Scrimmage Line: As Month Ends and Virus Flares, Profit-Taking Could Weigh

The market couldn’t follow through early Friday on Thursday’s late recovery. Instead, stocks came under pressure following earnings from Caterpillar and Exxon Mobil.

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5 min read
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Key Takeaways

  • Stocks have a weaker tone amid pre-weekend virus fears

  • Amazon up sharply as investors cheer its earnings results

  • Overnight trading Sunday could be important in setting Monday’s tone

(Friday Market Open) It looks like many investors are running routes out of town before the big football weekend. Disappointing earnings news from Caterpillar (CAT) and Exxon Mobil (XOM), more coronavirus fears, and some end-of-the month positioning blocked rally attempts early on.

New cases of the virus in Russia appeared to spook markets early on, and it’s also hard to have a good start when two heavyweights like CAT and XOM are getting tackled. Also, today’s the last day of January, and many investors had a great month in the market. The end of the month can sometimes see a little profit taking come in. 

As we saw last Friday, some people could feel the risk of exposure—not necessarily to the disease itself but rather the market impact of any coronavirus news that were to come out over the next two days when the markets are closed. So we might see some load-lightening today, regardless of any fresh negative developments. Maybe investors think they can more easily enjoy the game Sunday without worrying so much about the stock market.

That said, investors might want to keep in mind that futures trading starting this Sunday night (yep, right around game time) is probably going to be important for setting Monday’s tone. The market in Shanghai will be back open after the extended holiday—the Shanghai market has been closed since Jan. 23—so that could be a big one to watch. Also, remember to consider watching U.S. futures trading once it starts Sunday to get a sense of the tone.

CAT got hit by what some analysts called weak guidance. CAT’s call could be an interesting one because of the company’s heavy exposure to China. Missed earnings at XOM just reinforced the struggles of the Energy sector.

The early weakness today is kind of surprising in one sense, when you consider where things ended up Thursday. Stocks really turned it around to end the session after the sharp earlier losses. Sometimes a strong finish can set up a positive tone for the next day, but not this time, apparently. Hong Kong stocks fell again Friday, but less than 1%.

Staying overseas here for a minute, Britain formally leaves the European Union tonight, but that’s more symbolic than anything else. The country still has until Dec. 31 to work out its future relationship with Europe. Negotiations begin in March. If they break down or don’t make progress, it could set up a day of reckoning down the road. Just another geopolitical thing to keep investors on their toes this year.

Double-Digit Gains for AMZN

Amazon’s (AMZN) solid earnings after the closing bell yesterday did give the market some temporary excitement. Shares of the online retailer/cloud/delivery/grocery store/streaming mega-giant jumped more than 10% in pre-market trading to move back above $2,000 for the first time since late July. 

Guidance came in right around the middle of the Street’s consensus and might have seemed a bit conservative to some, but the 21% growth in Q4 revenue solidly beat analysts’ projections and EPS was in the stratosphere at $6.47 vs. the $4.04 that analysts expected. Closely-watched Amazon Web Services (cloud) business revenue rose 34% and slightly edged out consensus views. It looks like gains on the services side of things might have helped gross margins, but shipping expenses do keep growing.

Those rising costs are a concern, but AMZN appears to be doing a good job with the “sell them the razor and they’ll keep buying the blade” approach. With paid Prime customers now at 150 million, the company has a big base that’s probably not leaving AMZN’s ecosystem anytime soon. In sector terms, it’s as if AMZN has shifted from discretionary to staple in many households.

Meanwhile, Visa (V) shares fell in pre-market trading as investors reacted to the company’s outlook. As Reuters noted, V said revenue this year would be crimped by incentives it provides to banking clients.

IBM (IBM) shares went the other way, rising sharply in pre-market trading as the company announced a CEO change. 

Gong, Gong, Gong

The markets are ringing like a giant bell this week, gyrating around without a firm sense of direction. Things went back and forth from big losses to slight gains in stocks yesterday, but bonds, gold, crude, and copper all kept pointing toward fear being a big overhang as the coronavirus officially became a World Health Organization (WHO) emergency. The 10-year yield slipped below 1.55% for the first time in four months, but volatility did fade a bit late Thursday as stocks mounted their late comeback. Yields remained around 1.56% early Friday. 

Some of the late recovery yesterday might have reflected investors climbing back in after selling on anticipation of the WHO move. The decision was announced pretty late in the session and many had expected it. The WHO declaration tells countries that the situation is “grave,” and allows governments to decide whether to close  borders, cancel flights, screen people arriving at airports, or take other protective measures.

