Is this rally running out of steam? More catalysts might be needed to sustain the positive flow, but most of the news this morning is negative. That includes reports of spiking virus caseloads in parts of the U.S. and a bearish initial jobless claims report.
It goes back to what we’ve been talking about. Can progress on reopening match investor expectations? Right now, with increased hospitalizations in about a dozen states, there’s fear it could take longer for those states to move out of the various phases of reopening they’re in, and that could be an impediment for any return to normalcy. Restaurants, stores, and offices could take longer to get to the next stage, slowing economic progress. The market has been penciling in a V-shaped recovery, but is the optimism trade too fast for reality?
For the first time in weeks, the initial jobless claims report Thursday showed a rise. A 1.5 million gain was above analysts’ average estimate of 1.35 million. The market might not show too much reaction to this, however, because the May payrolls report set expectations that the jobs picture is improving. One week of higher-than-expected claims probably won’t be enough to offset that positive sentiment.
China’s progress contrasts with parts of the US. The travel stocks are under pressure again, and retail is also getting bruised.
Despite yesterday’s setback and another tick lower in pre-market trading today, the major indices remain on pace for a positive week. Even if the fierce rally doesn’t return today and tomorrow, a weekly gain would contrast with the nearly 5% drop for the S&P 500 last week. That was its worst weekly performance since March.
Lack of fresh positive news on the COVID-19 and other fronts Wednesday helped slow the upward move with a whimper, not a bang like last week. There’s just not much on the table ahead that might move the needle. Earnings season is almost a month away, the next jobs report is a couple of weeks out, and we just had a Fed meeting.
That means the market could be more likely to react with volatility to any headline news, especially if it’s virus-related. Spiking caseloads in parts of the southern US appeared to get some investors’ attention this week.
For the most part, though, it feels like people are responding to good news more than they’re selling off bad news. Many investors want to keep alive the idea of a V-shaped recovery, and there appears to be lots of cash still on the sidelines. The Fed also seems to have a habit of showing up with a new gadget every time the market needs repairs.
All this could make some potential bears less likely to try and be heroes by selling into positive sentiment. Look where that got them last time, when the market immediately rebounded following last Thursday’s big selloff. Some analysts now see that selloff as a “bear trap.”
One question entering Thursday is whether the market’s reopening optimism trade can make a quick reappearance. Wednesday wasn’t a very good day for the “outdoors” segment that’s led the long rally over the last few weeks after taking the baton from technology. Airlines and cruise companies gave up some recent gains. So did Boeing (NYSE:BA) and Caterpillar (NYSE:CAT), which had risen earlier this week, when reopening optimism stirred up excitement.
Meanwhile, Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) both cruised to new highs Wednesday. The NASDAQ Composite, which is loaded with tech names, actually rose a bit despite Oracle (NYSE:ORCL) getting taken out to the woodshed, as investors reacted negatively to its earnings. Small caps, which led earlier this week, hit the dirt yesterday.
AAPL could remain in the spotlight ahead of its Worldwide Developers Conference starting next Monday. For investors, the conference often provides insight into potential tech innovations, so consider staying tuned. Some analysts think AAPL’s recent gains could partially reflect excitement ahead of the conference.
Getting back to the bigger picture, Wednesday’s setback for the SPX and the Dow Jones Industrial Average could have reflected a little investor exhaustion. Things can’t just keep going up without a break. Technically, there may be disappointment that for the second-straight day, the SPX wasn’t able to hold onto early gains that took it above resistance at 3130. Wondering where support might be? It’s possibly shaping up at around 3090, and the bias remains positive above that level, according to research firm CFRA.
Speaking of CFRA, they say it might take sharp upward revisions to Q2 earnings estimates for the market to gain more steam. The firm’s note to investors late yesterday projected a 44.2% decline in Q2 earnings year-over-year after an 11.9% drop in Q1. Things do look better moving forward, CFRA said, projecting 30.2% earnings growth next year following this year’s expected decline of 24.2%. A lot of analysts have pretty much thrown in the towel on 2020 earnings and are now modeling based on their expectations for 2021.
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