Trying Again: Tech-Related Stocks Look to Resume Bounce as Oracle Results Encourage

After a late-day selloff Thursday, Friday begins with another bounce, as the market digests inflation numbers, weakness in crude oil, and the future of any stimulus package.

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

  • Peloton, Oracle beat on top and bottom lines

  • VIX falls to 28, but still elevated by historical standards 
  • CPI for August comes in slightly hotter than expected

(Friday Market Open) As the saying goes: If at first you don’t succeed, try, try again. It seems like the market is taking that to heart as early indications point to another start in the green.

The question is whether the second attempt at continuing a tech-related bounce will hold after yesterday’s gains faded. Of note, crude oil is still seeing some weakness, which could mean there are some demand-related economic headwinds in the air.

Four out of the last five sessions have ended in the red for the S&P 500 Index (SPX) as investors have been focused on a repricing in tech related companies after strong gains following the coronavirus selloff.

Oracle Corp.  (ORCL) was helping give a boost to the Information Technology sector in early going. After the bell yesterday, the business software provider reported quarterly results that beat expectations on its top and bottom lines and issued quarterly guidance that was ahead of forecasts for revenue growth and earnings. The company’s shares were up more than 3.8% in pre-market trading.

ORCL, which has focused on in-office database products, has been playing catch up in cloud computing but has managed to attract new cloud business during the coronavirus crisis, which has accelerated the shift toward working from home.

In economic news this morning, the August CPI came in slightly above expectations with a 0.4% gain when a Briefing.com consensus had expected a rise of 0.3%. The average CPI year-over-year is up 1.3%. After the Federal Reserve’s speech earlier this month indicating inflation could run higher than 2% if necessary, inflation numbers may be closely watched by investors.

While it’s nice the stocks seem on track for a start in positive territory, with the Cboe Volatility Index (VIX) still near the 30 mark, investors can’t get too comfortable with a market like this.

Given that it’s a Friday, some market participants may want to square up some positions ahead of the weekend.

Reversal of Fortune

For a while on Thursday it looked like the tech rebound would continue. But the gains didn’t hold and all three of the main U.S. indices ended deeply in the red. This pinballing around could be part of a consolidation period before the market decides whether it will resume a general uptrend or move meaningfully lower again.

Stocks didn’t move lower immediately following release of disappointing jobless claims numbers, which showed 884,000 initial claims when 813,000 had been expected in a Briefing.com consensus. But news that the Senate killed a Republican bill that would have provided less coronavirus relief than Democrats wanted added to the news flow to perhaps cause investors to want to retreat.

However, it didn’t feel like those were the main factors pushing stocks lower yesterday. It’s also possible that market participants simply think that the re-valuation of tech-related shares isn’t complete. Remember: the market in general—and tech shares in particular—have come a long way since the March lows (see chart below). 

Perhaps the combo of jobless numbers and the political news were reminders of the long haul for the economic recovery and the wide divergence between Main Street, where unemployment is high, and Wall Street, which until recently was on a solid march higher.

Even though the big-name tech-related stocks have benefited from the stay-at-home trade, continued pain in the economy, especially without new stimulus, could still be a headwind.

Checking in on the Stay-at-Home Trade

Speaking of the stay-at-home trade, Peloton Interactive (PTON) after the closing bell reported earnings and revenue that handily beat expectations and encouraged investors with strong quarterly and yearly sales guidance.

The maker of stationary bikes, treadmills and workout apparel saw strong demand as people look to burn calories at home. Its shares were up about 11% in pre-market trading.

Meanwhile, another stay-at-home play, pet food e-tailer Chewy (CHWY) reported weaker-than-expected new sales per active customer, disappointing investors and sending its shares down in after hours trading.

Still, not all was doom and gloom, with CHWY reporting better-than-forecast quarterly revenue. CHWY shares were down more than 1% in pre-market trading.

CHART OF THE DAY: TECH SUPPORT. For the second time in three days, the Nasdaq 100 Index (NDX) closed on session lows—and right at the 50-day moving average (blue line). Chart watchers might see that as an area of solid support. Early movement in the major indices seem to point to a retention of the 50-day as a support level. But as a reminder of just how far the index has risen, even after the recent selloff, it’s well above its 200-day moving average (purple line). Data source: Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

It’s Not a Gas: Although every SPX sector ended in the red yesterday, Energy was a particularly notable loser, falling more than 3.6% when the next biggest decliner was the widely-watched Information Technology sector, which dropped roughly 2.3%. The day’s losses for Energy came as government data showed a surprise rise in weekly crude stockpiles. As if the beaten-up sector needed more bad news, fresh numbers from OPIS, an IHS Markit (INFO) company, showed that the recovery in U.S. gasoline consumption has plateaued. U.S. gasoline sales had improved rapidly from May to early July after the national shutdown, when sales were 50% below prior year levels. But the recovery had begun to sputter, and the latest numbers, out Thursday, show that demand actually fell 1.9% during the last full week of August from the previous week, with the four-week rolling average for the period ending Aug. 29 showing demand 18.2% below prior-year levels.

A Long Way To Go: While the headline producer price index (PPI) figure came in as expected at 0.3% monthly growth in August, the core PPI reading came in a little hotter than expected. Core PPI, which strips out volatile food and energy prices, gained 0.4% for the month, ahead of the 0.2% gain expected in a Briefing.com consensus. The inflation could be a welcome sign that we can add to the green-shoots narrative of the economic recovery. But we still have a long way to go. The yearly core PPI figure came in at just 0.6% growth and the headline number was in negative annual territory. “The soft year-over-year readings will overshadow the stronger month-over-month readings, because the year-over-year numbers play into the Fed’s view that it isn’t even thinking about thinking about thinking about raising rates,” Briefing.com said, paraphrasing a recent comment by Fed chair Jerome Powell.

Revolving Credit Contracts Again: With the latest initial jobless claims numbers rising more than expected, it might be a good time to review one of the consequences of unemployment on the economy. Without a job, people have less money to spend (of course), but they also have a harder time borrowing money that could help them make up the shortfall. Data this week showed that revolving consumer credit decreased by $0.3 billion in July, marking the fifth consecutive monthly contraction. “That hasn’t happened since late 2010-early 2011, underscoring the more restrictive credit stance adopted by lenders in the wake of the COVID shutdown and spike in unemployment,” Briefing.com said. With consumer spending necessary to help power the economic recovery, consumer credit is worth watching. And it does appear that the declining trend may be stabilizing.

Good Trading,
JJ
@TDAJJKinahan

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

  • Peloton, Oracle beat on top and bottom lines

  • VIX falls to 28, but still elevated by historical standards 
  • CPI for August comes in slightly hotter than expected

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