Apple in the Afternoon: Virus Fears Retreat as Investors Shift Focus to Tech Giant

Apple waits in the wings with earnings this afternoon, along with Advanced Micro Devices. The focus on earnings, as well as the start of a Fed meeting, might distract from the virus scare.

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5 min read
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Key Takeaways

  • Turnaround Tuesday might be a theme as “buy the dip” takes hold

  • Caution indicators like bonds and gold are stepping back, and crude is flat

  • Apple reports after the close, along with Advanced Micro Devices

(Tuesday Market Open) The coronavirus hasn’t stopped spreading, but maybe investors hope Apple (AAPL) earnings after the close can distract a bit from yesterday’s steep losses and put “turnaround Tuesday” into play.

That’s the way it looks early on, with stock futures turning around after the virus stopped the rally cold on Friday and Monday. On the four days a year when AAPL reports, it usually sucks a lot of the air out of the room, allowing investors to pinpoint on its results. Another thing that can really bring focus is a Fed meeting, and one of those happens to start today. 

The caution lights still shine, but maybe some people feel a little more confident today. That’s what it appears we’re seeing in bonds, crude, and gold early Tuesday, anyway. The 10-year yield looks like it’s stabilizing at about 1.63%, and crude is holding near $53 a barrel after hitting a three-month low yesterday. Gold stepped back from Monday’s big gains. European stocks mostly moved higher. Based on how U.S. stocks are moving in the pre-market, it looks like some investors have a “buy the dip” mentality.

It’s encouraging to see the overnight gains continuing this morning as people get into the office. Sometimes you see that level off a bit, but not so much today.

When the market starts descending the way it did Friday and Monday, technical indicators can sometimes look more important. If the S&P 500 index (SPX) stays above the key 3,200 level it will likely be seen as a very good sign. Yesterday, it managed to close above another technical support level of 3240, which appeared to be one positive take-away from a day without many of them.

Monday's selloff could also be seen as part of a normal cycle after the amazing start to 2020. While there aren’t any guarantees, things have a chance of reversing if some China-focused companies like AAPL or Starbucks (SBUX) put out anything encouraging about their businesses there. That’s why it’s so important to track earnings, now more than maybe a week ago.

Earnings season began about two weeks ago, but now investors might be paying a little less attention to Q4 results and listening more for how executives think the coronavirus could affect earnings going forward. If companies start sounding grim about a possible negative impact, stocks might not be able to recover too easily from the recent carnage.

Looking at this morning’s tally, Pfizer (PFE) shares dipped in pre-market trading after the drug company missed the Street’s earnings consensus. Revenue slightly beat. 3M (MMM) also missed on earnings, but revenue looked in-line as the company talked about “challenges in certain key end-markets.” 

On the positive side of the ledger, Lockheed Martin (LMT) shares rose 1% before the bell after the company surpassed Wall Street’s expectations. The company posted year-over-year earnings growth of more than 20% and revenue growth also was up double-digits as F-35 sales looked strong. Boeing (BA) goes tomorrow, and the 737 MAX is going to probably be front and center as analysts expect the company to take a charge against Q4 earnings related to the troubled aircraft. 

Durable goods orders this morning looked good, but keep it in perspective because it reflected a big batch of military spending as funding bills took effect. 

Earnings, Especially from Apple, Could Shift Focus Tuesday

Barring another batch of virus-related news, today’s session could potentially help shift the conversation back to earnings. After the busy earnings morning, it’s AAPL in the afternoon. AAPL is expected to roll out the iPhone 5G by fall and analysts have said they’ll be listening for any comments the firm’s top brass have on plans to capitalize the next-gen wireless network. 

AAPL is such a global bellwether that its results could help shape the entire market’s tone for the rest of the week. So many people own the stock, and it also has a huge ecosystem with all of its suppliers.

If AAPL doesn’t beat earnings or raise guidance, the market could continue to sputter. The quality of its earnings is very important. 

SBUX is obviously a much smaller company than AAPL from a market-cap standpoint, but its presence on the ground across much of China comes into play when it reports this afternoon. A lot of people will probably be listening to hear any observations about consumer behavior from a company that owns a lot of corner stores, so to speak, in some of China’s biggest cities. 

Tomorrow, McDonald’s (MCD) might play a similar role when it reports. Before that, Advanced Micro Devices (AMD), a closely-watched chipmaker, reports today  after the close. AMD competitor Intel (INTC) saw its earnings cheered by the market last week, and seemed to hold in pretty well on Monday. Tesla (TSLA) goes tomorrow after its hyperbolic rally the last three months. 

Tech stocks, including AAPL, got hit yesterday amid concern over how the virus might affect China’s manufacturing sector. Shanghai has extended the Lunar New Year holiday for an additional week, through Feb. 9, which raises questions about supply chain impact for AAPL. Maybe today’s earnings call could provide more color regarding that.

Navigating a Virus Scare

If it moves, people sold it Monday. That might be the first lesson in positioning your trades and your portfolio for this type of outbreak.

