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Boomerang Seems To Continue As Caterpillar, Nvidia, Apple Among Early Gainers

JJ Kinahan

The “losers’ parade” that began Tuesday continued marching early Wednesday as some of the most beaten-down stocks clawed back from recent weakness in a surge of pent-up investor demand. The question is whether and how long this boomerang action can continue.

Stocks with a positive early tone included Apple Inc (NASDAQ: AAPL), Nvidia Corporation (NASDAQ: NVDA), and Caterpillar Inc. (NYSE: CAT). These names rose in pre-market trading following a day when a couple of the big banks were up front twirling the batons. Financials, which had been smacked most of the last month, were among the best performing sectors yesterday and stayed in the green early Wednesday as well.

Global markets continued to rally, as well, on the back of yesterday’s U.S. gains, and early momentum on Wall Street looked strong. This was the first major buying interest the stock market has seen in weeks, as people mainly had stayed on the sidelines or bought Treasuries. Some investors might have taken profits from the big run-up earlier this year and retreated. The last six weeks haven’t been so much a story of people selling as people not buying, and now there seems to be pent-up demand.

The story hasn’t really changed much overnight. Hope that the Fed would ride to the rescue helped send the market to its second-best gains of the year on Tuesday, while optimism developed about U.S./China relations as the U.S. Treasury Secretary planned to meet with China’s central bank chief Wednesday. That’s the first time that key officials from the two countries have met in almost a month.

Tuesday’s surge came after Fed Chair Jerome Powell implied in a speech that the Fed would do what it has to do to protect the economy from trade turmoil.

In one possible important development, the S&P 500 Index (SPX) managed to close above the key psychological 2800 level Tuesday. We’ll see if that can hold today. 

One thing that might weigh as we move ahead Wednesday is a private jobs report that came out this morning showing very soft U.S. jobs growth last month. However, that number doesn’t necessarily correlate with the one we’re waiting for on Friday from the government. Analysts expect May jobs growth of 180,000, according to Briefing.com.

Does Rally Have Legs?

A big question heading into the rest of the week is whether the market can continue climbing on Fed hopes or if this was a one-day event. Some sort of spark plug was needed after a month of weakness, but the test is whether the interest rate hopes get people engaged enough to keep buying.

One important thing to consider watching is whether the market can break the cycle of being down six weeks in a row. It was up a lot the first two days of this week thanks to Tuesday’s rally, but can it power through? The SPX closed just above 2752 last Friday.

Another question as the week continues is whether this “losers’ parade” that began Tuesday can keep marching. Some of Tuesday’s biggest gainers were stocks that had been most beaten down recently, including FAANGs and some of the big banks. Early on, the answer appeared to be yes, at least so far.

The big takeaway from yesterday is that Powell didn’t confirm or deny the possibility of rates falling. He just said the Fed will act to keep the growth going. Comments later Tuesday on CNBC by Fed Vice Chair Richard Clarida might have added to the positive sentiment. Clarida said the economy is in a “good place,” and “it’s our job to keep it there.”

It doesn’t look like the Fed is necessarily going to ease rates at its meeting later this month, but odds for a rate cut in July are now above 65%, according to Fed funds futures. Chances of a cut this month recently stood at 17%, according to the futures market, up from single digits last week.

To put things in perspective, a rate cut at this point would be pretty much unprecedented. Last we heard, the economy was adding about 200,000 jobs a month, unemployment was at 50-year lows, and gross domestic product (GDP) growth was north of 3%. Stocks, while down about 5% from all-time highs posted in late April, aren’t exactly in the doldrums, either. 

Normally, it wouldn’t be a time when investors think about rate cuts, but this trade war seems to be making the difference. Worries about overseas economic weakness, tariffs’ potential impact on U.S. growth, and sluggish inflation here all could potentially tip the Fed’s hand. If the Fed does reduce rates this month or next, it would be the first time since the Great Recession of 2007-2009. Last year, the Fed raised rates four times, most recently in December.

