Search for Fresh Kindling: Lack of Spark from New Catalysts Has Market Under Pressure

The market seems to lack direction today as investors focus on a lack of positive catalysts that would help build on yesterday’s record close. A new stimulus move by China helped stocks there overnight.

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5 min read
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Key Takeaways

  • China announces new stimulus move, helping stocks climb in Shanghai

  • Lack of new positive catalysts might be putting pressure on U.S. market

  • Deere earnings tomorrow as dollar continues to rise, posing potential headwind

(Thursday Market Open) Today’s question is what can the market do to follow up another record-high close. With catalysts kind of thin, it might be hard to keep the spark in this rally, at least for the moment. Futures had a weaker tone before the opening bell despite positive news about China cutting its primary loan rate.

The China stimulus didn’t seem to have much impact outside of China, where stocks rose nearly 2%. European markets fell, U.S. Treasury yields dropped, and the dollar continued to roll up gains vs. the euro as investors apparently still sought potential safety of dollar-denominated assets. On the plus side, crude has really turned things around this week, with front-month crude futures (/CL) starting the day around $54 a barrel.

We’re approaching the end of another week, so even though this may sound like a broken record, investors might want to stay on their toes today and tomorrow for some potential profit-taking pressure ahead of the weekend. It didn’t really turn into a factor last Friday, and volatility was on the decline yesterday, but being extra careful isn’t a bad thing.

Today doesn’t stand out as far as data, but existing home sales for January come out early tomorrow and could bear watching. They’re expected to come in at a seasonally-adjusted 5.42 million, according to Briefing.com, and follow Wednesday’s 21.4% year-over-year increase in January housing starts—a 13-year high. The big story with existing homes has been falling inventories and rising prices.

Yesterday’s monthly producer prices data caused a little static with the headline number rising more than analysts had expected. As Briefing.com pointed out, however, the 2.1% year-over-year growth is pretty tame. Also, a single month is never a trend, so let’s stay tuned for next month’s data.

The dollar index is knocking on the door of 100 as people keep flocking toward supposedly “safer” assets, though no investment is truly safe. A rising dollar can hurt multinational U.S. companies, but Information Technology and Energy—two areas where some companies have a lot of international exposure—led all sectors on Wednesday.

What Next for Tesla, Walmart Shares After Turbulent Wednesday?

Tesla (TSLA) also stayed hot yesterday, but as you’ve probably read, this is a ride where you’ll want to make sure you meet the height requirements. There’s a lot of volatility and no guarantee things won’t take a sharp turn south at some point. It’s hard to be sure if this one is paying much attention to fundamentals now as shares navigate what continues to look like a short squeeze.

At the same time, Walmart (WMT) gave back most of Tuesday’s post-earnings gains on Wednesday after an analyst said that the company’s customer data collecting could raise privacy concerns. It wasn’t a huge drop, but we’ve all seen this sort of privacy focus get more attention over the last few years, and it’s a legitimate concern not just for WMT but for the retail sector in general. These are issues we’ll probably have to look at more and more going forward. 

On the plus side for WMT, it does seem to be weathering the coronavirus better than some other major retailers. WMT hasn’t closed a single store in China, compared with Nike (NKE) and Ralph Lauren (RL) temporarily closing some stores. WMT's ability to stay open is important to keep in mind, because that might give it an advantage.

In other corporate news, Deere (DE) reports tomorrow morning. This company is often seen as a good barometer of the farm economy and also of international trade and the dollar. It might be interesting to see if executives do mention the dollar, which might become a headwind.

High Flyers and Safe Havens: Are They Ever the Same?

One other potential reason we’re seeing stocks like TSLA and maybe some of the chip companies like Nvidia (NVDA) take off might actually go back to coronavirus.

Notice that TSLA is up 57% since Jan. 29 and NVDA is up 27%. Over that same period, which coincides with the surge in coronavirus cases and headlines, the Shanghai Composite of major Chinese stocks was about flat before surging today. Shares of Alibaba (BABA), one of the best-known and biggest companies in China, are up just 5% since late January. Some analysts think Q1 Chinese economic growth could fall 6% from a year ago due to the virus.

With this in mind, could it be that investors in Asia and elsewhere are piling into shiny U.S. technology names because they’re worried about stocks in China and the rest of the region? For that matter, is it a coincidence that, over this same time period, bitcoin and other cryptocurrencies have seen a bit of a resurgence? 

The "high-flyer-as-safe-haven" concept is just one theory, although it seems logical that TSLA, NVDA and other U.S. companies with exposure to China might also suffer due to the virus. Perhaps not as much, though, and that might fuel some of the thinking. If that’s what’s happening, it’s possible some of these names, and maybe the entire U.S. stock market, could deflate a little if the virus situation starts to improve and foreign investors shift assets back into China. 

This isn’t to take anything away from either TSLA or NVDA. You could argue there are fundamental reasons for them to be doing well in the market, considering their recent positive earnings reports. Whether they should be trading at these kinds of valuations certainly is a fair question, however. 

