Not Over Yet: Old Year Still Has Packages to Deliver, Including Key Earnings, Witching

Investors are still digesting the Phase One trade deal agreed to last week and looking ahead to housing data, Nike earnings and a quadruple witching later this week.

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Key Takeaways

  • Monday starts with overseas strength with trade deal in focus

  • The week ahead brings key earnings, including Nike, FedEx, and Micron

  • Phase One deal was something, but full-fledged deal remains unreached

(Monday Market Open) A lot of holiday packages got wrapped up last week, including a Phase One trade deal, a Fed meeting, and the UK election, but the week ahead still has a few bows left to tie.

We’re in the home stretch of 2019, with this week probably the last of the year to feature any major volume before people head off for the holidays. Several major earnings reports, with Nike (NKE) being one of them, highlight the coming days. There’s also key housing data and a “quadruple witching” (see more below). Things aren’t over yet for this old year.

We’ll talk more about that Phase One deal a little lower. To sum it up in a sentence: We got something, but until we have a full-fledged deal, it may be tough to get excited.

Last week was another solid tally for the S&P 500 Index (SPX), now up more than 10% from its early October lows. Nine of the 11 S&P 500 sectors are in the green over the last month, and the SPX is up more than 26% year-to-date. The Nasdaq (COMP) led all the major indices Friday, while small-caps stumbled.

Friday might have seemed like a typical “sell the news day” as stocks retreated from early gains they posted on news of a Phase One trade deal. On the other hand, it’s hard to talk about “selling” when you consider the markets finished just about unchanged and basically at the record highs they’d hit the day before.

Stocks around the world mostly posted gains early Monday amid excitement over the trade deal and the UK election results. Also, some fresh data from China Monday showed factory production and consumer spending improved in November, The Wall Street Journal noted. The better-than-expected results for industrial production and retail sales could help ease investor concerns about the economy there.

The U.S. markets might see some follow-through, at least judging from pre-market strength. One question is whether the “Santa rally” that sometimes happens in late December might have gotten pulled forward a bit this year. The answer remains to be seen.

Earnings Just Keep on Coming

This week’s calendar includes another batch of earnings potentially worth watching, including Nike (NKE), Micron (MU), and FedEx (FDX). The NKE and FDX results could provide more clues about the consumer situation, while MU puts semiconductors in the spotlight. The chip sector had a rough day on Friday as some of those stocks might have gotten powered down by Broadcom (AVGO), which fell despite what appeared to be pretty strong earnings. Pressure on the stock came after the company forecast a sales decline for its mixed-signal chip business in fiscal 2020, Barron’s noted.

However, semiconductors as a sector are up more than 50% year-to-date and recently broke above a resistance level in the charts (see chart of the day below), so it’s hard to get too upset about one weak session. The Phase One deal with China would seem to be a positive development for chips, as well as for other Technology companies that have a big presence across the Pacific, including Apple (AAPL). Shares of AAPL moved up more than 1% Friday and posted all-time highs.

Another stock that ended the week on a high note was software firm Adobe (ADBE), which sprouted up almost 4% after earnings easily topped expectations. The big earnings beat drove shares toward all-time highs as analysts upgraded the company and raised price targets.

Looking ahead to NKE, the stock’s been on a nice run over the last month to put the icing on a really solid year. The company ran up big gains after its last earnings outing in September when it reported 27% sales growth in China. So one factor that might be worth a look when NKE reports after Thursday’s close is whether it built on or at least maintained that big number. Online sales rose 42% in the prior quarter as NKE continues to ramp up direct-to-consumer, so e-commerce again could be a big talking point this time around.

Bonds had an interesting week but ended not far from where they’ve been hanging out a lot lately at just above 1.8% for the 10-year Treasury yield. The yield fell below 1.8% early in the week and then climbed to above 1.9%—a one-month high—as the Phase One trade deal brought some excitement. Investors piled back into Treasuries at the end of the week in what might be a sign that people wanted to remain on the sidelines and see exactly what this preliminary deal might mean heading into the weekend.

How Big a Relief? Let’s Wait and See

One thing the deal definitely meant was the cancellation of those threatened new tariffs on $156 billion in consumer goods that had been scheduled to go into effect yesterday. That’s going to probably feel like a big relief for many U.S. companies with operations in China, who’d been worried they could suffer margin and sales losses if the tariffs raised prices for U.S. consumers.

The really positive thing is that those last-minute holiday presents people are out buying aren’t suddenly going to have new and higher price tags slapped on them. This probably helps the retail sector, along with any companies that make products like smart phones, toys, and consumer electronics that were supposed to be targeted by the tariffs that never came.

What isn’t getting explained enough (and that could be one reason stocks didn’t add to their rally Friday) is what the next negotiating steps are, and how nagging issues like intellectual property and forced technology transfers will get addressed. The U.S. side said China did make some commitments on those things, but the details remain a bit fuzzy for now. The Phase Two talks might address those in more detail, and could be crucial to watch as the new year begins. This likely means the volatility we saw over trade in 2019 isn’t over yet.

