oil/commodities. If you’re a contrarian investor, those findings could be red flags.

MARY, MARY: According John J. Murphy’s “Technical Analysis of the Financial Markets,” the principle of contrary opinion is when the vast majority of people agree, they’re generally wrong. For some this may be wise, for others it could be hubris. For example, deciding not to follow a stampeding crowd could get your run over.

Warren Buffett summed up contrarian investing when he said, “Be fearful when others are greedy, and greedy when others are fearful.” Perhaps Mr. Buffett’s actions suggest how to be contrarian because he’s known for sticking to his system of valuing companies and only buying when those valuations are met. Sometimes that means buying nothing. Other times it means putting as much money to work as you can spare. 

Notable Calendar Items

July 21: European Central Bank interest rate decision, Philadelphia Fed Manufacturing Index and earnings from AT&T T, Philip Morris PM, Union Pacific UNP, Intuitive Surgical ISRG, and Freeport-McMoRan FCX

July 22: Earnings from Verizon VZ, American Express AXP, Schlumberger SLB, and Twitter TWTR

July 25: Earnings from Alphabet GOOGL, NXP Semiconductors NXPI, and Whirlpool WHR

July 26: New home sales and earnings from Microsoft MSFT, Alphabet GOOGL, Visa V, Coca-Cola KO, McDonald’s MCD, United Parcel Services UPS, and 3M MMM

July 27: Durable goods orders, Pending home sales and earnings from Meta META, Qualcomm QCOM, Rio Tinto RIO, Boeing BA, and Automatic Data Processing ADP

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

Image sourced from Shutterstock

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