On the Mend: After a Tough Monday, Wall Street Attempts to Turn Things Around

The market looks like it’s attempting another turnaround Tuesday with many investors anticipating a strong earnings season. Data and earnings are a bit light today, so Washington could remain in focus.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Volatility ahead of vaccine rollout, stimulus
5 min read
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Key Takeaways

  • Stocks show signs of rebounding after Monday’s weakness despite lack of news

  • Treasury yield climbs above 1.15%, crude hits $53, for first time in nearly a year

  • Focus again could be on Washington amid thin data and earnings flow

(Tuesday Market Open) Last week featured a “turnaround Tuesday” after a rough start. Can the same thing happen today?

So far, there’s signs of it despite the fact that news-wise, not much has changed since yesterday when stocks sold off. People are anticipating a good earnings season and the market is overall kind of ignoring the Washington drama. At the same time, bond yields continue marching upward and volatility edged lower overnight. 

The 10-year yield hit 1.17% this morning, the highest in 10 months, and crude climbed above $53 a barrel for the first time in 11 months as investors anticipated another drop in U.S. inventories. These kinds of moves can be signs of renewed economic hopes, even though the latest wave of the pandemic shows no signs of easing off. After months of piling into bonds and holding on tight, investors seem to be abandoning them rapidly. Which raises the question, where is this money going to go? 

Another question to start Tuesday is whether the pressure we saw on many Tech stocks yesterday—especially the so-called FAANGs—will make an encore appearance. Many of the “mega-caps” appeared to be on the rebound in pre-market trading, but time will tell. Sometimes when sell offs happen, stocks that gained the most on the way up take the heat. 

Social Media at Center of Washington Swirl

The stocks that could feel the most after-effect from the D.C. situation are the social media stocks. They’ve been getting hit and they’re right dead the center in the middle of everything. We talked about it being a story that wouldn’t go away back last year when executives got called to Washington, and it seems like that happens every three or four months. Tech is under general scrutiny, but social media stocks are getting the most attention from regulators. 

All of the FAANGS fell 2% or more on Monday, though some of that might have reflected a general downward trend in social media stocks like Facebook (FB) and Twitter (TWTR) as investors considered their bans on President Trump. The FAANGs had a banner year market-wise in 2020 to beat the broader SPX, but the question is what can they do for an encore. Rising rates in the bond market might also be weighing on the Tech sector, research firm Briefing.com observed.

The Stimulus Front

A big reason rates are spiking is in anticipation of stimulus. One related worry is whether an inflationary scenario could be developing. Another is earnings-related. A sudden spike in yields could be bearish for stocks because higher borrowing costs can eat into future earnings.

The recent surge on Wall Street came partly on hopes that President-elect Biden’s economic proposals might include stimulus money and an infrastructure plan. That’s still possible, and he’s expected to announce more details Thursday, but the question is how much can he get done when there’s this swirl around Trump. This isn’t a political column, but Impeachment—if it continues moving in the direction it did Monday—could become a distraction for Biden early in his term, political analysts told the media. 

Even if stimulus had a clear highway ahead, a lot of expectation has arguably been built in since the election. This doesn’t mean the market can’t go higher. Remember how quickly it bounced back last week after a rough start. That being said, any continued rally based on stimulus faces a possible headwind. It’s still going to be a pretty close divide in Congress, which could make it hard to get things done quickly even without the potential impeachment overhang.

While a repeat of last week is no guarantee, it’s interesting to see the Cboe Volatility Index (VIX) again bouncing above 24 on Monday before easing a bit this morning. It was the second Monday in a row where volatility popped, but last week it spent Tuesday through Friday retreating even as chaos erupted in Washington. Could the VIX pull back again this week? You can’t count it out, but any close above 25 or flirtation with 30 could signal that stocks might be in for more pressure, judging from recent history. Also, the futures complex looking out to February and March shows investors betting on higher volatility, not lower. 

Monday’s slump didn’t extend to Treasury yields, which continued forging new 11-month highs. It was kind of an odd way to start the week, with signs of caution dogging mega-cap stocks and lifting VIX but also some selling of bonds. Maybe investors are trying to position themselves for whatever might happen as earnings season looms, starting with Delta (DAL) and many big banks later this week. It’s not rare to see consolidation and position squaring at times like these, and the tension in D.C. could also have people a little confused about which way to lean. 

Retail, Housing Start Week Strong, with KB Home Reporting Later

Not everyone had a bad Monday. The semiconductor sub-sector of Tech put on a nice little rally and has shown a lot of resilience. Some analysts think semiconductors might face challenges once we come out of quarantine and people go back out, but when you consider all the technology they make possible, it’s hard to argue they’re just a so-called “stay at home” sector. 

