Summer Starts with Optimism Trade Back on Stage, But Can Show Last Another Season?

There’s a firmer note to start the week as investor optimism seems to be back after a frenzied Friday. Signs of life in the U.S. economy as reopenings continue might be enough to help blunt worries about rising caseloads.

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

  • Wall Street up in four of the last five weeks, and optimism continues as new week begins

  • Wall Street up in four of the last five weeks, but is conviction flagging?

  • Week ahead is thick with data, including GDP, along with earnings from Nike

(Monday Market Open) We’re back to the optimism trade.

After Friday’s leveling off amid coronavirus concerns and quadruple witching, things looked a bit firmer early Monday. Major indices staged an amazing comeback in futures trading considering how far down they were last night. 

This enthusiasm could reflect a combination of things. If you look at hospitalizations, they’re up, but the death rate isn’t super-high. That’s not to minimize the horrible impact of the pandemic on so many people, but any sign of improvement can’t be ignored.

Also, people are out seeing restaurants jammed in many of the big cities, and are starting to see airports and hotels get busier. There’s more traffic in retail stores. It’s not any one thing, just a bunch of better signs around the country.

Early Monday, reopening optimism showed up as some retail stocks gained ground ahead of the open. However, the travel sector looked pretty ugly in pre-market trading. Crude came under pressure after OPEC and its partners didn’t make progress last week extending output cuts. 

Despite the firm start Monday, don’t forget that fresh moves upward last week didn’t exactly bring loads of investor enthusiasm. Instead, things felt a bit tired and signs of caution emerged in the bond and gold market. Volatility began to rise. Major indices rose in four of the last five weeks, so we’ll see if the week ahead can keep that going.

Case Count Center Stage

The caseload watch is on and could be one of the main drivers this week. Apple (AAPL) closing some stores in the southern U.S. wasn’t exactly a positive sign, and might not be the last of its kind. 

The worry a lot of people have is that state governments might start rolling things back or even resume stay-at-home orders. That doesn’t mean it will happen, it’s just the worst-case scenario that seems to be on investors’ minds. Remember, stocks are at historically high values, so it doesn’t take much to get people nervous.

You can think of COVID-19’s market impact as being like an earthquake. The first one was massive and incredibly destructive, like San Francisco in 1906. Now we’re dealing with aftershocks, and the question is whether they’re just some minor trembles or if they’re warning about another big one ahead. That’s the riddle the market is trying to decipher, and it helps explain why stocks and “safe havens” like bonds are both rallying in sync. It’s also probably why the VIX is elevated. 

It didn’t probably help much, either, to hear Boston Fed President Rosengren say Friday that a second-half economic rebound could end up being slower than initially thought due to the continued virus spread. A lot of the market’s hopes are still pinned on some sort of economic revival in the latter part of 2020 and into 2021. 

The Week in Preview

Though we’re in an earnings donut hole between seasons, sometimes a major company opens the books even in the off months. That’s the case this Thursday with Dow Jones Industrial Average ($DJI) component Nike (NKE) reporting after the close.

NKE’s results could be a nice barometer on the state of consumers, in part because its products aren’t must-have staples. People tend to buy more “fun” apparel if they’re not worried about how they’ll pay the mortgage. Also, a lot of NKE’s sales are in China, so the company’s results can potentially be a good check on that country’s consumers. However, NKE’s results from its most recent quarter won’t reflect the spike in coronavirus cases reported in Beijing last week. 

In other corporate news, AAPL’s developer conference is this week. Investors may want to watch for new product launches that could move the needle for the stock. The conference in past years has been good for some noise, so we’ll see if there’s anything surprising out of it. 

There’s also plenty of data in store the next few days, including existing and new home sales for May,  durable goods orders, inflation, and the final government read on Q1 gross domestic product. Of course, weekly jobless claims data will probably continue to be more heavily watched than it was in pre-coronavirus days. As noted here Friday, states have been giving the green light for bars and restaurants to open, so one thing to watch for is how that might affect Thursday’s initial jobless claims report. 

From a technical aspect, this week begins with markets looking a little shaky. The Nasdaq (COMP) wasn’t able to dig in above the psychological 10,000 level Friday, and the SPX just hasn’t found much traction above a resistance area near 3130. The SPX ended the week just above what some analysts see as key support at 3090, so we’ll see if it can hold that level today. 

Caution Clock Keeps Ticking

For once, “quadruple witching” lived up to its billing last Friday. Things went up, down and all around before ending with a thud, though the S&P 500 Index (SPX) managed to finish slightly up for the week. Volatility shot higher, with the Cboe Volatility Index (VIX) cruising above 35, compared with lows near 31 earlier in the day.

