Strong profits and small yield gains provide early support after collapse

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Key points to remember:

  • Major indices rebound early after worst day in 10 months
  • Crude and Treasury yields are slightly higher, offering possible support
  • Netflix and Chipotle profits expected after closing

On the day that Amazon founder (AMZN) Jeff Bezos takes to space, most investors would likely be happy to see the major indices pull out of the carpet after yesterday’s collapse.

At first, it looks like they might make their wish come true. The major indices rebounded overnight after the worst day in 10 months, with some of the “reopening” stocks that were shelled yesterday showing signs of “recovery on Tuesday”. The key could end up being what happens after the first 30 minutes of trading. The fallout from the overnight session may lift things higher at first, but then we’ll see if there’s continued momentum for the rest of the day.

Two of the factors that helped bring things down yesterday surfaced a bit this morning, which may be why stocks turned green in pre-market trading. The 10-year Treasury yield has climbed a fraction but remains below 1.2%, and crude oil has also risen slightly but is still trading below $ 67 a barrel. Weak yields and crude yesterday were seen by some as signals of a possible slowdown in economic growth.

It also helps to see Big Blue — IBM (IBM) —having a solid quarter after yesterday’s close. The company has exceeded analysts’ estimates on both earnings and earnings, and the CEO said IBM sees continued signs of strength in the cloud market and customer demand. Shares are up over 3% in the pre-market. Travelers (TRV) also had a good quarter and saw stocks rebound which could send some positive waves.

As we’ve talked about before, the “buy the drop” mentality seems to remain in place. People, like sports teams, tend to continue to run the game that has worked, and lately it has worked a lot. We’ll see if it speeds up. But remember: the past is not a prologue, and complacency and commerce are like oil and water.

Volatility, Delta variant, profits among the things to watch out for

After a day like yesterday, it is probably fair to say that we are far from being out of the woods. First of all, when the market takes such a hit, there is often reverberation for days or even weeks. Volatility is a bit lower this morning, but the Cboe Volatility Index (VIX) is still above 21 after recently falling into my mid-teens. Anything above 20 could signal concerns of turbulence ahead, although it’s probably constructive that VIX never hit 30 yesterday.

Additionally, the Delta variant of Covid – which appeared to help spark much of yesterday’s sales by speculators – went nowhere. The number of cases in the United States yesterday was the highest daily number since early May, according to media reports. Major indices fell in Asia overnight but rose in Europe.

The earnings season officially started last week, but will accelerate in the days to come. This afternoon and tomorrow morning are expected to bring results from Netflix (NFLX), United Airlines (UAL) and Chipotle (CMG), among others. These three elements could give investors a full look at how factors such as higher prices, the Delta variant and the reopening are playing into consumer preferences. With Netflix, subscriber additions will likely be a key goal, while trip numbers figure prominently on UAL.

Although the real earnings palooza does not begin until next week, 76 companies in the S&P 500 are expected to report this week. Texas Instruments (TXN) and Intel (INTC) are expected in the coming days, bringing Tech into the picture. Hopefully earnings can give the market back its bullish momentum, especially if CEOs can paint a positive picture of the future.

Meanwhile, bitcoin (BTC) fell below $ 30,000 this morning. Many people have been waiting for BTC to be like gold, that is, something that can be bought in times of crisis. But the gold / BTC correlation was not as strong yesterday as people thought.

Become technical

Excuse the technical language ahead, but it’s important to understand if you want to master the market this week.

Yesterday’s downward movement sometimes sent the S&P 500 (SPX) below its 50-day moving average. This level was near 4240. On the positive side, the SPX managed to find buyers below and came back to close above 50 days. This can often signal a bit of upside momentum on a day like Monday, but it wouldn’t be surprising to see at least one more test of the 50 days, which has been a key support level all year.