Another reason some analysts say U.S. stocks keep rolling higher could be their relatively high yields as 10-year Treasury yields remain in the dog house. If you strip out S&P 500 companies that don’t pay dividends, the average dividend yield is 3%. That might look pretty tempting to overseas investors facing negative bond yields there, or to U.S. investors eyeing 1.54% yields here. That said, before you jump into stocks for their dividends, keep in mind that stocks tend to be more volatile and risky than fixed income investments, and dividends aren't guaranteed. 

Don’t Just Do Something, Stand There!

One argument in favor of higher stock prices potentially has a little less traction after Fed minutes released Wednesday showing the Federal Open Market Committee (FOMC) doesn’t seem to feel the need to reduce rates further anytime soon. 

It’s hard not to see where the Fed Chair Jerome Powell and the rest of the central bank is coming from at this juncture. If you look at the U.S. economy, why would a rate cut be needed right now? Employment is awesome, and housing is great. The stock market is setting new records. Earnings growth is meh, but Q4 results have generally been a bit better than analysts originally expected. If you look around, it’s hard to see as much fault with things as many people seem to want to find right now.

Yes, coronavirus could have a negative impact on the market and the economy, and the Fed minutes pointed out that Mr. Powell and company are keeping a close watch. However, there’s a psychology out there that seems to believe the Fed or some other entity should try to prop up the market if it falls. That’s not the case.

No one wants to see it happen, but there’s no rule that says the market can’t drop 10% or even 15%. That wouldn’t look good in anyone’s retirement accounts and you’d hope things could bounce back, because no one wishes harm on anyone. At the same time, this expectation that the market can’t go down, and that if it drops 1% something has to be done, is what’s scary.

CHART OF THE DAY:  GOLD KEEPS ON RISING. Generally, gold prices rise when equities aren’t performing well. So why are gold prices moving higher when equities are also moving up? The divergence between gold futures (/GC-candlestick) and Treasury yields (TNX-purple line) suggests that low yields could be helping push gold prices up. Data sources: CME Group, Cboe Global Markets. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

When Everything’s Expensive, Tech Sees In-Flow: An argument you hear a lot lately centers around valuations being historically high. However, it might be hard to convince a typical investor (if there is such a thing)  to worry about that when it seems like every time they get into the market they see their investments rising. At least that’s been the case over the last few months, especially in the high-flying Information Technology sector.

This can’t last forever, because nothing goes straight up without a break. Still, even people who might be considering some profit-taking and a move into so-called “defensive” investments like gold, the dollar, bonds, and Utilities can’t find bargains in any of those. That might be causing money to get steered into areas like Information Technology and Consumer Discretionary longer than some might have thought. The thinking might be not to fight the Fed as it keeps borrowing costs low. It also could be people remembering that old saying, “The trend is your friend.” A better-than-expected Q4 earnings season for the tech sector doesn’t hurt, either. 

No, You Go First: When you’re a $1 trillion company like Apple (AAPL), it might not hurt too much to do what it did Monday and announce way ahead of time that quarterly revenue isn’t likely to meet previous guidance. However, if coronavirus is having that kind of impact on AAPL’s cash register, why aren’t other tech companies—especially AAPL suppliers—also warning about revenue? Well, if you’re a Silicon Valley semiconductor company competing in that cutthroat environment and you don’t have $1 trillion backing you up, you might not want to go out on a limb and say things are getting bad unless you’re absolutely sure they’re really getting bad.

We’re only midway through Q1, so even companies suffering now might hope the virus starts to fade and they can still make up for possible softness that occurred earlier in the quarter. AAPL can kind of get away with being the first one to go public with stuff like this, because it’s such a massive elephant in the room. Let’s wait until the next earnings season gets closer and see if any semiconductor or other tech firms start talking about revenue shortfalls. It’s a possible stumbling block for Information Technology that investors might want to monitor in coming weeks.

Signs of Progress: It’s good to see headlines about 401(k) balances hitting records, because that’s a sign that more people are listening to repeated urging (including on sites like this) about the importance of investing in yourself. The average 401(k) balance rose 17% last year to $112,300, the Associated Press reported this week. That said, the average is skewed to the high side by a small number of accounts that have $1 million or more. So the median balance of $27,000 might be closer to reality for many people. One good lesson from the report is that those who got serious about saving saw rewards for that. Workers who contributed to their 401(k) plan for 10-straight years have an average balance of $328,200.

You hear often how important it is to get into the habit of putting retirement money away as early and as consistently as possible. You may not be close to the six-figure averages above, but if you have a retirement account and are contributing as much as possible, you may have a better chance to meet some or all of your retirement goals. One big problem is that too many workers, especially ones at small companies, don’t have access to retirement accounts, and too many people still haven’t built adequate savings.

Good Trading,

JJ

@TDAJJKinahan

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

  • China announces new stimulus move, helping stocks climb in Shanghai

  • Lack of new positive catalysts might be putting pressure on U.S. market

  • Deere earnings tomorrow as dollar continues to rise, posing potential headwind

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