Murky Monday: Recovery Rally On Ice For Now As Virus Cases Surge in China, Some States

The little recovery rally from Friday dissipated quickly in pre-market trading, with most of the focus on a surge in virus cases in China and some U.S. states over the weekend. Retail sales and Oracle earnings lie ahead this week.

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

  • Fears of a “second wave” of the virus have the market losing ground

  • Travel sector again under pressure as SPX loses grip on 3000

  • Crude slides to start week, raising worries about demand

(Monday Market Open) As baseball legend Yogi Berra said, deja vu has a way of repeating itself. 

This morning’s pre-market flop triggered memories of last Thursday’s sharp rip in the major indices, which only got partly sewn up on Friday. It also might have some investors worried about a possible repeat of the crazy volatility seen earlier this year, when triple-digit swings in the major indices became common-place. 

Let’s not get carried away. Things look a little shaky to start the week as investors nervously scrutinize the latest batch of virus data. That doesn’t necessarily mean the June swoon that began Thursday is another “Ides of March” type of stomach-churning collapse. 

For the moment, however, Friday’s optimism is rolling back as fast as the weekend zoomed by. Worries centered on a new set of virus cases in China that’s forcing Beijing to take action, along with surges in some U.S. states. Fears that we’re starting to see a “second wave” have the market in their grips to start the week. Weak Chinese factory data and crumbling crude prices didn’t help, either.

Generally, the “reopening optimism” stocks that did so well in late May and early June took the brunt of this morning’s pre-market selling. The travel industry, including cruise lines and airlines, is suffering most. As we’ve been saying, the question is, can the economy get back to work fast enough to please Wall Street? The jury is still out.

The major indices ticked dramatically lower in pre-market trading, and it appears the S&P 500 Index (SPX) might take out the support level that held last week near the 200-day moving average and just above the psychological 3000 level. 

It’s tempting to say the selling that began last week and continues today is all virus-related. However, it could also reflect some profit-taking. We went up in a hurry and now we’re correcting in a hurry. Volatility is higher again this morning, which probably reflects the new virus fears and also could be a reminder that without a lot of other news out there today, virus headlines could continue to shake the market around as the week continues. 

Keeping our focus just on today, it would feel like a bit of a victory if the SPX could hold 2960 and then find its way back toward 3000. Today is a key day to see if we can rally back into the close like we did Friday, or if the early move to the downside picks up steam and continues into the end of the session. 

Retail Sales, Oracle Earnings Among Data to Watch

This morning’s June Empire State Manufacturing data came in a lot better than analysts had expected, so there’s some good news.

Another data point looming large is tomorrow’s May retail sales report. Recall that in April, retail sales fell off a cliff as everyone was stuck at home. The 16.4% April plunge was the worst in the report’s history. Going into Tuesday’s data, analysts expect a pretty big turnaround for May with a projected gain of 9%, according to research firm Briefing.com. If the number comes in lower than expected, however, it might get written off by some because May reflected a time when the economy remained mostly closed. 

Other things to consider watching in the coming days include earnings from home-builder Lennar (LEN), along with results from Oracle (ORCL) and Kroger (KR).

One thing that’s a bit worrisome is the fact that Friday’s trading trend appeared to be “sell into strength,” as Briefing.com described it. For a lot of the day, it felt like every rally got met by selling interest. However, a “buy the dip” mentality eventually appeared and helped major indices close way above session lows.

More Powell Talk as Congressional Testimony Looms

Did you get your fill of the Fed last week? Get ready for more. Fed Chairman Jerome Powell appears before Congress tomorrow and Wednesday to deliver his semi-annual monetary policy report to elected officials and take their questions. This is one of those events that’s often televised for hours, meaning markets might trade off of it. 

Elevating the Fed’s profile even further, Fed Vice Chair Richard Clarida is scheduled to deliver a speech tomorrow night called, “U.S. Economic Outlook and Monetary Policy.” That’s a pretty wide-ranging title. All this could make for some volatility in the days ahead. 

Fairly or not, many analysts pinned the selloff last week on Powell and the Fed, saying their words and forecasts seemed pessimistic. Powell often seems like a pin-cushion for angry investors, so it’s not too surprising to see that happen again. It’s a matter of debate whether his words were truly bearish, though.

