(Tuesday Market Open) It feels like this elevator only goes up. Once again, the numbers all look green today as optimism about trade and earnings continues. Asian and European markets moved higher across the board overnight and U.S. futures suggest the major indices could build on record highs set yesterday.
In the latest trade news, there’s chatter that the White House might cancel some tariffs on Chinese goods, the Financial Times reported. The idea behind this, the report said, would be to meet a core demand of China’s and help propel progress toward a trade deal this month. While there’s no guarantee, it does look like a possible trade deal is pulling toward the station even if it hasn’t reached the platform yet.
Earnings also continue to roll in a little better than many had expected. At this point, we’re nearly three-quarters of the way through the season and the average S&P 500 earnings results are down 2.7% from a year ago, according to FactSet. That might not sound too impressive, but it’s better than the 3.8% drop that FactSet had projected last week. Positive earnings surprises in several sectors, led by Health Care and Technology, appeared to help move the needle.
At this point, 76% of reporting companies have beaten analysts’ average earnings estimates for Q3, above the five-year average of 72%, FactSet said. The bar was low, but companies are stepping over it.
DJIA Climbs Aboard Record Train
The Dow Jones Industrial Average ($DJI) probably gets more attention than it deserves considering it’s just 30 stocks, but let’s give it a pat on the back for joining its bigger cousins and setting a new record high yesterday. The S&P 500 (SPX) and the Nasdaq (COMP) entered the week at all-time peaks and also climbed to new ones Monday, but the $DJI needed a little extra time. It got help from gains in the Financial and Industrial sectors, which own an outsized piece of the $DJI’s property.Some of the big Industrial names—including those inside and outside the $DJI—went on the march yesterday. These included 3M Company (NYSE:MMM), Caterpillar (NYSE:CAT), Boeing (NYSE:BA), Deere (NYSE:DE), and FedEx (NYSE:FDX). Bank stocks like JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) also are on the move, maybe in part thanks to this week’s slight uptick in Treasury yields. The 10-year yield is once again testing 1.8% after dipping below 1.7% late last week.All this could be connected to better feelings around trade with China, despite no schedule yet announced for when China and the U.S. will meet to sign Phase One of the trade deal. Media reports yesterday suggested the two countries are looking for a time and place. Meanwhile, the exact outlines of any agreement remain a bit fuzzy.It might be prudent to remember that the two sides were close to an agreement last May only to have it shelved at the last minute. That’s not to say that will happen again, only to remind investors that this new era of good feelings propelling the market still rests on a slightly fragile base. Earnings are starting to lose a little influence now as the two biggest weeks of the season retreat in the rear-view mirror, meaning the market could be prone to jitters if there’s a negative tweet or news headline.For now, though, investors seem mostly relaxed. The CBOE Volatility Index (VIX), which is sometimes called the “fear index,” registered a 3% rise by late Monday, but that only took it to 12.76. It was above 20 less than a month ago, and hasn’t spent extended time below 13 all year. Sometimes a low VIX can be a contrary indicator, so it’s probably not a good idea to get too complacent.
Caution Flag Still Waving For Some
Retail investors can’t really be accused of complacency, judging from the latest Investor Movement Index® ( IMX), released Monday. The headline number of 4.84 during the October period was the highest in five months, but TD Ameritrade clients were net sellers of equities during the period. They once again favored less-risky assets, including fixed income. The IMX is TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets.
For the fifth month in a row, the IMX showed TD Ameritrade clients as net-sellers of Apple (NASDAQ:AAPL). They also were net-sellers of two other “FAANG” stocks: Netflix (NASDAQ:NFLX) and Facebook (NASDAQ:FB). Some of the stocks that were more popular as tracked by the index included Amazon (NASDAQ:AMZN), AT&T (NYSE:T), and Disney (NYSE:DIS), maybe a comment on all the attention the “streaming wars” are getting. Microsoft (NASDAQ:MSFT) also received a bid.
One interesting detail from the report is that retail investors were net-buyers of fixed income, but focused mainly on investments with durations of six months or less. That could suggest there’s still some anxiety about the stock market, but people might be parking cash and ready to use it for stocks if they think they can find a lower entry point.
AAPL is making new highs almost every day, so it may seem a bit surprising to hear that part of the market is a net-seller of the stock over such a long period. One possibility is that when there’s bad news on the China trade front, some people might be trading that synthetically using shares of AAPL.
Meanwhile, investor interest in shares of T could go beyond streaming. People might be searching for return and deciding to park money in a dividend stock.
Sector Shift?
