Blistering Rally Slows Down As Tesla Goes Into Reverse and Jobs Data Awaited

The rally goes on, but it might have temporarily lost its leader as Tesla got slammed yesterday and continued lower in pre-market trading today. Jobs data tomorrow looming large.

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5 min read
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Key Takeaways

  • Stocks up again but a little less sharply as China cuts tariffs

  • Investors gearing up for Friday’s January payrolls data

  • Tesla shares continue to give ground after yesterday’s pounding

(Thursday Market Open) The beat goes on, but a little less intensely so far today. Though stocks enjoyed more overnight gains as China announced tariff cuts and overseas markets rose, it looks like the parabolic rally of the last two days is slowing down.

That’s not too surprising. Major indices are at record highs, and Tuesday and Wednesday’s kind of gains aren’t easy to sustain. We might need some new catalysts to keep the party hopping, and the China tariff news today is nice but not unexpected. Tesla (TSLA), which helped spark things earlier this week, got slammed yesterday and is down again in pre-market trading. 

Following the bounce yesterday, attention could turn away from earnings and toward tomorrow’s monthly payrolls data. Analysts generally anticipate a slight improvement in job and wage growth for January. The average analyst estimate ahead of Friday’s report is for job growth of 164,000 in January, according to Briefing.com, up a bit from December’s lukewarm 145,000. Some analysts think growth could top 170,000. We’ll see.

Analysts also expect wages to climb a more solid 0.3% in January after rising just 0.1% in December. Keep an eye on year-over-year wage growth, which has been coming down from last year’s long stretch of 3% or higher and was only 2.9% last time out. That’s not too shabby because it still outpaces inflation, but it would be good to see more money hitting the average person’s wallet. 

Weekly jobless claims edged lower to just 202,000, according to data this morning. U.S. productivity rose 1.4% in Q4, below the expected 1.6%.

Hopes for progress fighting the coronavirus probably played a big role in yesterday’s recovery, and so did word from some high-profile economists that the virus might not have a big impact on the economy. A big comeback in crude prices, sometimes seen as a canary in the coal mine for world economic demand, also helped propel stocks.

The 10-year Treasury yield rose all the way back to nearly 1.65% on Wednesday before dipping to 1.63% early today. It could be an important indicator to watch Thursday for more insight on the path forward for stocks. If it climbs back above old technical support at 1.7% and into the range between 1.7% and 1.95% that it occupied for many weeks prior to last month, maybe that sends a signal that investors have more confidence in the U.S. economy. The challenge remains low yields overseas, where the German bund is way under water at negative 0.37%. 

Crude and gold delivered small gains ahead of Thursday’s open, and volatility eased even further. The Cboe Volatility Index (VIX) is below 15 after testing 20 last week.

Aid for the Needy?

TSLA—which looks like it’s in the midst of a classic short squeeze—cooled off in a big way Wednesday, but almost everything else continued to sizzle as coronarvirus fears eased.

The warmth extended to some sectors that had a rough time so far this year, including Energy and Health Care. The fact that crude oil got its head back above $50 a barrel again Wednesday helped some of the big energy firms, while voting in Iowa appeared to give a helping hand to Health Care, especially some of the providers. 

This isn’t a political column, but we have to consider politics in the case of Health Care yesterday. The lack of a clear winner in the Iowa caucuses is one of the things that might have helped the sector. Some expected Sen. Bernie Sanders to win, and he’s talked about replacing private health coverage. Now experts watching the Health Care space say the sector could be helped if someone else emerges and doesn’t sound as threatening.

Strong earnings from Humana (HUM) appeared to be another bullish development for Health Care, and some analysts raised their price targets for the company. Lately, the entire sector had been running in the mud, with almost any good news met with resistance. That didn’t happen Wednesday. 

The Earnings Beat

A few big companies saw their stocks take a beating yesterday as investors reacted to earnings and forecasts. Walt Disney (DIS), Ford (F), and Merck (MRK) gave up ground, and Nike (NKE) also got clipped, like DIS, by China demand worries. General Motors (GM) moved higher.

On the positive side, Twitter (TWTR) is up big this morning after the company missed analysts’ earnings estimates but reported a bigger than expected gain in user numbers.

After the closing bell today come earnings from Activision Blizzard (ATVI) and Uber (UBER), both of which might be interesting to check. Barron’s said ATVI investors could key in on adjusted revenue from both Call of Duty mobile and console releases and World of Warcraft Classic.

Though TSLA is in reverse, another big company’s shares enjoyed a meteoric rise Wednesday. Biogen (BIIB) rose more than 17% after getting a favorable patent decision for a multiple sclerosis drug. The Nasdaq Biotechnology Index rose more than 2.5% Wednesday, helped by BIIB. 

TSLA’s hammering yesterday goes to show you can’t go up forever. That said, TD Ameritrade data shows that millennial investors were big buyers of the stock most of last year, so they might be enjoying the fruits of that even with yesterday’s sharp losses.

CHART OF THE DAY:  CHANNELING THE DOLLAR. The U.S. Dollar Index ($DXY) has been in a slow uptrend for over a year, though it may be hard to spot without the aid of the yellow channel lines. After briefly piercing the lower channel in late 2019, $DXY has returned to the trend in recent days. Data source: ICE Data Services. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Fed Still Seen Likely to Wait: Despite the shellacking stocks took last week amid coronavirus fears, investors seem relatively confident that the Fed plans to hold rates about where they are well into 2020. Chances of a rate cut even by late July remain below 50%, according to CME futures. The market puts 92% odds on rates holding steady at next month’s meeting. Earlier this week, Atlanta Federal Reserve Bank President Raphael Bostic said the virus hasn’t changed his economic outlook, media reports said. 

Earnings Tally Looks Brighter: It looks like S&P 500 companies collected a few more Franklins and Hamiltons last quarter than analysts originally gave them credit for. While Q4 earnings season is only about 75% over, enough companies have reported to give a decent sense of how things might ultimately turn out. As of Wednesday, research firm CFRA pegged Q4 earnings growth—yes, that’s growth—at 0.4%. Most analysts went into the quarter expecting a small overall earnings loss. The updated FactSet estimate is likely coming tomorrow.

Looking more closely, five of the 11 S&P 500 sectors are still expected to report earnings in the red column, CFRA said, led by double-digit declines in Energy, Industrials, and Materials. The firm expects Utilities and Financials to enjoy double-digit earnings growth in Q4. CFRA expects full-year 2019 earnings to be up 1%, and looks for 6.6% earnings growth this year, down from its previous estimate of 7.6%. Some analysts might be paring back Q1 earnings and economic growth estimates due to the coronavirus and its potential impact on China’s economy.

Can You Trade Tesla? Well, sure, it’s possible. However, trading TSLA  here is something you shouldn’t consider unless you really understand the risk and how to control it. You can make small or big bets, but you have to control risk and limit it. Decide how much money you can lose in any trade before tip-toeing in. As we noted yesterday, there’s something futures traders used to warn newcomers about back in the Chicago trading pit days. They would say, “Be careful. Sometimes there are chocolate-covered hand grenades.” Meaning something that looks luscious from the outside might bite you back if you handle it too much.

At this point, shares have come down double-digits from early-week highs, but consider that even a nearly 50% drop from current levels would put TSLA above what had been all-time highs until recently. The company would also still have a market-cap that’s among the highest in the auto industry. Does that whet your appetite?

Good Trading,

JJ

@TDAJJKinahan

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

  • Stocks up again but a little less sharply as China cuts tariffs

  • Investors gearing up for Friday’s January payrolls data

  • Tesla shares continue to give ground after yesterday’s pounding

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