Arguably, he said what a lot of people know: It’s a long road ahead and we’re in unprecedented times. If Powell had delivered too much optimism and then things didn’t work out, he’d probably get blamed on the other side. As we see so often, the Fed chairman has to thread a needle, and he often can’t please anyone. It’s a tough position to be in, and he comes back into the spotlight this week for more.

Fits and Starts

Checking back over the rough week we just had, it’s important to take a breath and keep things in perspective. Remember, stocks had gone straight up for weeks without a real sell-off, so arguably the market was due for one, and that might not be the worst thing in the world.

Looking ahead, as more states get back, the question becomes: Are they going to ramp up fast enough to please Wall Street? What we saw last week—to some extent—suggests it’ll be hard to do that. The bulls who piled into stocks in April and May presumably hoped for a V-shaped recovery, and now when the road looks a little more twisty, some of them may be abandoning ship. That evidently continued to happen in Monday’s pre-market trading. 

After Friday’s rebound brought the major indices back about a quarter of the way from their steep Thursday losses, it’s arguably more relevant to consider the bigger picture. Friday’s SPX close of 3041 put it down exactly 10% from the all-time high close of 3386 posted in February, and up 36% from the March low. All things considered, the market has had a nice run, even with Thursday’s skid and possibly more losses today factored in.

CHART OF THE DAY: S&P 500 INDEX TRYING TO HOLD ON. After the big March break and initial April bounce, the recovery rally seemed to stay in this tight regression channel (parallel purple and blue lines). The red candle on the far right in this chart of S&P 500 futures (/ES) might be a good one to watch. If /ES settles below the channel (roughly the 3000 level) it could indicate further weakness. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Sector Watch: Some of the “value” and cyclical areas that suffered earlier last week had recovery days on Friday. It’s not looking like that will spill over into the new week. Still, it’s worth remembering that Financials and Energy—the worst two laggards on Thursday—were two of the three best-performing sectors on Friday. They’re still the two poorest performers year-to-date. 

Another interesting thing Friday was a little “divergence of the defensives,” with Real Estate posting the biggest gain of any sector while Consumer Staples and Utilities both lost ground. Could this reflect hopes that lower interest rates might spark increased demand for housing? This week brings a little update on that front with Wednesday’s May housing starts and building permits report. 

Ripples in the Mortgage, Foreign Exchange Markets: The Fed’s extreme dovish policy impact might be showing up in another form: The mortgage market. Weekly mortgage applications tracked by the Mortgage Bankers Association (MBA) rose 9.3% on a seasonally adjusted basis for the week ended June 5 from the previous week, the MBA said last week. Refinancings are also up big. So at least one aspect of the economy is “exploding,” to borrow language from Mortgage News Today, a trade outlet. 

Mortgage rates remain historically low despite some signs of life in 30-year bond yields lately. The 30-year yield took a hit with all the rest of the bond yields late last week, but remains in the 1.4% to 1.5% range. That’s a big improvement from lows below 1% earlier this year and still a 75 basis-point premium to the 10-year yield. As we noted last week, the yield curve continues to be worth monitoring for insight into how investors see the economy moving. A steepening of the curve historically tends to hint at optimism (and with it sometimes better fortunes for the wounded Financial sector). 

Homework Time:  If you’re having trouble negotiating your way in these volatile times, remember there’s no need to get “all in” or “all out” on a whim as the market wobbles. Instead, it’s never a bad idea to keep focused on your investment plan. If that means taking some money out of the market now because you’re over-exposed to stocks, that’s OK. If you’re checking out the market with thoughts of getting in, keep in mind that a lot of stocks have come a long way fast and remain pretty high-priced even after the recent selloff.

For instance, a few weeks ago some analysts were cautioning investors about the airline stocks as they soared. Then airlines got pounded last week. Some of these stocks may have gotten ahead of their skis. When you see some of the airlines being priced at the levels they were before this all started when they say they’re going to do 60% of their business, it just doesn’t make much sense. Now, as much as ever, it’s important to do your homework before jumping into any stock or sector. It’s easy to find some sectors that appear overbought, but there are other parts of the market that some analysts believe look relatively cheap. It just takes some digging.

Good Trading,

JJ

@TDAJJKinahan

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

  • Fears of a “second wave” of the virus have the market losing ground

  • Travel sector again under pressure as SPX loses grip on 3000

  • Crude slides to start week, raising worries about demand

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