Sentiment Seesaw: Volatility Likely To Continue Along With Market Optimism, Worry

Excitement about the economy slowly starting to reopen has boosted shares in recent days. But there seems to be a sense among traders and investors that the economic recovery may have a ways to go.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Bank earnings weak.
5 min read
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Key Takeaways

  • The Fed has started buying corporate bond exchange traded funds

  • Fauci warns against reopening too quickly

  • Re-emergence of coronavirus cases casts a shadow

(Wednesday Market Open) The market seems caught in mixed thinking.

On the one hand, excitement about the economy slowly starting to reopen has boosted shares recently. But there also seems to be a sense that it all might be too good to be true and the reopening might be premature. 

This morning, the former seems to have once again taken hold, as cautious optimism might be the theme of the day. 

In addition to optimism about the economic reopening, the Federal Reserve has also been a boon to the recovery in equities by providing support for the economy and market. This morning, market participants were waiting for a speech from Federal Reserve Chairman Jerome Powell. Investors and traders were likely wanting to hear more commentary about the potential for negative interest rates as well as the Fed’s position on helping out the economy amid the financial devastation from the coronavirus.

With the next scheduled Fed meeting weeks away, the market will have plenty of time to parse Powell’s comments. We may know a lot more by then about the spread of the virus, the pace of economic reopening, and whether more fiscal stimulus is forthcoming.

This morning’s positive tone has helped an impressive rebound after the really weak close to yesterday’s session. The positive sentiment, which is also helping oil hold around $25 a barrel and the Cboe Volatility Index (VIX) dip toward 30, seems to be coming from the idea that the worst of the coronavirus may be over. But with headlines shifting daily, it seems that volatility will continue.

The Down End of the Seesaw

In addition to the optimism, there seems to be a sense that the economic recovery may have a long way to go. That school of thought appeared to prevail as yesterday’s session wore on.

There’s been nervousness about international locales that are seeing a resurgence in coronavirus cases after lifting lockdowns. And Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, told the Senate that opening the U.S. economy prematurely could trigger an outbreak that might be uncontrollable and set the economic recovery back. 

One of the places that has seen fresh coronavirus cases is Wuhan, China. That location has particular weight because it was the global epicenter when the coronavirus first emerged, making the news particularly discouraging for those thinking the economy might rebound quickly and support a V-shaped stock market recovery.

There also seems to be an increasing amount of tension between the U.S. and Chinese governments over the coronavirus. (See more below).

At home, the airline industry was one of the worst performers in the S&P 500 Index (SPX) Industrials sector after downbeat comments on the industry from Boeing’s (BA) chief executive officer. That industry has been one of the hardest hit amid the pandemic amid grounded flights as travel has dried up considerably.

Some Bright Spots

While those issues may have been marks in the negative side of the ledger on Tuesday—perhaps sparking some profit-taking from recent gains—the news wasn’t all doom-and-gloom on Tuesday.

The Fed started its program of buying corporate bond exchange traded funds (ETFs). While this is arguably a positive for the market—assuming it’s viewed as a temporary backstop from the central bank—it was also baked into the cake, which might have limited broader support for stocks amid the other somber news. (See more on the ETF buying below.)

News from the supply side helped oil on Tuesday, with crude oil futures (/CL) gaining ground on news that Saudi Arabia and some neighboring countries said they’ll cut production even further. But crude’s advance didn’t seem to provide much help to the Energy sector (IXE), which fell 2% as the broader market lost ground.

The excitement about the domestic and world economies reopening has helped lift oil prices—and the Energy sector—in recent days. But that sentiment is fickle, and the ebbs and flows in oil prices have been serving as a sort of proxy on sentiment about a global economic recovery. That economic recovery would likely mean an increase in demand for petroleum products for ground and air transportation and manufacturing. 

Though the core of earnings season is behind us, there’s one to watch for this afternoon: Tech giant Cisco Systems (CSCO). Earnings are expected to come in at $0.69—down about 14% vs. the year-ago quarter—according to third-party analyst consensus. Big tech has delivered a mixed bag this earnings season, with Microsoft (MSFT) surprising to the upside but Amazon’s (AMZN) Web Services and cloud and hardware mainstay IBM (IBM) falling short. CSCO earnings may be of particular interest, as its cutoff date includes the month of April—which is when the coronavirus shutdown kicked into high gear in many places.  

CHART OF THE DAY: 10-YEAR YIELD SLIPS.As stocks pulled back Tuesday amid worries about the economic recovery, demand for safe-haven Treasuries increased. That caused the yield on government debt, including the 10-year Treasury, represented here by an index, to decline. Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

The Market and the Economy: The Fed’s historic foray into buying corporate bond ETFs on Tuesday marked just one of the ways the central bank is trying to help backstop the stock market and wider economy amid the coronavirus pandemic. Other steps have included lowering the federal funds rate and buying Treasuries. It seems that the Fed’s interventions have helped equites recover faster than the wider economy, creating a gap between Wall Street and Main Street. It’s arguable that the stock market, which is forward looking, is pricing in a relatively quick economic recovery, aided by the Fed’s efforts. The situation is another reminder that the market isn’t the economy, and vice versa.

Deja Vu All Over Again: In an uncomfortable reminder of the U.S.-China trade war, there are signs that tension is once again rising between the world’s two largest economies. Legislation was introduced in the Senate on Tuesday that would allow the president to sanction China if the Asian nation doesn’t cooperate with investigations into the origins of the pandemic. In separate news, Bloomberg reported that legislation to impose sanctions on Chinese officials over treatment of Muslim minorities could come to the floor as soon as this week. The White House has also directed the Federal Retirement Thrift Investment Board to stop plans to invest in Chinese companies. For investors, the talk of punishing China financially may bring back memories from the not-too-distant past when the market faced uncertainty over the trade dispute. Now, with the economies of both China and the United States on the backfoot from the coronavirus, it seems that added uncertainty is the last thing Wall Street needs.

Technically Speaking: Yesterday, it looks like the news flow gave traders and investors an excuse to book some profits, and the selling seems to have reinforced an area of technical resistance around 2,945–2,955 for the SPX. Late last month, the SPX pulled back from a high of 2,954.86. It retested that general area this week and hit a high on Tuesday of 2,945.82 before pulling back. It seems that the market would need some sort of catalyst in the news flow to move solidly above that level, with a close above 2,950 perhaps needed to shift the technical picture higher. 

Good Trading,

JJ

@TDAJJKinahan

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

  • The Fed has started buying corporate bond exchange traded funds

  • Fauci warns against reopening too quickly

  • Re-emergence of coronavirus cases casts a shadow

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