Can May Turn Green? Week Opens in a Buying Mood as Major Retailer Earnings Awaited

The market has struggled for gains all month, but seems to be getting a small boost this morning from hopes of lower commodity prices and a surge in bitcoin. Retail earnings are in their final stretch ahead of the holiday weekend.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/bears out: selloff picks up steam
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Key Takeaways

  • After struggling most of May, markets gather strength to start final week of month

  • Higher bitcoin price after volatile weekend appears to be one factor helping stocks

  • Another big week of retail earnings ahead including Best Buy, Costco, Nordstrom, Gap

(Monday Market Open) Is this the week we escape the May doldrums? 

Though the market is in a better mood so far today, Wall Street continues to struggle toward summer as earnings season winds to a close. The S&P 500 Index (SPX) just suffered its first back-to-back weekly losses since February, and the Nasdaq 100 (NDX), heavily weighted toward Tech, only barely missed falling five straight weeks. It managed to eke out a small gain in the week that just ended, but remains down about 4.5% from its April all-time high. 

Perhaps working in the bulls’ favor is something research firm CFRA pointed out: Last week’s low of 4061 for the SPX was just slightly above the previous week’s low of 4056. From a technical point of view, it could be supportive that the older low point held, but we’ll have to wait and see. The SPX ended last week slightly lower for the month, but hasn’t had a losing month since January. 

Like it or not, another item that could help determine direction this week is bitcoin (see more below). The cryptocurrency was volatile over the weekend but up slightly this morning, which seemed to help support stocks in pre-market trading. If nothing else, bitcoin is one measure of how much risk people are comfortable taking. It seems right now like the world is in more of a buying mood.

Meanwhile, inflation fears that dominated the last few weeks and helped keep stocks under pressure haven’t disappeared, but may have been tempered a bit over the weekend when China said they’d try to keep commodity prices down. The government wants to clamp down on speculation, according to media reports. 

Earnings Highlights Include Retail, Chip Sector, Home Building

The earnings parade marches along this week without slowing down much despite more than a month of heavy company reporting. 

Two of the reports to consider tracking include retailers Best Buy (BBY) and Costco (COST), both of which benefited from the “stay at home” economy and might face tough comparisons in coming quarters. The retail calendar also includes Nordstrom (JWN), Gap (GPS), and Dick’s Sporting Goods (DKS). Strength in retail sales over the last few months probably provided a tailwind for many of these firms, but the question always seems to be, what next? 

Beyond retail, Nvidia (NVDA) reports from the semiconductor sector, and analysts have said they expect solid numbers based on the demand metrics they’ve been tracking. NVDA also just grabbed some headlines last week by announcing a proposed four-to-one stock split, pending shareholder approval. Remember that while splitting the stock doesn’t change the market cap, a lower price per share can sometimes reel in some investors who may not have been comfortable paying $600 for a single share of a stock like NVDA.

By the way, shares of NVDA are already up almost 200% from their Covid low. It’s been an amazing run for the chip sector, and many chip stocks had decent gains last week as Tech kind of stabilized. As one analyst noted on CNBC Friday, a strong showing by NVDA when it reports Wednesday after the close might give Tech another thing to hang its hat on after a rough May so far. Salesforce (CRM) is another one to watch in Tech later this week as the cloud-based software firm opens its books. We’ll talk more about CRM and NVDA tomorrow. 

Housing has been red hot lately, but last week saw a couple of data points fall below Wall Street’s expectations as housing starts and existing home sales disappointed. Toll Brothers (TOL), one of the big home builders, is expected to report this week, so let’s keep track of what their executives have to say about the recent bump in mortgage rates and how that might be affecting demand.

How Confident Are You? We’ll Find Out Tomorrow

Today’s a data desert with no reports of any significance scheduled, but tomorrow brings new home sales for April and consumer confidence for May. Keep an eye on one-year inflation expectations in that consumer confidence report, and also on overall expectations. April’s confidence report was really solid overall, but if inflation is starting to make people nervous, it might show up in the May data we’re about to get. 

Another thing to watch this week is the technical picture around the SPX. Last week it made a nice bounce off the 50-day moving average, which now stands near 4091. That likely remains a key technical support area, and every test of it so far this year ran into a “buy the dip” mentality. The first time this doesn’t happen, maybe it’s time to get a bit less confident. Until then, investors are likely to keep doing it as long as it keeps working. 

The other SPX level that may be important is up near 4180, a pivot point we’ve been watching that’s also roughly where the index closed in April. It edged just above that early Friday but wasn’t able to hold gains, a minor bearish note heading into the weekend. It didn’t look like there was much buying appetite up there, which points again toward investor caution amid a lack of positive catalysts. This caution may be why gold prices have been gaining ground and the 10-year Treasury yield failed to hold its mid-week gains. 

The level to watch with the 10-year yield is 1.7%, a point it wasn’t able to break through last week despite the slightly hawkish Fed minutes that caused an upheaval on Wednesday. Anywhere higher than 1.75% might get people a bit more interested, but it’s now been two months since the 10-year yield touched those levels, and it’s generally been range bound between 1.5% and 1.7%. It’s right in the middle of that at 1.61% to start the week. Not much drama there so far, and it would likely take some sort of major surprise in the May jobs data at the end of next week or some unexpected word from the Fed to knock the yield much out of its range before the Fed meets in mid-June. 

