Focus Turns To CPI, Treasury Auction Following Dramatic 'Turnaround Tuesday'

After yesterday’s dramatic “turnaround Tuesday,” the pendulum seems to be slowing a bit this morning. Plenty of potential catalysts jump into the pool today, so we’ll see what they bring. For now, there’s just not much direction.

The week moves ahead with today’s closely watched consumer price index (CPI) for February and a final wrap-up of the fiscal stimulus. The House is expected to vote on the $1.9-trillion package today. We’ve been talking about it for months, and now we’ll likely see it in action.

CPI came in at 0.4%—in line with analysts’ estimates. Core CPI, which strips out energy and food, rose just 0.1%. This is probably going to calm down some of the inflation concerns, at least for the moment. Both readings were higher than in January, but not by much. Stocks appeared to gain a little momentum in pre-market trading once traders saw the data, with the major indices turning positive after some weakness earlier.

On the bond side of things, investors are likely to focus on a $38 billion auction of 10-year Treasuries later today. The 10-year yield rose slightly to around 1.56% this morning, and every step higher lately seems to disturb Wall Street’s peace of mind. Any sign of flagging demand in the 10-year auction is likely to send yields higher, and maybe stocks lower as investors worry about what that might mean for borrowing costs.

Oracle Today, Initial Jobless Claims Thursday

There’s only a smattering of corporate news in the mix today. Campbell Soup (NYSE:CPB) reported this morning and Oracle Corporation (NYSE:ORCL) is on tap this afternoon. CPB shares fell slightly after an earnings report that didn’t have many big surprises.

One good thing about ORCL’s earnings is that they can give us a status check on how demand is going worldwide, since they have a big presence in so many markets. Their main business is database software, and earnings have grown steadily over the last year as they’ve started seeing some gains in their cloud offerings.

Tomorrow, attention turns to initial weekly jobless claims. Consensus among analysts is for 725,000, according to research firm Briefing.com. That would be down a little from 745,000 a week earlier, but well above historic averages. This indicator continues to be about 2.5 times as high as before COVID, a sign that the economy is far from recovered.

From a technical perspective, the Nasdaq 100 emerged out of correction territory (defined as a 10% drop from highs) with yesterday’s surge, while the S&P 500 failed to hold onto a brief move above 3900 on Tuesday. That level could continue to represent resistance, Briefing.com noted.

Extra Credit

Yesterday, we talked about Tuesday being a test case. Things started strong, but would they stay that way in the past hour or give back some gains? Recent rallies had mostly run out of steam in the final hour of the day.

Well, the major indices mostly passed their test, but it was just a single session. And to be completely honest, the NASDAQ Composite did close a bit off its highs, giving back a little in the very last minutes. It still ended 3.6% higher to enjoy its best day in four months. Also, volatility fell as the Cboe Volatility Index (VIX) closed below 25. That’s near the lower end of its recent 23–30 range. VIX continued to ease early Wednesday.

One day isn’t a trend. And as they say in Chicago, if you don’t like the weather, wait a few minutes. We’d have to see the market build on this over days and weeks before being convinced the worst is over for the struggling tech sector. A single session in isolation can seem like a big deal, until you look back at the charts a few weeks later and wonder what that little blip was in the overwhelming trend. Only time will tell if that’s how things work out.

For now, we have a one-day trend of tech rebounding in what appeared to be mainly a technical rally. There wasn’t really any news you could peg the turnaround on, unless you want to point to the 10-year yield falling back below the one-year highs of 1.6% it posted Monday. In a real-world sense, Tuesday’s 10-year level near 1.54% wasn’t a huge change, but it was a step in the right direction for anyone fearing inflation and economic overheating.

That dip in the yield delivered financials and energy their first blow in a while. Both finished in the red Tuesday after leading for weeks. They’ve each benefited from a massive reassessment of how people want to position themselves, with value leading growth now for months on ideas that the economy is reviving from COVID.

This kind of thinking—and the boost it’s given so-called cyclical stocks like banks, materials and industrials that tend to do best in a recovering economy—doesn’t vanish just because of one day’s market movement. Some analysts think the U.S. economy could grow as much as 7% this year, which would be the best since 1984. Even if it grows “just” 5% or 6%, that would probably help justify the kind of love cyclicals are getting these days.

Old Stalwarts Back In The Saddle — In One Respect

The big news so far this month (until Tuesday’s surge) was just how far Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) shares had plunged from all-time highs posted in early 2021. It was 37% at the bottom for TSLA. Bucking that particular trend, retail investors tracked by TD Ameritrade’s Investor Movement Index® (IMXSM) appeared to embrace both stocks during the February tracking period.

