Good Friday evening to all of you here on r/StockMarket. I hope everyone on this sub made out pretty nicely in the market this past week, and is ready for the new trading week ahead.
Here is everything you need to know to get you ready for the trading week beginning August 10th, 2020.
Markets could be challenged by Washington stimulus talks and China tensions – (Source)
The debate in Washington over the next round of fiscal stimulus and rising tensions between the White House and China could act as brakes on the stock market in the coming week.
Stocks rallied in the past week but were more sluggish Friday, as investors watched stimulus talks between Democrats and the Trump administration stall out. Investors also were concerned that President Donald Trump’s executive order banning U.S. transactions with Tencent’s We Chat and Bytedance’s Tik Tok would accelerate the deterioration of relations between the U.S. and China and draw retribution.
Just ahead of Friday’s market close, Treasury Secretary Steven Mnuchin said just that he is recommending the White House move forward with executive orders on unemployment, student loans and rental foreclosures. He said a compromise could not be reached with Democrats, who wanted a $2 trillion package. Stocks edged higher after the announcement though details of the orders and how any assistance could be funded were unclear.
“It’s an attempt to bring the Democrats back to the table to negotiate a deal by threatening to use an executive order. They may be able to get some things down, but it won’t be enough to create the bridge they need while the economy continues to repair itself,” said Michael Arone, chief investment strategist at State Street Global Advisors.
The S&P 500 was up 2.4% for the week, ending at 3,351, after a 2 point gain Friday. The Nasdaq was down 0.9% Friday, ending at 11,010. It was up 2.5% for the week.
“Part of the reason stocks have held in there well and continue to melt up is that one of the things that is priced in is a fifth fiscal policy package of $1.5 trillion. if we don’t get one, I do think the market will retrace lower to reflect a lack of stimulus,” said Arone. “The recovery will stall out without one.”
As for China, it has so far not taken actions against U.S. companies, even with the Trump administration’s moves to block Chinese telecom giant Huawei from using U.S. parts. The latest steps, however, raised concerns that China could find ways to retaliate, and that the U.S. will bar Chinese IPOs.
“On balance, continued hostility toward China is going to be a continued net negative for U.S. companies that are revenue exposed to China,” said Julian Emanuel, head of equities and derivatives strategy at BTIG. “We know the exposure is very centered in the Nasdaq names.”
Emanuel said the stock market is entering a seasonally weak time, and while market psychology is still strong it could start to change. “The seasonals are starting to shift negatively. We all know September is a poor month and the degree of the escalation of the tensions between the U.S. in China is not a surprise, but the degree of the escalation over the last 48 hours is,” he said. “It’s not changing psychology, but it’s challenging bullish psychology.”
In the coming week, there are some final earnings of the season, including technology company Cisco and food company Sysco. Some travel companies including Royal Caribbean report, as does consumer goods company Tapestry. In the week after, big retailers roll out their reports in the final earnings burst of the quarter.
Economic reports could be important in the coming week, as investors watch consumer price index inflation data Wednesday and retail sales Friday. Retail sales should provide a window into the consumer, as workers returned to their jobs but also faced uncertainty because of reclosings.
CPI is important as the market has been assuming inflation will ultimately start to show gains because of the weakening dollar and ballooning budget deficits. CPI last month showed a 0.6% increase month over month.
The pro-inflation trade has become important and has driven investors into stocks, gold, and out of the dollar.
Watch this trade
The dollar could be the key to the fate of markets in the coming week. The U.S. currency was edging higher Friday but is still down about 3.5% over the past four weeks. Gold declined Friday, and Treasury yields moved lower.
“The dollar … to me it just continues to be an important barometer that has a unique intersection of rates, inflation and risk assets,” said Arone. “With rising China, U.S. tensions and combined with the fact that there’s uncertainty about the fiscal policy package and the fact the dollar has declined so quickly, many are expecting it to catch a bid here and rebound.”