Airplanes, cruise ships, roulette wheels—companies involved in all those businesses got hammered as fears of coronavirus sent stocks to their worst daily performance since October. It was the first time in nearly two months that the SPX fell two days in a row. The market hasn’t had an excuse to sell all year long, and Monday seemed to be peoples’ chance to start taking a little (or a lot) of profit.

Anything related to travel, tourism, and crude had a tough day, and so did the chip sector. The old fears have come back that a tech slowdown might be on the way, maybe triggered by the virus and its impact on China. Nvidia (NVDA) took a pounding. Other Technology names like AAPL and Microsoft (MSFT) suffered, too.

The Energy space was another target. Halliburton (HAL) shares got taken to the woodshed as U.S. crude oil prices dipped under $53 a barrel at times. It seems like not long ago we were wondering if crude could take out $65. Now the question is whether it can hold $50. 

With fears mounting that the virus could dent tourism, Disney (DIS) had its biggest move to the downside in a while. Shares fell more than 2% after the company closed both its Shanghai and Hong Kong theme parks. As you’d expect, airlines and casinos had a tough day, with United (UAL) stock declining nearly 5% and Wynn Resorts (WYNN) down more than 7%. Fear that people might stay away from WYNN’s Macau facility appeared to help drive shares lower.

Though no sector escaped yesterday's selloff unscathed, defensive sectors such as Consumer Staples, Utilities, and Real Estate fared better than others. Bonds rallied yesterday as well, as investors were seeking a safe haven. This might serve as a reminder that a diversified portfolio typically includes fixed income investments.

The yield curve continues to flatten, with only about 16 basis points separating 10-year from two-year yields by the end of the day Monday, down from above 20 last week, and 34 at the start of the year. That might bear watching, because a flatter yield curve can eat into Financial sector profits and even signal broader economic fears.

Fed Footsteps in Background

The Fed meeting starts today, and while a rate change is highly unlikely if you go by futures prices—which suggest about an 87% chance of the central bank standing pat on the Fed funds rate— Fed Chairman Jerome Powell might have remarks about the potential economic impact of the virus. Some analysts say it’s possible Powell could tell investors the Fed is ready to do whatever it takes to blunt the virus impact on the economy if necessary. That could mean another pledge to keep rates low. 

For investors watching all this, the downturn Friday and Monday provides an interesting lesson. When there’s fundamental stuff going on, it’s important to watch the overnight action. The market opened a little lower Sunday, but didn’t really crater until the middle of the night when trading began in London. Stocks gapped lower and the SPX seemed to find some support at around 3250.

CHART OF THE DAY: GOLD—A BREAKOUT OR DOUBLE TOP? Since gold futures (/GC–candlestick) broke out of its downtrend (yellow line) price continued to move higher until the 1580 level. It almost looked like it would reverse from there but instead it hesitated and then started moving back up toward 1580. It remains to be seen if price will break above this level or if it’s going to act as a resistance level again. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

Risk-on, risk off: Generally, when there’s a strong negative reaction in the global equity markets based on news of a viral outbreak, investors tend to flee to risk-off assets such as gold and bonds. This might be evident when you look at the daily chart of gold futures (see chart above). The sharp selloff in the global equity markets due to the coronavirus fear sent investors fleeing to gold, which is considered a safe-haven asset. Gold prices hit a high that it reached less than two weeks ago. That high is now acting as a strong resistance level. Where gold prices move from here might be an indication of investor sentiment as the current situation plays itself out.

Staying Well: Health Care also took a real beating on Friday, but it was one of the better performers on Monday and is still up sharply over the last three months. Looking ahead, Investors might be getting cold feet about some parts of the sector, especially providers, as the U.S. election gets closer. The whole sector has political risk when you consider that both major political parties have made a lot of noise about trying to lower health costs. Intuitive Surgical (ISRG), a maker of robotic surgery products, fell 4% Friday as the company’s outlook appeared conservative to some analysts. However, their imaging unit did very well in the quarter. Some key health stocks are set to share earnings this week, including PFE today and Amgen (AMGN) on Thursday. Merck (MRK) and Bristol-Myers (BMY) are on tap early next month.

Fear Effect: Volatility took off Monday as the Cboe Volatility Index (VIX)—sometimes considered the market’s main “fear” indicator—jumped above 17. It had been below 13 earlier this month. It fell below 17 early Tuesday. The selling yesterday seemed pretty smooth. There weren’t a lot of massive swings in volume during the day, or any huge percentage moves. Still, investors might want to stay extra careful. Volatility is probably going to be elevated for a while, as it often is at times like these. People making trades might want to consider keeping sizes a little lower than normal and not going in with both hands, so to speak.

Good Trading,

JJ

@TDAJJKinahan

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Key Takeaways

  • Turnaround Tuesday might be a theme as “buy the dip” takes hold

  • Caution indicators like bonds and gold are stepping back, and crude is flat

  • Apple reports after the close, along with Advanced Micro Devices

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