(Tuesday Market Open) First appearances can be deceiving.
A few weeks ago, some might have written off the U.S. holiday shopping season as a bit disappointing based on early earnings results. Since then, however, evidence has grown to counter that theory. The latest came early Tuesday from Target (NYSE:TGT) and Kohls (NYSE:KSS), even as U.S. stock indices licked their wounds after Monday’s slide.
Before looking at yesterday, let’s focus on today’s retail news. Target’s Q4 same-store sales rose 5.3%, above analysts’ expectations and pointing to a strong holiday season for the company. Shares rose more than 5% in pre-market trading, getting a secondary boost from full-year guidance that surpassed the Street’s estimates. Earnings and revenue for Q4 were in line to slightly higher than analysts had expected.
Over at Kohl’s, sales and earnings both handily beat analysts’ estimates, and holiday same-store sales also rose faster than the street had expected. The company said it plans as much as $500 million in share buybacks this year, and shares rose nearly 4% in pre-market trading.
So here we seem to have more evidence of what’s looking like a better U.S. holiday shopping season than many had first thought. Back in January, things hadn’t looked so healthy as a few major consumer-oriented companies waved the caution flag about their Q4 results. Now, with Walmart (NYSE:WMT), TGT, and KSS in hand, it’s looking like consumers might have been packing the aisles a bit more than people initially thought, and that’s potentially a positive sign for the overall economy.
Still, major U.S. stock indices didn’t move much early Tuesday following mixed action overseas. China’s indices did rise, which analysts there said could be the sign of more optimism around trade. Crude and the U.S. dollar were up a bit, along with U.S. 10-year yields.
In other earnings news after yesterday’s close, Salesforce.com (NYSE:CRM) shares initially tumbled as the cloud software company’s outlook for Q1 and 2019 came in below Wall Street’s expectations. The post-market stock price dip came despite CRM beating third-party consensus estimates for both earnings and revenue in Q4. Shares did claw back most of their losses before the opening bell.
One potential lesson to think about regarding CRM earnings is that sometimes you see a stock climb and climb and climb, and then earnings come and it’s a little bloom off the rose. What we’re seeing here is probably just a bump in the road for the company, however.
Something to consider watching today is new home sales for December, while tomorrow morning brings earnings from Dollar Tree (NASDAQ:DLTR).
Stomping On The Brakes
About half an hour into Monday’s session, U.S. stocks plunged in a surprising turnaround after a positive open. Technical resistance near 2815 might have inspired profit-taking amid perceptions that the extended rally could be overdone. The day’s high was 2816, and it was straight downhill from there until later in the session when buyers started to jump back in.
It’s actually not too surprising to have selling pressure surface after the S&P 500 rallied about 12% in two months through last Friday’s close. What was surprising, and maybe a bit concerning, was the suddenness of the move, especially after the SPX acted strong overnight and out of the opening gate. A sudden chill like this can sometimes be the sign of a pattern change, though we’d need more than one day to confirm it.
Stocks that were among the best performers over the last months—including Salesforce (CRM), Lockheed Martin (NYSE:LMT) and Boeing (NYSE:BA)—bore the brunt of Monday’s blow. The Dow Jones Industrial Average, which has a bunch of companies getting a partial tailwind from trade hopes, had a much worse day than the SPX.
What’s also a little surprising is seeing a data point like Monday morning’s December construction spending report appear to trigger part of the sell-off. While the 0.6% decline that month doesn’t look good on its surface and was worse than Wall Street had expected, it probably should be taken in context. What we know about December and January was that we had the government shutdown then, which could make numbers a little screwy. They’re probably less than reliable numbers, but the market sold off on them anyway.
The technical part of the sell-off also arguably shouldn’t be ignored. The SPX closed above 2800 for the first time in nearly four months on Friday but then couldn’t find much traction above that on Monday. Also, the Russell 2000 (RUT) small-cap index had started losing a little ground late last week, and lately it’s been a pretty good signal for what’s coming next in the broader market. The RUT’s weakness followed by the SPX’s weakness might argue for investors to pay more attention to RUT in coming weeks if they haven’t been doing that already.
Looking For Catalysts After Week Begins With Profit-Taking
Mostly, though, what happened Monday probably reflected the length of this rally. After so many good weeks in a row, some people perhaps were looking for excuses to take profits, and that’s what Monday morning was all about. Whether this type of trade continues into the rest of the week remains to be seen, but if retail earnings are good, that could maybe inject some positive feelings. Another successful attempt at the 2800 level for the SPX might also be a bullish sign.
In the risk-off sort of trading that dominated on Monday, it’s interesting to see that while VIX and bonds both moved higher, the gold market didn’t really get much of a boost. In fact, it’s fallen under $1,300 an ounce pretty convincingly after rising to around $1,340 last month. The dollar has been fairly strong, which might be hurting gold, and stocks have also done well, perhaps injecting more pressure on the shiny metal. We’ll have to wait and see if something happens to change this narrative.
Looking at sectors, financials struggled Monday as Goldman Sachs (NYSE:GS) lost ground. Every time GS stock has approached $200 a share lately, it’s gotten slapped down. Wells Fargo (NYSE:WFC), meanwhile, traded both sides of unchanged for much of the day.
Last week saw Treasury yields climbing, which seemed like it might be positive for financials. That changed Monday when the 10-year yield fell several basis points to 2.72%, sweeping away some of the enthusiasm. Also, if financial sector investors are hoping for help from the Fed, that doesn’t seem likely to come until at least June. Rate hike expectations for the meeting later this month now sit below 2%, according to the futures market.