One Friday factor that might be worth checking for spillover this week was the big turnaround in semiconductor stocks. The PHLX Semiconductor Index (SOX) reversed its sharp early gains to end lower, and arguably the SOX faces some technical resistance. Chipmaking stocks have generally been steady climbers throughout the comeback rally over the last two months, and it’ll be interesting to see if they can bounce back after Friday’s uneven finish. Some analysts say that even though fundamentals look good for chips, some stocks in the sector might be a bit overbought. 

The weakness in SOX and across most of the market at the end of last week brought back memories. A lot of Fridays skidded to the finish line earlier this year when participants got spooked about carrying long positions into the weekend. The COVID-19 news lately hasn’t been all that encouraging in parts of the U.S. and in China, so caution continues to be a major factor.

That’s likely evident in the recent performance of bonds, too. The 10-year Treasury yield finished last week just below 0.7%, and hasn’t shown much enthusiasm about climbing back to recent highs near 0.9%. It still holds a heavy premium to the two-year yield, which fell sharply Friday and is barely up for June. The 10-year yield is flat this month. It’s kind of a conundrum when you look at yields staying so weak even as the stock market has rallied so hard.

Gold is also hanging in there. Well, more than hanging in there, really. It had a huge gain on Friday (see chart below) and is approaching the intraday seven-year high from earlier this year of around $1,790 an ounce. Central bank stimulus and rising virus caseloads continue to underpin gold, analysts told the media. Key resistance is near $1,760.

CHART OF THE DAY: GOLD’S RUSH. There was some risk-off tone in Friday’s markets as concerns grew over an increase in COVID-19 cases in some states. We saw gold futures (/GC–candlestick) move higher and trading back above $1750 an ounce as the S&P 500 Index (SPX–candlestick) fell. Although $1788 was the high back in April, the $1760 level has acted as a strong resistance level since the high was reached. A break above the $1760 level could be a big breakthrough for the metal, so it’ll be interesting to see how /GC moves in the next few weeks. Data source: CME Group, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Taking the Show on the Road: The initial public offering (IPO) market, which snoozed when things shut down early in the pandemic, appears to be firing up again. Grocery company Albertson’s said last week it seeks to sell 65.8 million shares in a range between $18 and $20 a share. The company’s stock is likely to begin trading sometime this week, The Wall Street Journal reported. This follows recent strong debuts from Warner Music Group (WMG) and ZoomInfo Technologies (ZI), the newspaper added.

Typically, you don’t see a lot of IPOs when investor confidence and general economic hopes lag, so when a bunch of companies embark on the IPO path, it’s often a sign they think things are getting better. Consider it one of those “canary in a coalmine” indicators for the broader economy. 

Another Roadblock Ahead? During more normal times, stock rallies often get

accelerated through corporate buybacks. One interesting feature of the recent rally is that it’s happened with few big companies buying back their own stocks to reduce the number of shares outstanding—a technique that tends to raise the stock’s price. This isn’t likely to change much, considering the political environment where both major parties have made it clear they don’t love the concept of buybacks in desperate economic times. Lack of buybacks could be a potential speed bump as the year continues, especially if companies aren’t able to raise their dividends amid the financial challenges. They might need other strategies to attract new investors. 

Sub-$40 Blues for Crude: The Energy sector is witnessing another landmark of futility. U.S. crude prices have now closed below $40 every session since March 9, or 105 calendar days. That surpasses the 104 days crude closed below $40 from late 2015 into early 2016. To find a previous sub-$40 stretch this long, you have to go back to 2004. Generally, $40 is near the low end of where crude now needs to be for many U.S. crude producers to make money (the break-even was a lot lower in 2004, by the way, and the U.S. was much farther down the list of big producers then). 

Last week, crude got a little traction and actually moved above $40 intraday Friday as hopes emerged for tighter overseas supplies. Also, U.S. weekly data last Wednesday showed a decent-sized draw in gasoline supplies, even while crude stocks rose. Production seems to be moving more in line with demand, though there’s a lot of space in between. As of last week, Energy remained by far the worst-performing S&P 500 sector year-to-date, down nearly 34%.

Good Trading,

JJ

@TDAJJKinahan

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

  • Wall Street up in four of the last five weeks, and optimism continues as new week begins

  • Wall Street up in four of the last five weeks, but is conviction flagging?

  • Week ahead is thick with data, including GDP, along with earnings from Nike

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