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.

Retail investors buying TSLA and AAPL on dips is a pattern that we’ve seen in the past when there’s a little bit of disruption in the market. We saw it not only last month, but also in the last couple of weeks. As these stocks got hit, again, clients continued to come in to buy. None of this means it will necessarily keep happening, but it’s interesting that so many investors continue gravitating to these two. In some ways, it’s trading what you know. The two big names also did well last year coming out of the COVID market collapse. Back then, they were often seen as ports in the storm, so to speak. The same held true for the other FAANG stocks, as well as Microsoft (NASDAQ:MSFT).

Judging from Tuesday’s action, which saw TSLA have its best single session in almost a year, it looks like other investors joined the rush to buy the dip, but retail investors may have been ahead of the game. TSLA’s ride up on Tuesday may have been more than a buy the dip rally. An analyst upgrade of the stock and a report that TSLA grabbed market share from Chinese competitors may also have helped.

Another major stock making a nice move Tuesday was Boeing (NYSE:BA), which helped lead the Dow Jones Industrial Average after reporting more planes ordered than cancelled during February. That hadn’t happened in a few months and likely needs to keep happening for the stock to really go wheels up.

Economist’s POV: If you’re thinking stocks still seem expensive, influential economist Robert J. Shiller would agree. And disagree. In a recent New York Times column, Shiller wrote that stock valuations are at “giddy” levels historically, but also “fairly reasonable” considering current low inflation and interest rates. The S&P 500’s CAPE ratio—which Shiller helped create and corrects for inflation and corporate earnings—is at 35.0 today. That’s well below the all-time high of 45.8 reached in March 2000, but still the second highest since 1881. A high CAPE ratio suggests that the market is overpriced, portending low subsequent returns.

However, CAPE (Cyclically-Adjusted Price-to-Earnings ratio) doesn’t forecast the path of stocks from here. “It says that the market is high now, but also that it could remain so for quite some time,” Shiller wrote. Another measure he cited predicts stocks will outperform bonds. “I’d say the stock market is high but still in some ways more attractive than the bond market,” Shiller wrote. He told investors that a well-diversified portfolio containing both stocks and bonds “is generally a good idea.”

Telecom Takes the Stage: Three telecom giants dial-in to make a call on anything from their company’s strategy to capital allocations. These events, known as Analyst Day or Investor Day, are slated to kick off today with Verizon (NYSE:VZ) as the opener, T-Mobile (NASDAQ:TMUS) tomorrow as the middle act, and AT&T (NYSE:T) to close on Friday. If you’re invested in this space, you probably want to hear for yourself how each company’s executive team sees the road ahead, the strategic route they plan on taking, and any stops they plan along the way. Analyst & Investor Days are similar to shareholder meetings in that they provide transparency regarding their insights, plans, and activities. But unlike shareholder meetings, these events are open to the investing public. VZ plans on discussing progress on its 5G rollout among other developments, TMUS is going to talk about its big Sprint merger in addition to other strategic priorities, and T will be talking about their overall business strategy and capital allocation plans. In short, it may be a call you don’t want to miss.

Out For Lunch: When you hear people talk about inflection points, the current market seems like a good example. The economy is reopening, a process no one has been through before. There’s a lot of money sloshing around, with more to come in the form of new government spending, debt issuance, and consumer spending when stimulus checks hit mailboxes. What does all this mean for the market? Investors are still trying to figure out what to do. For all those Tech stocks that worked so well last year and had amazing years overall, we’re starting to see a little bit of a, “Hey, do I really want to continue with them and what’s next?” The reopening trade is probably one of the hardest trades people have to figure out going forward, because there’s so many mixed messages.

For instance, a question that’s not really addressed is how productivity might turn out once everybody gets the vaccine and there’s herd immunity, There could be a built-up demand to not work, if you will. Productivity is off the charts as everybody’s been at home, working a lot more. People are going to be so anxious to go outside. Everyone’s got so much vacation time built up. You might see many people just say, “I’m taking some time off, I’m going outside, I don’t really care about anything else.” This could potentially take a bite out of Q3 gross domestic product (GDP), which is the summer quarter. The “Out on vacation” signs we never saw last year might go up, with a corresponding impact on the economy. That’s just a theory for now, but it’s one of those variables that investors don’t necessarily know how to play.

Disclaimer: TD Ameritrade (NASDAQ:AMTD)® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.