Where Do We Go From Here? Investor Confidence Seems Firm Despite Headwinds

Can the market post a fourth-straight day of gains? It’s looking strong to start out despite a lack of much news, but investor confidence appears to remain firm.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Caution: Return of volatility
5 min read
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Key Takeaways

  • Investor confidence appears strong as markets try for a fourth-consecutive gain

  • Housing starts below expectations, so homebuilding stocks could feel pressure

  • Fed’s Powell and other Fed speakers take to the podiums today

(Wednesday Market Open) It’s hard to keep this market down. Investors seem to want to bet on the rebound continuing and a V-shaped recovery. So despite a lot of potential headwinds, we keep pounding through.

Early signs point to more strength Wednesday as stocks continue to recover from last week’s selloff and major indices try for a fourth consecutive day of gains. Since things can’t go up forever, the question becomes, what’s next? 

If you had one of those little toy balls from the 1970s that answered questions when you shook it up, the reading now might be, “Reply hazy. Try again.”

What’s not so hazy is a slew of data hitting Wall Street today and tomorrow that could help reveal how the economy is performing during this pandemic. It all starts this morning with a look at the housing market, which has been showing signs of life lately. 

May housing starts, however, disappointed with a seasonally-adjusted reading of 974,000. That was up from a revised 934,000 in April but well below Wall Street analysts’ expectations for more than 1.1 million. We’ll have to wait and see if that hurts the homebuilder stocks today. People had been expecting a pretty decent number with mortgage rates where they are and confidence overall looking pretty good. Maybe the June data will reflect that more. 

Consider keeping an eye on the weekly crude inventories report that comes out later this morning. It rose last week by nearly 6 million barrels at a time of year when supplies are typically dropping. Another big jump might get people wondering if demand is still slow to emerge. 

Also, start getting ready for tomorrow’s weekly initial jobless claims report. These numbers have been heading steadily lower so any change in that trend might be a negative surprise for the market. Wall Street’s consensus is for 1.35 million, down from the previous 1.54 million, research firm Briefing.com said. 

There’s more testimony from Fed Chairman Jerome Powell today in front of a House committee, though it seems unlikely he’d say anything too market-moving after being in front of the lectern last week and again yesterday. Other Fed speakers are also scheduled now that the silent period around the meeting is over.

Small Victory

One key takeaway you might not hear much about is that for the second session in a row on Tuesday, small caps led the way. The Russell 2000 Index (RUT) outpaced the rest of the major indices, rising 2.3%. One element of the rally in April and May was outperformance by the RUT, and that’s potentially a positive reflection of the domestic economy because these companies tend to rely less on overseas sales.

The RUT is up 3.3% so far in June, compared with 2.2% for the S&P 500 Index (SPX). It might be a good idea to keep an eye on this relationship, because lately, when the RUT rallies, that’s been a positive for the broader market. 

Other than small caps standing out, there isn’t too much to write home about from a sector standpoint so far this week. Almost all the SPX  sectors are rising pretty much in sync, without much difference between the so-called “stay at home” firms and the “let’s play outside” companies. The market continues to respond pretty vigorously to any positive headlines about progress against COVID-19, as we saw yesterday. 

That goes both ways, obviously. Remember how things went last Thursday when cases began rising in some U.S. states and major indices fell almost 6% in one day? This remains a very volatile market that might punish complacency. Anyone trading here needs to be ready for possible quick moves, especially when the steady flow of earnings news isn’t around to provide distraction from geopolitical and virus headlines. The Cboe Volatility Index (VIX) remains well above 30, when historically it’s averaged closer to 20.

Retailers Lead Charge

Retailers are having a nice week so far, getting a boost yesterday from that surprisingly strong May retail sales report. Nordstrom (JWN), Macy’s (M), Kohl’s (KSS), and Home Depot (HD) all enjoyed big gains as retailers led the charge.

Looking at retail sales, it’s dangerous to paint everything with one brush. You have to bifurcate between companies that need foot traffic and those that can do OK without it. Some of the big department stores sell the client experience, but it’s hard to do that online when people just care about getting their package on time. That’s one reason why Walmart (WMT) seems to be doing so well. 

Retailers could face continued volatility this year, with concerns about a possible “second wave” of the virus this fall. For most of retail, you have to decide if you’re a long-term investor or a trader. At this point, a lot of retail is still arguably a “trade,” meaning you might want to consider extra caution. 

Fed Won’t Be “Elephant” in Bond Room

Let’s go one more time around the block on the Fed’s bond-buying policy announced this week: The Fed just wants to make sure there’s plenty of liquidity in every market. In theory, this strategy should help do that. In practice, the jury is out. Other central banks have tried the same thing, and it’s not unprecedented in the U.S., either. It was tried in the post-World War II years, Powell said. But never in the “modern era,” he added.