Some sectors that trailed the major indices most of the year, like Energy and Health Care, are getting a little traction lately. With Technology and Communication Services on such massive upward runs, it’s possible we’re seeing investors sell some of their high-fliers and rotate into more beaten-down names.
Speaking of individual names, one analyst on CNBC yesterday made a good point: Even though the major indices are hitting new record highs, that’s not necessarily the case for the average stock. Only about 50 stocks in the S&P 500 were on pace to make new highs as of late Monday, the analyst noted. If you’re looking for a so-called “breakout rally” that would really move the indices way above the levels they were at, say, in the fall of 2018 when they previously made all-time highs, it might take more individual stocks coming to the celebration.
There wasn’t much of a celebration after the close yesterday when Uber (NYSE:UBER) reported. Shares fell 7% in pre-market trading as the company continues to lose money, even though the per-share loss was a little less than third-party consensus had projected. It’s been a tough stretch for UBER and some other stocks generally popular with millennials, as investors seem more focused on the ability to show a path toward profitability.
As for millennials, the IMX continued to show them as net-buyers in cannabis stocks and in Starbucks (NASDAQ:SBUX). Altria (NYSE:MO) was another company of consumable products that millennials seemed interested in last month.
The data calendar is a little light this week after being stuffed last week. Today brings the monthly Job Openings and Labor Turnover Survey (JOLTs) report and non-manufacturing ISM.
Fed speakers are also back on the prowl after last week’s meeting. Businesses are frustrated with political polarization and uncertainty about regulation, said Richmond Fed President Thomas Barkin on Tuesday, according to MarketWatch. Later this week, on Friday, Fed Governor Lael Brainard is scheduled to make closing remarks at a Fed conference on the economics of climate change.
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CHART OF THE DAY: LOCATION, LOCATION, LOCATION. The S&P Real Estate sector ($IXRE-purple line) was a high-flyer earlier this year for a bunch of reasons, including signs of life in the U.S. housing market. But it’s been dipping in recent days, perhaps in part because lower volatility (VIX-candlestick) may be influencing some investors to exit “defensive” sectors like Real Estate and put their money into “cyclical” ones instead. Data Source: Cboe Global Markets, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Case of A Falling Knife? Under Armour (NYSE:UAA) shares kept tumbling Monday after news of a government investigation into its accounting practices. For investors who might be looking at UAA and wondering what to do, one thing to consider is that things like this usually take longer than people think. The idea that you can “pick a bottom” for a falling stock isn’t too realistic and seldom works, especially in a situation like this where news is likely to continue dribbling out slowly over the months. So consider your time frame.
The company also lowered guidance in a quarter when many companies are surprisingly upping their guidance. That could be worth noting, too. One good lesson for investors is to separate the product from the stock. UAA arguably makes great products, but one problem for the company is figuring out who they are. You can find their products at high-end and low-end or discount stores. It’s important for companies to establish their identity.
Lagging Indicator: With stocks making new highs, it does seem a bit ironic that gross domestic product (GDP) growth continues to lag. Looking ahead, things don’t appear likely to improve right away, with the Atlanta Fed’s GDP Now indicator lowered last Friday to 1.1% for Q4 from its previous 1.5%. Some weakness could be linked to a sluggish manufacturing sector. The news from that side of the ledger wasn’t too hot again on Monday as September factory orders fell 0.6%, worse than analysts had expected.
That’s not exactly getting overlooked in the market. Most investors probably know that business spending is on the low side, especially if they listened to Fed Chair Jerome Powell emphasizing that after the last Fed meeting. However, the consumer appears so healthy that it’s dominating the narrative.
Crude Language: U.S. crude production remains near record highs well above 12 million barrels a day, helping keep a lid on world prices and fostering talk that OPEC might clip production further when it meets next month. However, another school of thought suggests OPEC might decide to lift the barriers and allow members to flood the market. That’s what it did in 2014/2015 in an effort to swat away the threat from U.S. producers. The idea was to make the price of crude low enough to get U.S. output down and improve OPEC’s share of the market.
That worked for a while last time, with crude falling below $30 a barrel in early 2016 from above $100 in mid-2014 and U.S. producers easing up on the spigots, but higher prices eventually came back and so did U.S. production. If OPEC does try the same thing this year, maybe it could be a holiday gift for U.S. motorists, but it also might weigh on the Energy sector. Already, Energy is by far the worst-performing S&P 500 sector of 2019. Energy companies that reported last week, including Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), appear to be trying to pump their way to success with huge output from the U.S. Permian Basin. Earnings beat third-party consensus for both firms, but both missed analysts’ projections on revenue.
Good Trading