However, if a “no-deal” Brexit starts to look possible, that could help some of the big U.S. banks because investors might want to turn toward something they consider solid. U.S. bank balance sheets do look like they fit that description.
Another “red” sector Monday was health care, which appears to still under the weather after the introduction in Congress last week of a “Medicare-for-All” bill. Managed care company UnitedHealth Group (NYSE:UNH) is really taking it on the chin, falling more than 4% Monday.
Is Trade Deal Optimism Baked Into Market?
One additional challenge for the overall market this week appears to be ideas that a trade deal with China might already be built into stock prices. All the positive news over the last month or two has been a big factor in the 450-point SPX move from Christmas Eve, so the question some investors are asking is how much farther this needs to go. Another concern is how a deal might get enforced and whether the U.S. might keep sanctions around as a tool if it sees violations from China once the agreement is in place. That could potentially keep the market on tenterhooks, bringing back the uncertainty factor.
Looking ahead, technical support for the SPX might be down at around 2750, in line with the 200-day moving average. The SPX has been trading above the 200-day for nearly a month, the longest it’s spent above that level since September. Monday’s selling stopped well short of 2750, but even a drop to near that level might not be viewed as all that damaging considering how far things have come in such a short time. Some veteran market watchers think it’s natural for a market like this to cool off 2% or 3% from time to time, and that wouldn’t necessarily jeopardize the overall bullish sentiment.
It also seems reassuring that the SPX recovered pretty swiftly from its lows on Monday. Though it ended the day down about 0.4%, it climbed roughly 25 points from the session low by the time the closing bell rang, adding yet another day to its streak of avoiding a 1% session drop. There hasn’t been a 1% daily decline for the SPX since Jan. 22, about six weeks ago. To put that into perspective, the SPX dropped 1% or more nearly every session between Dec. 14 and Dec. 24. Volatility did rise Monday, with the VIX piercing 15 again intraday, but it’s way down from above 30 back in December.
IMX Bounced In February
Rounding out the news, The Investor Movement Index® (IMXSM) ended its five month decline in February, reaching 4.59, up 7.2% from January’s score of 4.28. The IMX is TD Ameritrade’s proprietary, behavior-based index that measures what investors actually were doing and how they were positioned in the markets.
Overall, TD Ameritrade clients were net buyers during the February period. Clients favored less volatile assets—including fixed income products—while selling equities. With earnings season at our backs, it might be interesting to see how economic data, geopolitical events, and headline news impact the momentum we started seeing in February.
Figure 1: KNOCKING ON THE CEILING? When the S&P 500 Index (SPX) rallied through 2800 on Friday, many chart watchers pointed to 2815, the November 2018 high made just before the year-end meltdown. The 2815 level was breached briefly on Monday before the selloff. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
GDP Frosted? There doesn’t seem to be much in the economic growth projections coming out lately to suggest the Fed might change its mind about keeping a finger on the pause button following last week’s relatively benign inflation data. The Atlanta Fed’s GDPNow meter pegs Q1 gross domestic product (GDP) growth at just 0.3%, down from the government’s first Q4 estimate of 2.6% and 3.4% in Q3. If Q1 growth ends up being on the weak side, it might be prudent to consider keeping things in perspective, however. The last few winters have seen sluggish GDP growth, and this one had a government shutdown and a polar vortex that kept most of the northeastern and Midwestern population centers shivering for months, even into early March (ask any Chicagoan). A poor Q1 GDP figure could get shaken off as a weather- and shutdown-related “one timer,”, to borrow an old ice hockey term.
Mall Getting Mauled? Depends on Which One: A popular theme in retail lately is the so-called “death of the mall.” However, as one industry analyst noted on CNBC Monday, not all malls are at death’s door. In fact, he said, high-end malls are doing quite well. It’s second-tier ones – home to many department stores like JC Penney (NYSE:JCP), Sears (NASDAQ:SHOS) and Macy’s (NYSE:M) – that are struggling, and the malls’ troubles could could be having an impact on those retailers. Other retailers sometimes found in second-tier, struggling malls include Gap (NYSE:GPS) and Childrens Place (NASDAQ:PLCE).
Additionally, the overall retail sector is basically tracking the SPX this year as far as share performance, but there’s been a bit of a separation between tiers of stores just as there’s been between mall tiers. For instance, higher-end retailers catering to the wealthy as well as stores catering to lower-income people tend to be doing better than stores that cater mainly to the middle class, the analyst told CNBC.
Happy Birthday, S&P 500: Monday was the 62nd birthday of the S&P 500 Index (SPX), launched in 1957. Before that, investors looking for index performance could follow the Dow Jones Industrial Average ($DJI), but that covers just 30 stocks and it’s weighted by price, making it a less representative way to monitor the market. The SPX, however, includes 500 stocks and is market-cap weighted. It’s become arguably the primary index to follow, composed of the 500 largest U.S. stocks.
Since its launch, the SPX has generated an overall return (excluding dividends) of 6,310%, outpacing the $DJI’s 5,450% return in that same time, financial outlet Benzinga reported. Excluding dividends, the SPX has produced an average compound annual growth rate of just above 7%. Needless to say, past performance isn’t necessarily a guarantee of future direction.
Disclaimer: Charts For illustrative purposes only. Past performance does not guarantee future results.TD Ameritrade® 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.