Morose Monday: Week off to a Rough Start Amid Political Tension, Virus Concerns

A thin data and earnings picture to start the week could put a lot of the focus on events in Washington. That’s potentially contributing to the early rise in volatility and slump in stocks.

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

  • Politics still a main theme this week with an eye on possible stimulus updates
  • Early weakness could reflect virus worries, tension in Washington

  • Earnings season erupts later this week, but data and earnings thin early on

(Monday Market Open) Mondays might get a bad reputation on Wall Street if they keep starting out like this. 

For the second week in a row, stocks begin in a slump. Last week they recovered to hit new record highs by Friday, so there’s that. Rising cases of coronavirus and the swirl of events around President Trump could be contributing to this early weakness. Also, the employment report last Friday didn’t look all that bad when you drill down into it, but over the weekend some analysts were questioning the data and worrying about what it might reflect. 

Additionally, there seems to be a bit more of a “risk-off” sentiment taking shape today. Volatility is on the rise, bitcoin is down, and gold is edging higher. Bonds are holding in place, however.

With earnings and data a bit thin today and tomorrow, it wouldn’t be too surprising if the market keeps taking its cue from politics. Earnings season ignites later this week, but another big question hanging over Wall Street is whether Congress can push through another stimulus and if any stimulus effort conceivably could get slowed down by the current tension on Capitol Hill. 

Major indices continue to be driven partly by comments from senators and President-elect Biden on the prospect of another payment to Americans. Biden is expected to reveal more details of his economic package this week and wants to make it a top priority early on in his administration, media reports say. Any new information is worth watching, though it feels like Wall Street has already built in a lot of the stimulus hopes. There’s also concern that the possible reverberation of last week’s events in Washington might muddy the waters as the new administration tries to gain momentum on stimulus and infrastructure initiatives. 

One feature last week was volatility trending down after a spike to begin 2021. The Cboe Volatility Index (VIX) flirted with 30 a week ago but finished Friday below 22. By early Monday, it was heading back up. Investors still wait to see if VIX can get back below the historic average of 20, which it hasn’t done in almost a year. If you look further out at the VIX futures complex into the February and March timeframe, it’s trading in many cases above 25. So at least a lot of investors don’t expect VIX to calm anytime soon. 

“Buy-the Dip” Sees Carryover Popularity from 2020

Lower volatility last week might have given some investors more confidence to keep “buying the dip,” a trend that took hold last fall and seemed to be the case on just about every pullback the first week of the year. Take Tuesday’s quick recovery from Monday’s drop, and think about how quickly the major indices rebounded Friday after slipping below unchanged around midday. Nothing goes straight up forever, the saying goes. Another saying is “the trend is your friend,” and few seem to be trying to fight the upward trend lately. Those who did probably got bloody noses. 

Last week, nothing seemed to move upward more quickly than bitcoin and Tesla (TSLA). More on TSLA below, but remember this about bitcoin: Before diving in, make sure you understand the investment. The fundamentals that drive bitcoin are a bit mysterious, so you might want to be cautious if you’re considering trading it.

Overall, the first week of 2021 saw decent performance from most of the less “defensive” sectors. Energy, Materials and Financials got out of the gate nicely, though Tech slipped just a bit in what may have been profit taking after its December rally. 

The sectors that underperformed last week included Utilities, Real Estate, and Consumer Staples. In general, Utilities and Staples are places investors tend to park their money when they’re looking for dividend yields.

At the same time, the 10-year Treasury yield climbed roughly 20 basis points last week from around 91 to 111. That’s a really significant move that helped Financial stocks and the Russell 2000 (RUT) small-cap index, and is really starting to change the tenor of the market. Rising yields tend to put pressure on dividend-generating stocks because investors who want yields can find them in the fixed income market. However, even at 1.11% the benchmark 10-year remains near historic lows, so it’s early to read too much into this weakness in Utilities and Staples.

A couple of individual stocks are on the move ahead of the open. Eli Lilly (LLY) jumped 15% on news of positive Alzheimer’s trial data. And Chinese electric vehicle maker Nio (NIO) climbed 11% after it introduced a new model over the weekend. 

Jobs Report Redux

Looking back one more time at last Friday’s disappointing jobs report, it seems to have been shrugged off by Wall Street because it mostly reflected the impact of shutdowns on the leisure sector. The thinking could be that if vaccinations really get going, a lot of those jobs might come back. 

Also, the recent stimulus package passed by Congress didn’t take effect until well after the jobs data got collected, so Washington’s help for small business might have an impact starting this month. Any further stimulus could also have investors thinking December might have been a “one-timer,” to use an old hockey term. We’ll see. 