Retail shares like Kohl’s (KSS) and Macy’s (M) also had a nice start to the week, which might have reflected people trying to get in at current low levels. Retail sales for December come out Friday and that could give investors more insight into consumer spending that helps drive these stocks.

On the corporate front, KB Home (KBH) is scheduled to report after the close today. KBH and many of its competitors rolled up some gains Monday despite the recent climb in Treasury yields that can sometimes signal higher mortgage rates. The latest new homes data for November showed a sales decline from October but a more than 20% rise year-over-year, meaning it’s probably fair to say housing’s still hot. KBH could provide investors some foundational views on mortgage rates and future demand when it reports later. Stay tuned. 

Besides KBH, there’s not much on the calendar today. Like yesterday, it could lead to some back and forth, thin trading that causes sharper than normal moves. Volume is likely to get stronger as the week continues and we approach Thursday when DAL and BlackRock (BLK) report, and Friday when three of the biggest banks report.

philadelphia semiconductor index

CHART OF THE DAY: THE STUFF THAT COMES FROM THE GROUND. Commodity indices such as the Bloomberg Commodity Index ($BCOM) had been in a bit of a downtrend well before the 2020 COVID economy, and like much of the market, things really fell apart last spring. But like corn, crude, and other commodities that spring from the ground, BCOM popped its head above the soil in recent days. Data source: Bloomberg. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Valuations Take Some Blame for Monday’s Pullback: High valuations started to get more attention early this week, with some analysts citing them as one reason major indices pulled back Monday. Nasdaq (COMP), loaded with Technology and FAANG stocks, took the brunt of the blow with a drop of more than 1%. The small-cap Russell 2000 Index (RUT), by contrast, barely lost ground. 

Stocks entered Monday with the S&P 500’s (SPX) forward price-to-earnings (P/E) ratio close to 25 by some estimates vs. the next 12 months of earnings. That’s not “dot-com” territory, but it might be making people think. Earnings season is almost here and that’s when many companies, including some of the high-flying Tech ones, will be putting their mouths where their money is, so to speak. If earnings come in worse than expected, any companies with particularly high valuations and disappointing results could face pressure. 

Not Ready for Prime Time? Bitcoin futures (/BTC) had a rough start to the week, dropping 20% at one point before bouncing a bit to down “only” 13%. Today, in the overnight hours, /BTC has had a $3,000 trading range. It’s the dichotomy of bitcoin—part of the narrative is an alternative to traditional currencies such as the dollar as a medium of exchange and store of value, but its volatility would seem an impediment to getting there. Remember: /BTC was launched right around the previous high of 20,000, and within a year had bottomed out around $3,000. Then it shot back up to $14,000, down to near $4,000, and after taking out the old high, within a month it doubled in four weeks to above $42,000. That’s volatility.  

It’s interesting (some would say ironic) that yesterday’s selloff came right as exchange operator Intercontinental Exchange (ICE) announced it would be introducing its digital payments venture Bakkt to the public markets via a special-purpose acquisition company (SPAC). Bakkt and other digital platforms aim to position themselves for a possibly all-digital future. But if the future includes a migration to cryptocurrencies such as bitcoin, volatility could be a major stumbling block. Look at those numbers above and consider a business owner trying to manage income and expenses amid such volatility—or an investment analyst trying to make projections. This isn’t to say we won’t get there someday, but we’re not there yet.  

Are Commodities Poised for a Supercycle, and Should You Care? Commodities. You know, all the things we process to make the stuff we consume—metals, grains, livestock, energies, currencies, and your morning cup of coffee (don’t forget the cream and sugar). Commodities are popularly considered a strong diversification “return source,” meaning they tend not to march in the same direction as the stock market. The thing is, from July 2008 to April  2019, the S&P Goldman Sachs Commodities Index showed a harrowing plunge of around 75%. But then after hitting its low last April, somehow it managed to pull off a V-shaped recovery. How far might it go? 

Investment bank Goldman Sachs (GS) recently claimed that we’re seeing the beginnings of a commodities supercycle, and we’ll have to wait and see if they’re right. A supercycle can be a decades-long mega bull that encompasses a wide range of asset classes, in this case, a large swath of commodity markets. As an equities investor, why should you care? Maybe you’re looking to diversify in an area that might have potential for growth. Maybe the demand for commodities might mean changes in the jobs market. Or maybe the rise in commodity prices might affect the price of goods and profit margins of the companies that produce them. Certain sectors (Energy, Materials) tend to be more exposed than others to commodity prices. It’s something to think about even if you aren’t ready to dive into the pork belly market.

Good Trading, 

JJ

@TDAJJKinahan

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

  • Stocks show signs of rebounding after Monday’s weakness despite lack of news

  • Treasury yield climbs above 1.15%, crude hits $53, for first time in nearly a year

  • Focus again could be on Washington amid thin data and earnings flow

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