Rising Tide Lifts ...

With the idea of a rate cut in mind, almost every boat on Wall Street got lifted Tuesday. Cyclical sectors—which tend to do best in a booming economy—led the way. What’s really interesting is to look at Financials, which would normally get pounded by talk of rate cuts. Instead, Financials rose more than 2.7% Tuesday, perhaps because of pent-up demand.

Money needs to go somewhere, and maybe some investors started thinking the bond market was overdone because yields got hit so hard in recent days. The yield collapse probably signaled how much people are looking for safety, not necessarily caring about what kind of return they might get.

The head-turning rally in Financials might also reflect many investors feeling like the market is due for some sort of widespread comeback. If that happens, Financials would probably go up along with everything else. It’s often said that any rally that doesn’t include Financials doesn’t have much strength, so that sector could be key in coming days.

Rumors and Innuendo Could Rule the Day

Another thing to consider is that earnings are basically over, putting us in a no-man’s land where the only game in town is rumor and innuendo around tariffs and the Fed. Volatility remains elevated, with the Cboe Volatility Index (VIX) just below 17 early Wednesday, up from lows around 12 earlier this spring. Volatility often stays high when investors are on edge about geopolitics and earnings aren’t around to blunt the impact.

Tuesday’s huge shot of bullish adrenaline might reflect how much the market is leaning on words, rather than real news. It was an amazing rally based on what was arguably a non-statement by Powell. 

We’re not necessarily done yet this week with Fed influence on the market. Several more Fed speakers are on the calendar in coming days, and if any of them go off range and contradict Powell by sounding hawkish, for instance, that could potentially swing things the other way. Investors might want to consider taking extra care venturing into the market this week.

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FIGURE 1: WHO’S SCARED OF FALLING RATES? Apparently not Financial stocks, as the sector had its best day in a long time on Tuesday. This one-month chart shows Financials getting a 2.7% lift despite rising hopes of the Fed cutting rates, something that usually weighs on bank stocks. Data Source: S&P Dow Jones Indices. Chart source: Thethinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Twice Bitten?: The old expression, “Once bitten, twice shy” might apply to the stock market, though maybe it’s more appropriate to say “twice bitten.” That’s because twice in the last year—once last summer and again this spring—stocks leapt to all-time highs as the U.S. economy continued to chug along with solid economic numbers, only to see those rallies stopped cold. Now the Fed is widely expected to begin cutting rates before the end of the year. Some analysts think that could put new vigor into stocks, which have often raced higher the last few years every time the coast seemed clear. Putting aside Tuesday’s big rally, investors might be a bit more shy jumping in, especially with trade battles unresolved and economic numbers starting to ease both here and abroad. The latest reading of investor sentiment from the American Association of Individual Investors showed just 24.8% bullish, with 40.1% feeling bearish.

Technical Barrier Could Loom for Rallies: Another possible rally stopper could be on the technical side of the equation. Some analysts see a “double top” in the 2930-2950 area for the S&P 500 Index (SPX), with those levels representing all-time highs made last September and briefly exceeded in April. This sort of chart pattern could represent a challenge to overcome. While a resolution on trade issues and possible lower interest rates would likely put new life into stocks—and that’s a big if with the trade situation the way it is now—it’s still sometimes tough for markets to push past technical patterns like the one faced by the SPX. It’s possible that selling pressure could get amped up if the SPX starts testing those highs. It might also set up an interesting battle between fundamentalists and technicians.

Brexit Still in Background: Even if trade issues get resolved this summer, another geopolitical challenge might face investors as the leaves turn gold. The prospect of a “no-deal” Brexit waits in the wings, and as veteran investors know, the market tends to shy from uncertainty. The EU has agreed to push the deadline for a decision back to October 31. Potential outcomes include Britain scrapping Brexit altogether, ratifying the withdrawal agreement, or leaving the EU without a post-Brexit plan in place. But if there’s still no U.S.-China trade deal by October, then Brexit headlines could remain a secondary worry.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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