Beyond that, there was actually a bunch of stuff to like about the report, including upward revisions to October and November, along with solid growth in manufacturing, construction, transportation, and business and professional services jobs. The unemployment rate of 6.7% also was unchanged, though that can be a tricky number because it doesn’t reflect people who’ve given up job hunting and left the workforce. In a rapidly growing economy, those people often start venturing back in, and that’s why long-term unemployment remains a key number to watch if and when the virus gets under control. Most of the long-term numbers didn’t change much in December, according to the Labor Department.

philadelphia semiconductor index

CHART OF THE DAY:  GOLD GOT A HAMMERING. It didn’t take long for gold futures (/GC—candlestick) to lose their shiny luster. After moving in an upward channel (yellow lines) since the end of Nov. 2020, the uptrend looks to have gotten exhausted. Friday’s price action saw /GC gap down below its 1900 support level, closing at $1836 per troy ounce. It’s worth watching gold to see if buyers come back in or if prices continue to fall lower. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Did Slumping Jobs Picture Weigh on Retail Sales? One thing to potentially watch is how the negative jobs picture might have affected retail sales in December. That data comes out this Friday morning, and we’ll preview Wall Street’s estimates later this week. A big drop in retail sales can often weigh on sectors most exposed to consumers, especially Consumer Discretionary.

While retail sales is a big number to keep an eye on, this week’s calendar looks a little odd because it’s almost completely blank Monday and Tuesday. With the earnings calendar a bit light those two days as well—aside from KB Home (KBH) expected after the close Tuesday—investors might see a market that’s slightly untethered and more vulnerable than usual to moving on news from outside of the corporate and data world. That doesn’t mean hide under your desk and don’t trade, only to be a little more aware that sudden swings one way or the other could occur. 

Once earnings begin, there’s a lot to keep track of. BlackRock (BLK) is expected to report Thursday, and Friday is the big morning this week with JP Morgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC). There’s a lot investors can glean about the economy from watching how the banks did and listening to what their executives have to say, and we’ll be talking more about what to look and listen for as the week proceeds. Stay tuned. 

Why $50 Crude Might Not Last: Speaking of commodities, one big development last week was crude hitting $50 a barrel for the first time since February. The question is can it last? Though some analysts say they see $65 in the not too distant future, there’s a good argument why it might not be able to get much higher, and could even fall. If you live in the U.S., you’re not too far from the reason why a crude “supercycle,” at any rate, could face an uphill battle. 

Last week’s crude rally was partly due to Saudi Arabia’s surprise plan to cut daily crude production by one million barrels, a move that appeared to reflect growing worries about the virus impact on demand. Here’s the problem for the Saudis, especially if the world economy bounces back more quickly than expected: The U.S. has lots of spare capacity that could quickly come back online, spoiling any effort to keep prices elevated. At the end of 2020, there were just 267 active U.S. oil rigs, according to Baker Hughes, down from 670 a year ago and from a peak above 1,600 in early 2014. No one’s saying all that’s coming back online just because oil hit $50, but a jump toward year-ago rig levels wouldn’t be surprising if prices stay here—which ultimately could drive prices lower once new U.S. crude starts flowing. There’s nothing like $50 oil (near the break-even point for many U.S. drillers, according to the Dallas Federal Reserve) to encourage producers to drill, baby, drill. 

A Change in the Market Cap Lineup: If there was one narrative that ruled the Tech space over the last couple years, it’s that the big consumer platforms—Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), and Facebook (FB) held the top spots in terms of market capitalization among U.S. firms. Can anyone in America say they don’t touch two or more of these companies’ products and services each day—if not all of them? Probably not. 

But last week, Tesla (TSLA) cracked the top five, knocking FB to the #6 spot after a meteoric rise (recall TSLA was added to the S&P 500 Index last month). As of Friday, TSLA shares are on an 11-day win streak—adding 6.5% Friday alone. But here’s the thing: While they’ve become more ubiquitous in recent years, Tesla vehicles still make up less than 1% of the cars on the road. They’re still among a handful of nameplates (think Ferrari and Porsche) that are still capable of turning heads when they drive down the street. So while TSLA’s recent surge puts it in the top echelon in terms of market cap, among top companies that don’t have a strong foothold in American households, it’s in a class by itself.

Good Trading, 

JJ

@TDAJJKinahan

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

  • Politics still a main theme this week with an eye on possible stimulus updates
  • Early weakness could reflect virus worries, tension in Washington

  • Earnings season erupts later this week, but data and earnings thin early on

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