Some of that is already happening, and travel stocks took it on the chin again Thursday. The Dow Jones Transportation Average ($DJT) posted more losses and is down about 3% over the last five sessions as airline stocks lose altitude. Worries about Boeing’s (BA) 737 MAX issues already had the $DJT hurting, but the virus just pours salt in the wound. 

Semiconductors also got chipped Thursday, with Intel (INTC), Nvidia (NVDA), and Texas Instruments (TXN) all losing ground at times during the session. Overall, the sector finished just a little lower yesterday, but is down almost 5% over the last week as old fears about Chinese demand rose again like a vampire haunting investors. Still, it’s hard to get too dizzy when you’re talking about a part of the market that’s up more than 45% from a year ago.

Two other big names continued climbing Thursday as Microsoft (MSFT) and Tesla (TSLA) rallied off their respective earnings. Both maintained big gains even when the market was hitting its lows Thursday.

MSFT saw a bunch of upgrades as positive news about their web services show the company making up more and more ground vs. competitors. They’ve completely remodeled their business in a brand new area and investors and analysts seem to love it. The stock took the market on its back last year and continues to lead.

CHART OF THE DAY:  CHECK THE OIL PRESSURE? Travel restrictions to China are likely to have lowered the demand for oil. On the chart of crude oil futures (/CL-candlestick) price fell to just above $52, which if you go back to August 2019, was a strong support level for the commodity (yellow line). Crude fell below the support level yesterday but rebounded and closed above it. Something to keep an eye on going forward is how crude reacts to that support level. Data Source: CME Group.  Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

February Frenzy Begins Monday: After this crazy week of earnings, 60% of the S&P 500 companies will have reported. If you think things could quiet down next week, however, you’re in for a surprise. Some of the big burners opening their books the first few days of February include medical giants Merck (MRK), Bristol-Myers Squibb (BMY), and Abbvie (ABBV), FAANG member Alphabet (GOOGL), entertainment industry behemoth Walt Disney (DIS), consumer products firm Philip Morris (PM), and automakers General Motors (GM) and Ford (F). 

Doesn’t sound like things are quieting down as February begins, and they aren’t. Looking for more on what to watch in February? Here’s where you can go to find out. 

Dollar Watch: Six months ago, the Fed began to lower rates after nearly four years of hiking them. At that point, the dollar index stood just above 98. Now, after three rate cuts and the Fed resolving again this week to keep a low rate policy, where is the dollar? It traded around 97.9 on Thursday afternoon. Economics textbooks will likely tell you that a low rate environment tends to weaken the dollar, and maybe the Fed hoped its policy would do that and lower the cost of U.S. goods for customers overseas. If that was a goal, it failed, possibly because of all the geopolitical fears over the last six months. From Iran to trade with China to Washington politics to Brexit to the coronavirus, people have been scurrying for “safety,” in bonds and the dollar. At one point this month the dollar index fell to 96.39, but that’s as far down as it’s been.

If the dollar starts to lose ground, it might be one clue that fears are fading and might be a positive signal for the stock market. In the meantime, there’s no relief from the strong dollar’s painful impact on earnings for multinational corporations, and while some recent surveys of economists show expectations for the dollar to fall in 2020, some analysts aren’t buying it. The dollar bulls say economic growth just isn’t necessarily strong enough outside of the U.S. to make the greenback cheaper anytime soon.

Calling TINA: An acronym we’ve been seeing more of might have gotten some reinforcement with the Fed’s decision to keep rates unchanged Wednesday. When bonds rally this hard and cash pays nearly nothing, a few people are starting to say “There Is No Alternative” (TINA) to buying stocks. That’s how some analysts explain the fierce rally since last October. When investors can’t find good reasons to put their money into Treasuries or leave it in the bank, they might feel forced toward equities. And not just any equities. Look how Utilities are doing, up more than 6% year-to-date and 28% over the last year. That’s usually a pretty sleepy sector, but with bond yields well below 2% and investors chasing income, Utilities become more and more in demand. Now the sector is close to all-time highs, so maybe investors could start looking elsewhere. Money’s been pouring into corporate bonds, driving down yields even for some lower-quality ones. U.S. investment-grade bonds now yield an average of just 2.8%, while high yield goes for 5.1%, Barron’s said recently. If you’re thinking about parking money in high-yield corporate bonds, remember to know the risks going in, which include possible default and loss of your investment.

Good Trading,

JJ

@TDAJJKinahan

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

  • Stocks have a weaker tone amid pre-weekend virus fears

  • Amazon up sharply as investors cheer its earnings results

  • Overnight trading Sunday could be important in setting Monday’s tone

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