Part of the move in the dollar was based on the idea that huge government spending would increase the government’s deficit and Treasury issuance. Emanuel said the news on stimulus could have a big impact on the trade.
“We would make the argument the baseline expectation was a trillion dollars worth of stimulus to be implemented sometime in the month of August. Anything below that expectation is likely to cause the dollar to strengthen,” said Emanuel. “It’s a momentum and positioning trade as well as what has been … the unwind of an asset diversification trade.”
The stalling of talks could shift the market’s view that the U.S. is willing to spend any amount to fight the impact of the coronavirus. “It’s changing the market psychology that the government’s propensity to spend infinitely is not as great as it was earlier in the week,,” Emanuel said. “The dollar rallying, from our perspective, is a direct threat to a lot of these momentum trades.”
Strategists said a strengthening dollar could be a headwind for stocks.
“Given the friction with China, to the extent the inflation numbers come in weaker than expected, the argument being that whole weaker dollar asset diversification has helped feed into increasing inflation expectations,” said Emanuel. “If the inflation data does surprise to the downside, given the rally in inflation …it’s further potential for the unwinding of the short dollar trade and the unwinding of the long gold trade which in our view bleeds over into stocks.”
This past week saw the following moves in the S&P:
Major Indices for this past week:
Major Futures Markets as of Friday's close:
Economic Calendar for the Week Ahead:
Percentage Changes for the Major Indices, WTD, MTD, QTD, YTD as of Friday's close:
S&P Sectors for the Past Week:
Major Indices Pullback/Correction Levels as of Friday's close:
Major Indices Rally Levels as of Friday's close:
Most Anticipated Earnings Releases for this week:
([CLICK HERE FOR THE CHART!]())
(T.B.A. THIS WEEKEND!)
Here are the upcoming IPO's for this week:
Friday's Stock Analyst Upgrades & Downgrades:
Individual Investors Still Don't Believe
As mentioned in a prior post, in the past week the S&P 500 has moved within 2% of its 2/19 high, but at the same time, less than a quarter of AAII respondents are optimistic for the future of stocks over the next six months. That begs the question- if there have been past times that sentiment and price action have been so detached from one another. Since the start of the AAII survey in 1987, there have been 10 periods (including the current one) in which the S&P 500 was within 2% of an all-time high but bullish sentiment was less than 25% without another occurrence in the prior three months. The most recent prior occurrence was not even a full year ago. Back in October, sentiment was only slightly higher as the S&P 500 was 1.84% from its all-time high. Prior to that, there were some scattered instances throughout 2013, 2015, and 2016 but before that, you would have to go back to 1993 to find another similar period. The one occurrence in 2013 stands out as it was both the lowest sentiment reading of these prior occurrences and the only one that occurred with the S&P 500 right at an all-time high.
As for where things stand after such instances, sentiment has tended to reverse higher in the following six months as the S&P 500 has tended to move higher. The S&P 500 has actually tended towards better than average returns over the next three months, although performance six months out has been modestly worse than average, even as it has been higher more often than not. Additionally, as shown in the second chart below, of the more recent occurrences of the past decade, they haven't marked any major top or bottom for the S&P 500 with occurrences clustered both coming off of lows and in the middle of longer-term uptrends.
Silver Takes the Gold
Gold and silver prices were already on a tear heading into this week, but they've only seen their gains accelerate even more. With more than a day and a half of trading left in the week, front-month gold futures have rallied, but silver has been the real show stopper with a gain of 16%!
Taking a look at a one-year chart of silver over the last year, things have really gone parabolic this week as the front-month futures contract is trading more than 40% above its 50-day moving average (DMA) and 62% above its 200-DMA.
Were it not for the move in silver, gold's move would be getting all the attention. Prices for gold have also seen a major surge in the last month, rising from under $1,800 to the current level of $2,060 per ounce. While not as extended as silver, gold currently trades 14% above its 50-DMA and 26% above its 200-DMA.