And speaking of techniques, there’s an old-fashioned indicator – one of Charles Dow’s original tech toolkit – that could indicate continued pressure ahead: transportation. When the Dow Jones Transportation Average ($ DJT) fell below the Dow Jones Industrial Average ($ DJI), it was seen as a sign of weakness ahead. If you look at the chart below, you can see that $ DJT peaked in May and continued to decline, even though major indexes including $ DJI hit new highs. A day is not a trend (or an indicator), but sometimes these old-fashioned data points can help confirm the underlying trend.

Another technical trend to watch out for is the rough market. First-month crude futures broke a key support level on Monday and nearly fell below a second near the 100-day moving average. For crude, it was the worst day in four months and prices returned to their early June levels. Covid concerns were a burden, and the OPEC + deal to bring more crude back to market was another.

Banks Energy Play Defense

So-called “cyclical” sectors like energy and financials didn’t just start to fall on Friday and Monday. They backed off over the past month as concerns mounted about the strength of the economic recovery, even before this latest wave of Covid cases.

Financials rallied well last week thanks in part to strong earnings performance from major Wall Street banks, but yesterday’s collapse in Treasury yields put financials back on the defensive.

At the same time, investors have also started to look to “defensive” sectors like commodities and utilities which often move higher when economic expectations fall. It’s an interesting trend to watch this week to see if it has any legs after a nasty performance on the major indices. The trend started before Monday’s particularly bad day on Wall Street.

A few buyers also landed at Tech on Monday, which didn’t come as a huge surprise. When you think back to last year, stocks that often tended to do better in a low Covid rate environment were the big names in growth, many of which are in the tech industry. So-called ‘mega-caps’ like Apple (AAPL) and Microsoft (MSFT), as well as the tech chip sub-sector, saw massive gains in 2020 as people worked from home. It is important to watch these two, in particular, for possible signs of direction in the coming days.

There is no guarantee that this current Covid outbreak will look like last year, and I hope it won’t. Despite this, it appears that investors are incorporating an element of caution, which could explain the continued strength of the US dollar recently as well as lower yields on US government debt.

After the big first half, preparation for further IPOs: Although the market for ad hoc acquisition companies (SPAC) Cooled a bit from the frenzy of the first quarter, traditional Initial Public Offerings (IPOs) are tearing apart this year. Several new ones started to hit the market just last week, and CNN reports that Instacart grocery store, eyewear seller Warby Parker, fintech company NerdWallet and Indian e-commerce company Flipkart backed by Walmart (WMT) may also become public within the next six months. More than 200 IPOs began trading this year, according to research firm Renaissance Capital. This is over 200% compared to a year ago. These companies have raised over $ 70 billion, proving to some analysts that many investors are still looking for rapid growth.

Inflation is still there: With Covid now back in the headlines, let’s not forget the other factor that has helped push stocks down recently: inflation. A Wall Street Journal survey last week showed economists now on average expect inflation – excluding volatile food and energy components – to be up 3.2% in the fourth quarter compared to the previous year. They predict that the annual increase will decline to just under 2.3% per year in 2022 and 2023. That would mean an average annual increase of 2.58% from 2021 to 2023, bringing inflation to levels last seen. in 1993. Core inflation grew on average just 1.7% per year between 1995 and 2019, by comparison.

What’s concerning is that consumers are already starting to feel it in their wallets, at least judging by sentiment data from Michigan from last week. The expected inflation rate for the coming year fell from 4.2% to 4.8% in June, while the expected inflation rate over 5 to 10 years fell from 2.8% to 2, 9%.

The difficult path of rough faces: After a big drop like the crude suffered yesterday, it can sometimes take a long time to come back. For example, after the 7.5% drop in crude on March 18, it did not recover to close at its March 17 level until April 29. The past isn’t a prologue, but it looks like rough has a few things to work on here if it’s going to make a comeback to recent highs above $ 75. At its lowest level yesterday, it was down almost double digits from last Wednesday. It will be interesting to see the weekly US inventory and production figures tomorrow. The past week saw an increase in gasoline inventories, raising questions about the strength of demand. We’ll see if it continues.

TD Ameritrade® commentary for educational purposes only. SIPC member.


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