The NDX, meanwhile, moved below and then finished above its 100-day moving average (see chart below) last week. Though it fell Friday in lower than normal volume,  it may be a good sign for Tech that the 100-day moving average near 13,307 held at the end of the week. 

Bitcoin and Stocks: Is a Divorce in Process?

This isn’t a cryptocurrency column, but there’s no way you can ignore bitcoin’s impact on the markets last week or its possible effect in the days ahead. It looked on Friday like stocks and bitcoin were trying to divorce each other, as my TD Ameritrade Network* colleague senior equity strategist Kevin Hincks observed, meaning stocks and bitcoin might be going more separate ways on the charts. 

If that “divorce” happens, it would probably be good for stocks. It’s hard to argue that bitcoin’s volatility and especially its steep descent early last week didn’t put some pressure on equities. As the week advanced, the ups and downs in bitcoin seemed to have less of an impact, so we’ll see if that continues. At the same time, stocks like Tesla (TSLA) and Coinbase (COIN) that have specific ties to bitcoin could continue to be more prone to moving up and down with the cryptocurrency. 

That said, bitcoin does seem to be setting the momentum again early Monday after it rose over the weekend. It’s not a permanent indicator of where stocks are going by any stretch of the imagination, but it was a very quiet news weekend so people are looking for indicators on how to trade.

Remember, if you’re thinking of trading cryptocurrencies, don’t go in with blinders. Volatility is only one of the risks. Authorities are still getting regulatory infrastructure in place, and nothing exists yet to back you up, like the Federal Deposit Insurance Corporation does for U.S. bank customers. That means investors are entirely responsible for the security of any cryptocurrency holdings.

philadelphia semiconductor index

CHART OF THE DAY: ABOVE AVERAGE SHOWING FOR TECH. One way to keep track of the Tech sector is to watch the Nasdaq 100 (NDX—candlestick), which contains most of the largest Tech stocks. This year-to-date chart shows how choppy it’s been, and it hasn’t made a new high in over a month. The choppiness continued last week, but significantly, the NDX managed to finish above its 100-day moving average (blue line) after falling below it, sometimes a positive technical sign. Data Source: Nasdaq. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Get Out! Last year, lots of us spent time doing home projects or moving to new digs as Covid raged. Basically, having more time on their hands and more time staring at the same four walls seemed to inspire people to either fix up or get out. The strength in home improvement appeared to continue into 2021, based on the amazing 30% same-store year-over-year growth Home Depot (HD) reported last week and also the strong showing by Lowe’s (LOW). And until recently, the housing market also seemed to be unstoppable.

Last week, however, brought soft housing starts and existing home sales data for April. While it’s important to remember that one month is never a trend, one school of thought is that as people get out more and start traveling and going back to work, the housing market might cool a bit. More people are finding things to do besides stay at home, and many who wanted to move already have. It’s possible some of the strength in housing and home improvement got pulled forward by the pandemic, just as we saw demand for internet conferences and home exercise equipment pulled forward. This plays into one theory that’s been a speed bump for the stock market lately—the idea that we’ve reached the peak of post-pandemic economic growth. 

This remains a theory, not a fact, and it’s worth monitoring lumber prices, new home sales data tomorrow, and next month’s earnings reports from a couple of the biggest home-building companies to get a better sense of the housing roadmap in particular. If it’s true that housing had its best “showing” already, that could be one more point in favor of the so-called “reopening” trade where companies that offer “experiences” tend to perform better than companies selling you stuff to do while you sit around. 

Captain Has Turned the Seatbelt Sign On: If, like a lot of people, you wake up on Monday already looking forward to the weekend, you’re probably aware that next weekend gives us an extra day. A week from today we observe Memorial Day, and U.S. markets will be closed. For anyone trading the market this week, that means it’s important to keep volatility in mind, because volume is likely to taper every day this week as people start to wrap up for the holiday, barring some major news event. This can mean wider spreads between bid and ask, possibly leading to quicker gains and losses in stocks as buyers try to find sellers and vice versa. So, if you do plan to be active, remember to stay alert, be nimble, and consider keeping your trade sizes smaller than normal. There’s no guarantee, but doing all this (or staying out of trading altogether right ahead of the weekend) might help you avoid getting buffeted by any turbulence. Volatility isn’t flashing much of a signal right now, with the Cboe Volatility Index (VIX) hanging around right near 20 this morning. 

Financials Impress: It wouldn’t be right to not mention Friday’s very nice performance by the Financial sector, which was doubly impressive since it came without any help from lackluster Treasury yields. The biggest investment banks almost all shined in their Q1 earnings, and most of those stocks got rewarded by investors over the last month since reporting. Solid performance in a cyclical sector like Financials often suggests overall investor confidence in the economy. Consider watching this week to see if Financials can build on that strong performance, because it could suggest continued strength for “value” in its ongoing tug-of-war vs. growth.

Good Trading, 

JJ

@TDAJJKinahan

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This week’s economic calendar. Source: Briefing.com
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Key Takeaways

  • After struggling most of May, markets gather strength to start final week of month

  • Higher bitcoin price after volatile weekend appears to be one factor helping stocks

  • Another big week of retail earnings ahead including Best Buy, Costco, Nordstrom, Gap

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