Momentum Play: Tech Catches Tailwind Amid Fresh Trade Tidings

A rally in tech helped bring the market out of the Monday doldrums, and some of that momentum appeared to carry into early Tuesday amid renewed optimism over trade talks with China.

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5 min read

Key Takeaways

  • After sharp reversal Monday, positive feelings spill over into new session

  • Tech shares helped lead market Monday as FAANGs appeared to provide momentum

  • Renewed optimism around China talks seems to fuel early strength Tuesday

(Tuesday Market Open) Heading into Tuesday, a question seems to haunt the market: Can info tech help lead stocks back out of the wilderness?

For a while late Monday, some of the old cheer showed up again in that beaten-down sector as stocks like Apple (AAPL), Microsoft (MSFT), Intel (INTC), and Nvidia (NVDA) found themselves on the daily winner’s list after steep opening losses for the major indices. With equities down near their lowest levels in seven months, investors might have been seeking some sector or other to take a stand and start moving steadily up to help improve sentiment.

Earlier this year, tech filled that role, with hefty gains in the FAANG stocks providing momentum that helped lift stocks to all-time highs. That momentum pretty much disappeared this fall, sending the FAANGS to 20% losses and helping pull the plug on the overall market rally, too. One day isn’t enough to be a trend, but the nearly 1.5% gain in info tech on Monday certainly could have seemed like a refreshing change of pace after the 4% market losses a week ago. It was a very impressive comeback and the action early today, including more buying in the FAANGs, seems to be feeding off of it.

Pre-market gains in the U.S. followed overnight strength in Europe and across most of Asia amid renewed optimism about possible talks between the U.S. and China—along with reports that China might lower tariffs on U.S. cars and buy U.S. agricultural goods. Shares of auto companies moved higher in Europe, apparently on hopes China could loosen barriers. Trade talk is arguably the biggest thing helping the market today, but some investors might be skeptical about whether any trade-based rally can last given the quick turnaround last week after sharp gains that Monday on trade tidings.

A weaker dollar might also be giving some assets like gold and crude oil a lift this morning, and the producer price index (PPI) for November came in a bit higher than expected at 0.1%. Analysts had expected a flat reading. The number isn’t high enough to spark inflationary fears, but does seem to indicate continued economic strength and not deflation, which would probably be seen as bearish.

In another development, the president is expected to meet with Democratic congressional leaders Tuesday morning to discuss how to avoid a possible partial government shutdown that would happen after Dec. 21 if there’s no budget deal by then. Any positive (or negative) news on this front might have a market impact, but maybe not a big one because investors have gotten used to these periodic shutdowns over the last decade.

Apple Appears To Find Buyers At Lows

One info tech name that helped lead the surge yesterday was AAPL. Nearly every time that stock has fallen below $170 this year, it’s found some buying interest. It’s a very widely-held stock and might hold psychological importance to some investors. As it goes, it’s possible the market could follow, at least to some extent. When you see AAPL down more  than 20% since early November, that actually might tell you a lot about the market, because it’s such an influential name.

Speaking of psychology, TD Ameritrade clients tracked by TD Ameritrade’s Investor Movement Index® (IMXsm) in November were buying some of the FAANG names, including AAPL, Netflix (NFLX) and Amazon (AMZN). However, any one month is just a snapshot, so it could be worth watching in months ahead.

On another note, some of the stocks the IMX saw investors selling in November included Procter & Gamble (PG) and Tesla (TSLA), two names that have weathered the storm pretty well. This may reflect people taking profits where they could in a market that’s mostly been lower.

Rally Hats Come Out Monday As Market Executes Reversal

For the second time in the last week, stocks charged back from early lows on Monday, this time managing a higher finish for most of the major indices. The early weakness, which saw the Dow Jones Industrial Average ($DJI) fall more than 500 points at its low, appeared to partly reflect frayed nerves over Brexit. The worst moments of the day for the $DJI and S&P 500 Index (SPX) roughly coincided with a widely-aired speech by British Prime Minister Theresa May in which she postponed the parliament’s vote on her Brexit deal. There’s a lot of uncertainty about what might happen next over in the mother country, and the pound is sliding vs. the dollar.

As the Brexit drama unfolded across the Atlantic, the SPX briefly fell below 2600 for the first time since last May. It plunging below its worst October reading of 2603 and started to come within range of the yearly lows in the 2530-2550 area. Weakness in AAPL, which took a hit early from news that Qualcomm (QCOM) had won a preliminary injunction in China preventing AAPL from the sale and import of many of its new iPhones in the country.  AAPL said its phones remain available, but its stock price dropped below $165 a share for the first time since April.

Then everything turned around. Info tech led the revival, with even AAPL coming back to finish higher on the day. News of a $9 billion Facebook (FB) share repurchase program might have been one catalyst, though FB now lives in the communication services, not info tech, sector. A turn-around in some of the defense and aerospace names, including Boeing (BA), Lockheed Martin (LMT) and Raytheon (RTN)  might also have helped spark the comeback. 

By day’s end, the Nasdaq (COMP) had posted the biggest gains of any index for the day, up about 0.75%, but the SPX and $DJI also finished slightly higher. With the SPX finishing up for the day after falling below the October lows, some analysts were saying that might represent what some call a “key reversal” that can sometimes provide additional momentum and help establish a solid bottom. We’ll have to wait and see, but for the moment, at least, it looks like the SPX might have found some buyers down around 2600 or just below. Whether that would happen on another visit to those levels is still a question mark.