Financials took a bit of a blow as Powell again went over the bleak economic projections and promised Fed support, all of which could keep rates at rock-bottom levels. Powell also said the central bank would adjust corporate bond buying based on market conditions. The comment may have disappointed traders who wanted the Fed to keep its foot on the pedal even as financial market conditions improve. 

The Fed chairman gave some color on the bond buying announcement, saying the Fed “doesn’t want to run through the bond market like an elephant.” 

That might stir up some interesting images, but basically he’s saying the Fed isn’t planning to do anything that would really disturb the equilibrium. Some senators said in the meeting that having the Fed in there at all threatens to do just that. One worry is that the Fed might signal winners and losers with its actions. 

Bond market internals aside, it’s arguably a bit late to worry about the Fed’s stimulus impact when it’s already a fact on the ground with trillions of dollars added to the balance sheet over the last three months. Some analysts argue this is what’s really driving the market, and could continue to be the driver for a few weeks until we get to Q2 earnings season. That’s when the rubber might hit the road if results come in even worse than already expected.

You can’t rule that out for some companies, especially with both Wells Fargo (WFC) and Starbucks (SBUX) announcing last week that they’re expecting pressure on their profits in the current quarter. Consider keeping an eye out for similar announcements as we get closer to earnings season, because that might be one thing that could take the wind out of the sails of this rally.

CHART OF THE DAY: A LITTLE RAIN FOR YOUR PARADE? If you’re able to divert your eyes from the rebounding stock market, here’s a year-to-date chart that might remind you there’s still plenty of caution out there. Gold (/GC—candlestick) hasn’t come down much from recent highs, and the 10-year Treasury yield (TNX—purple line) hasn’t come up much from recent lows. Data Sources: CME Group, Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Danger of Missing Out: Trying to time the market almost never works for anyone, as we’ve noted over and over. If you’re a long-term investor, the key thing is to consider staying invested even while making regular adjustments in your portfolio allocations over time to account for changes in the markets and changes in your life. Otherwise you could miss a big positive move. This week brought another reminder of the dangers of missing out (DOMO, maybe?) as the market engineered a key reversal after many investors were prepared for another downturn. Selling got triggered last week after a disappointing economic forecast from the Fed, rising virus caseloads, and a sense that the major indices had come too far, too fast. With the S&P 500 Index (SPX) all the way back to flat for the year after falling 35% and the Nasdaq (COMP) closing at 10,000 for the first time ever, the usual signals seemed to indicate a slowdown in the rally. 

Then about a half hour into Monday’s session, the SPX fell to a technical support level near 2960 and quickly stampeded back above 3000 as the “buy the dip” trade came roaring to life again. The move might have caught sellers by surprise, and some analysts by Tuesday were calling last week’s selling a “bear trap.” That remains to be seen, because things could still turn lower. On the other hand, if you sold on the way down, you might be regretting it now. That’s why it doesn’t make a lot of sense to always be moving in and out of positions if you’re a long-term investor. You’re never going to catch every wave in the right direction, and sometimes your head will go under the water. Even the experts can’t time things, as Warren Buffett has said, so a possible lesson is to not try and be a hero.

Gaining from Gardening: Home Depot (HD) rose 4% yesterday, representing a pretty good move for the stock. Shares appeared to benefit from an upgrade, and also may be benefiting from its strong digital presence. It might come as a surprise, but HD is now the fifth-largest retailer in terms of digital sales, behind only some of the biggest online sellers like Amazon (AMZN) and Walmart (WMT).

During the shutdown they had an extra advantage over some other retailers because the government gave them “essential business” status and they stayed open. HD also may be enjoying the advantage of a surge in gardening interest from people working at home and having more time to get out in the backyard as the weather improves. 

Getting Technical Again: One disappointment from yesterday is that the SPX couldn’t hold early gains above technical resistance at 3130. It gets another chance today, and a close above that might have an outside chance of pulling in additional buyers. Also, don’t rule out “buy the dip” coming back if the market sinks. The turnaround this week after a brief move below 3000 for the SPX has some analysts thinking there’s support not far below where we are now. In other words, unless something new enters the picture, we might have set the range for the time being.

Good Trading,

JJ

@TDAJJKinahan

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

  • Investor confidence appears strong as markets try for a fourth-consecutive gain

  • Housing starts below expectations, so homebuilding stocks could feel pressure

  • Fed’s Powell and other Fed speakers take to the podiums today

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