With gold 25.7% above its 200-DMA and silver 62.2% above, the average spread of the two commodities currently stands at 44.3%. In the 40+ year history of the two futures contracts, there have only been a handful of prior periods where the average spread of the two commodities was larger or even above 35% for that matter with the most recent occurring back in early 2011. This recent rally in the two commodities has certainly been one for the ages.
Big Moves Off 52-Week Lows
Within the US equity market, we've seen some major moves in individual stocks off their 52-week lows over the last few months. Look at the table below. Within the Russell 1000, which tracks the performance of the largest companies in the US, stocks in the index are up an average of 87.6% from their respective 52-week lows. Looking at performance by individual sectors, stocks in the Energy sector are up an average of 136.8%, while the average Consumer Discretionary stock has rallied 131.4%. The Technology sector wasn't hit nearly as hard by the Covid-crash as other sectors, but stocks in the sector have doubled on an average basis relative to their 52-week lows. The only sector where stocks are up less than 50% on an average basis from their 52-week lows is Utilities at 46.33%.
For many investors, the holy grail of stock picking is the proverbial ten-bagger. A ten-bagger is a stock that multiplies by ten times its original price. Usually, this happens over the span of years, but in the Covid-economy, we've actually seen a number of these ten-baggers play out in the span of months. While most of these examples are in the small-cap space, shares of Wayfair (W), which has a current market cap of $27.5 billion, have rallied from $21.70 on March 19th to its current price of $290.85 now. That's a gain of more than 1,200% in less than five months!
Within the entire Russell 1,000, 257 stocks have at least doubled off their 52-week lows, and in the table below we highlight the 34 stocks that are at least a quarter of the way to the ten-bagger club and have rallied more than 250%. As mentioned above, W tops the list, but Fastly (FSLY), which has barely been public for a year, is just shy of the club with a gain of 992%. Behind FSLY, Livongo Health (LVGO) is up 855%. Given that LVGO just got a takeover offer from Teladoc (TDOC), the 11th best-performing stock on the list, it may only make the ten-bagger club under the banner of the TDOC ticker.
In looking through the list of stocks shown, many of these names come from the Health Care, Technology, and Consumer Discretionary sectors and have been direct beneficiaries of the new Covid-economy. At the same time, six stocks from the Energy sector made the list as well as they recovered from their bombed-out levels after oil prices briefly traded in negative territory earlier this year.
Bullish Earnings Season So Far
At our Earnings Explorer tool available to clients on our website, we provide a real-time look at beat rates for both EPS and sales. Below is a snapshot from the website showing both the EPS and sales beat rates for US companies reporting earnings on a rolling 3-month basis. Currently, 64.61% of companies have exceeded consensus analyst EPS estimates over the last three months, while 63.75% of companies have beaten consensus sales estimates over the same time frame.
In looking at the chart, you can see a big spike in the EPS beat rate over the last few weeks. Since earnings season began on July 13th, nearly 80% of companies have posted stronger than expected EPS numbers. That's a huge beat rate and suggests that analysts were too bearish on Q2 numbers heading into July. The revenue beat rate held up much better than EPS beats throughout the first half of 2020, but it too is on the upswing this season.
We also monitor how share prices are reacting to earnings reports. So far this earnings season, the average stock that has reported Q2 numbers has gained 1.31% on its earnings reaction day. That compares to a historical average one-day change of just 0.06% on earnings reaction days. As shown below, stocks that have beaten EPS estimates this season have gained 2.2% on earnings reaction days, while companies that have missed EPS estimates have fallen 1.89%. It's rare to see beats gaining more than misses decline, but that's what is happening this season.
Labor Market Continues Summer Momentum
After falling the most on record in April, the US labor market has rebounded with three consecutive months of job gains, adding back more than 9 million of the 22 million jobs lost in March and April. In July, the economy added back nearly 1.8 million jobs, ahead of Bloomberg consensus estimates for 1.5 million and lowering the unemployment rate from 11.1% to 10.2%, but lingering measurement issues could add 1% to that number, according to the Bureau of Labor Statistics.