Caution Still Looks Like a Watchword

Even with Monday’s recovery, there’s still a lot of fear in the markets. The VIX fell just slightly and remains above 22. That’s historically not far from normal, but well above the very calm readings under 15 seen most of last year. Also, even though the U.S. 10-year Treasury yield ticked up to 2.86% by the end of Monday from lows of down near 2.82% last week, it’s still down sharply from above 3% just a week ago, another sign that many investors appear to be embracing what they might see as more defensive positions.

Besides info tech, some other sectors in the green Monday included communication services, health care, materials, and utilities. That looks like a pretty broad mix of defensive and cyclical elements. On the other hand, financials just couldn’t get it going, falling more than 1%. The regional banks have been under a lot of pressure, but all the big banks are down sharply as well over recent months. There’s an old adage that it’s hard to throw a rally party without inviting financials, so investors might want to monitor that sector for any sign of improvement before thinking this market downturn is over.

For anyone considering trading in this market, whether you’re someone who trades daily or a long-term investor, one word you might want to keep in mind is “partial.” That is, at times like these it could be wise not to go “all-in” whether you’re selling or buying, and to trade in partial increments. This can increase trading costs, but it also represents a more cautious approach when it seems like so many people aren’t sure where this market might go next and things can move so quickly in either direction.

Figure 1: Small-Caps, Big Losses: This year-to-date chart of the Russell 2000 Index (RUT) of small-cap stocks (candlestick) vs. the S&P 500 Index (purple line) shows how small-caps outpaced large-caps for much of the early part of the year but began descending about a month sooner than the SPX. While both indices are down sharply from their highs, the RUT is performing more poorly, in part due to credit worries that might be dogging some of the small-cap names. Data Source: FTSE Russell, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

The Smaller They Are...Sometimes small caps, like transports, can be a leading indicator of problems brewing in the stock market. That certainly seems to be the case this year, as the Russell 2000 Index (RUT) of small-caps hit its peak in late August, about a month before the S&P 500 Index (SPX) topped out. Since that peak close on Aug. 31, the RUT had fallen 18% as of midday Monday, putting it on the edge of a bear market, typically defined as a 20% drop from the high close. The SPX is in correction, meaning double-digit losses from the high, but far from bear market territory. RUT was the only major U.S. index to close lower on Monday.

Why is the RUT down more dramatically than its big brother? One explanation could be growing concerns about corporate credit. Higher interest rates mean companies will need to pay more to borrow, and companies already in debt might be forced to pay higher rates when current debt rolls over. Small-cap companies are often more heavily leveraged than large cap ones, and many RUT components have no positive earnings and are forced to depend on credit, at least in part, to keep the lights on. In a growth environment where investors are eager to take on risk, this might seem less important. In the current environment, however, where many investors appear eager to embrace more “defensive” sectors and blue chips with dividends, the RUT and its components might be at a disadvantage. 

Some Ease 2019 Outlook: While the economy and earnings are still expected to grow next year, analyst predictions are coming down a bit as economists continue to warily watch for impact from the U.S./China trade war and Fed rate hikes. For instance, research firm CFRA issued its 2019 outlook Monday, and now sees S&P 500 earnings growth of 5%, down from its previous estimate of 10%. The firm also lowered its prediction for S&P 500 (SPX) performance in 2019, setting its 12-month target at 2975, down from the previous 3100. In addition, CFRA sees less pressure on the bond market next year, but still sees the 10-year yield at 3.3% in Q4 2019, above any reading it’s achieved this year and a possible sign of economic strength. However, anyone hoping for a break from volatility probably won’t get one in 2019, CFRA said. One possible historic trend in the market’s favor, CFRA noted, is that the SPX has risen in the 12 months after all U.S. midterm elections since World War II. As we know, however, past performance doesn’t necessarily point toward future returns. 

Holiday Tidings: In this season of thanksgiving and celebration, it might be difficult for some investors to feel much holiday spirit amid the steady decline in asset prices and no sign of a “Santa Claus rally,” at least not for the moment. It’s been a rough year trying to make money in the markets, and that doesn’t just include the major stock indices. Almost everywhere you look seems flat or red, including bonds, commodities, stocks, metals, and emerging markets. A few things to consider if you want to have a happy face walking into those holiday parties:

  • There’s still no sign of any real breakdown in U.S. economic data.
  • The holiday shopping season has been strong so far. 
  • Earnings are still projected by most analysts to rise moderately in 2019. 
  • The Fed seems likely to press the pause button on rates as the new year begins, at least judging from futures prices.
  • The recent drop in Treasury yields could mean lower mortgage rates, potentially a boost for the housing market.
  • Lower crude prices are pushing down the cost of gas at the pump, a potential lift for consumers.
  • Some emerging markets seem to be flattening a bit after a long drop.
  • The U.S. and China are at least talking, and talking might be better than the silent treatment when it comes to reaching some sort of trade agreement.
  • The market managed to claw back Monday to reverse sharp early losses.

Good Trading, 

JJ

@TDAJJKinahan 

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Economic calendar for week of Dec. 10. Source: Briefing.com
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Key Takeaways

  • After sharp reversal Monday, positive feelings spill over into new session

  • Tech shares helped lead market Monday as FAANGs appeared to provide momentum

  • Renewed optimism around China talks seems to fuel early strength Tuesday

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