A lot of the content of the deal announced Friday featured agriculture. However, that’s arguably the low-hanging fruit. China’s already been a huge buyer of U.S. soybeans and other farm commodities for a couple of decades, and as long as that hog epidemic continues there, Beijing will likely need to buy U.S. pork.

What we do know is this: The tariff rate on $250 billion of Chinese imports will remain at 25%; the tariff rate on $120 billion of Chinese imports will be cut to 7.5% from 15%, and China will try to purchase $40 billion in U.S. farm goods. A deal will reportedly be signed in early January. The Wall Street Journal called it a “limited” trade deal, and that’s probably a good explanation. Phase Two talks are expected to start soon, and that’s when those big gorillas in the room might be addressed.

Volatility ebbed to finish the old week. The Cboe Volatility Index (VIX) tumbled back below 13, but don’t necessarily expect volatility to remain hibernating this week. Quadruple witching on Friday might cause some choppiness (see more below). VIX fell below 12 early Monday.

Data-wise, investors might want to closely watch tomorrow’s November housing starts and building permits numbers. They showed signs of improvement in October, so we’ll see if that carried into November, as well. Consensus heading into the report is for November housing starts at a seasonally-adjusted annual rate of 1.34 million and building permits of 1.4 million, Briefing.com said.

Things just keep getting more turbulent for Boeing (BA) shares. They fell another 1% in pre-market trading Monday after The Wall Street Journal reported that BA  is considering either halting or further cutting production of the 737 MAX as uncertainty grows over the plane's return to service.

CHART OF THE DAY: CHIPMAKERS BREAKING OUT. Positive trade news had an impact on the tariff sensitive Semiconductor sector last week, though it gave back some gains on Friday. The Philadelphia Semiconductor Index (SOX - candlestick) broke out above a significant resistance level at 1760 (yellow line) on Dec. 12, a high it hit about a month earlier on Nov 11. Data Sources: Philadelphia Stock Exchange, Nasdaq. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Witch Watch: Yep, it’s that time of the quarter again when the broomsticks come out. Friday is quadruple witching day. It happens every quarter on the day when futures and options on indices and stocks all expire on the same day.  At every expiration, you should have a heightened sense that there might be more movement at the open or close as people unwind positions. On every expiration you should be aware, and on quadruple witching, you have to be more aware. Here’s where you can learn a little more about what you might want to keep an eye on ahead of and during options expiration days.

Greenback Losing Steam: Turning to another geopolitical issue, the dollar index descended to its lowest point since late July on Friday at around 97.2. This is an interesting level on the charts, marking an apparent support point that was tested in October and again in November, bouncing back both times. A drop below 97 might open the dollar up to some technical selling.

All this would be good news for multinational firms who’ve seen their profits dragged by dollar strength all year. In fact, if the dollar does go back to the mid-90’s and stays there for a while, some analysts might have to start raising their 2020 earnings expectations for major Technology, Industrial, and Materials companies that rely a lot on foreign business. The Industrial and Materials sectors happen to be ones that saw their earnings struggle in 2019. The dollar is under pressure in part due to a strong British pound after a convincing victory by Conservatives in Thursday’s parliamentary election. This likely opens the way to Brexit happening in the next few weeks, though with this issue, it’s never been a good idea to make predictions.

Trend is Your Friend...But Not Necessarily Forever: The so-called “FAANG” stocks may not be in the headlines as much, but they still can have an outsize impact on the market. Though the rally since October has been pretty broad-based across lots of sectors and small-cap, mid-cap, and large-cap names, the “alpha males” in the room like Alphabet (GOOGL), Apple (AAPL), and the FAANG group’s close cousin, Microsoft (MSFT), continue to draw huge chunks of investor cash. In part, this simply reflects that because of these companies’ huge market shares, any portfolio manager trying to compete with a benchmark probably has to have these included in the mix.

When things are going well, that’s not necessarily a problem. However, if any of these mega-cap names run into trouble, it could mean tough sledding for more than just the FAANGs and their cousins. “The trend is one’s friend until it isn’t,” said Patrick O’Hare, chief market analyst at Briefing.com. “There’s a lot of faith in those leading companies continuing to do their thing and generate huge amounts of cash, which bodes well for shareholder returns. With expectations so high, there’s definitely a concentration risk if any of them disappoint. There would be some payback because they have such large caps that they’d have a major impact on the index and act as a weight.”

Good Trading,

JJ

@TDAJJKinahan

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

  • Monday starts with overseas strength with trade deal in focus

  • The week ahead brings key earnings, including Nike, FedEx, and Micron

  • Phase One deal was something, but full-fledged deal remains unreached

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