As shown in the LPL Chart of the Day, job gains were broad based across industries, with a third of the increase coming from the leisure and hospitality sector—the “scene of the accident” industries—while only information, and mining and logging posted declines in July.
“March and April were historically brutal months for the labor market, but the labor market’s resiliency this summer has been a welcome development,” stated LPL Chief Investment Officer Burt White. “However, the next few months will be critical for the economy as schools reopen and additional fiscal stimulus still hangs in the balance.”
The July report also comes on the heels of a rise in COVID-19 cases across the Sunbelt region of the United States. Because of the date of the survey, it may not fully reflect the economic impact of some of the more recent high-frequency data that has captured some of the effect of rising cases. Still, the jobs report shows that the US economy is continuing to heal despite the long road ahead.
Are Recessions Good For Stocks?
This isn’t like any recession we’ve ever seen, as it was sparked by a horrible pandemic and happened because people were told to stay inside. The impact was the worst contraction in gross domestic product (GDP) last quarter that anyone who is reading this has ever seen. But what is quite surprising is the fact the Nasdaq has made 30 all-time highs so far in 2020, while the S&P 500 Index has gained four consecutive months, all while the unemployment rate remains above 10%.
Why is this happening? There are two main schools of thought. One is that stocks are forecasting a better economy later this year and into 2021; remember, stocks tend to lead the economy and could be doing so once again. Another school of thought is that the massive fiscal and monetary policy are boosting equity prices, while not helping the overall economy quite as much.
Here’s the catch. It actually isn’t abnormal to see stocks gain during a recession. “This is one that might surprise many people, but stocks have actually gained during 7 of the past 12 recessions,” explained LPL Financial Chief Market Strategist Ryan Detrick. “There’s no question the difference between what is happening on Wall Street compared with Main Street is about as wide as we’ve ever seen, but maybe it shouldn’t be as big of a surprise that stocks have been strong.”
As shown in the LPL Chart of the Day, the S&P 500 actually gained 1.3% on average when looking at the 12 previous recessions going back to World War II, with a very impressive median advance of 5.7% (the average is skewed lower due to 2008). We continue to expect this recession to end soon, if it isn’t over already. In fact, when the end of the recession is officially declared at a later date, we could have yet another recession that saw stock market gains.
STOCK MARKET VIDEO: Stock Market Analysis Video for Week Ending August 7th, 2020
STOCK MARKET VIDEO: ShadowTrader Video Weekly 8.9.20
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Here are the most notable companies (tickers) reporting earnings in this upcoming trading week ahead-
- T.B.A. THIS WEEKEND
([CLICK HERE FOR NEXT WEEK'S MOST NOTABLE EARNINGS RELEASES!]())
(T.B.A. THIS WEEKEND)
([CLICK HERE FOR NEXT WEEK'S HIGHEST VOLATILITY EARNINGS RELEASES!]())
(T.B.A. THIS WEEKEND)
Below are some of the notable companies coming out with earnings releases this upcoming trading week ahead which includes the date/time of release & consensus estimates courtesy of Earnings Whispers:
Monday 8.10.20 Before Market Open:
Monday 8.10.20 After Market Close:
Tuesday 8.11.20 Before Market Open:
Tuesday 8.11.20 After Market Close:
Wednesday 8.12.20 Before Market Open:
Wednesday 8.12.20 After Market Close:
Thursday 8.13.20 Before Market Open:
Thursday 8.13.20 After Market Close:
Friday 8.14.20 Before Market Open:
Friday 8.14.20 After Market Close:
([CLICK HERE FOR FRIDAY'S AFTER-MARKET EARNINGS TIME & ESTIMATES!]())
T.B.A. THIS WEEKEND
T.B.A. THIS WEEKEND T.B.A. THIS WEEKEND.
What are you all watching for in this upcoming trading week?
I hope you all have a wonderful weekend and a great trading week ahead r/StockMarket.