Earnings Start Picking Up As Week Advances With KB Home Today And Nike Tomorrow

JJ Kinahan
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Lights flashed red this morning for the first time in a while after a weak finish yesterday and more selling overnight. Media reports blamed the pressure on coronavirus fears, and there may be something to that. Cases keep rising, which has many people feeling a bit nervous.

While everyone wants to see caseloads fall as the world continues to grapple with this serious crisis, it’s worth noting that the market has gone pretty much straight up recently despite cases rising in parts of the U.S. That suggests the relationship between stocks and virus cases isn’t necessarily black and white. If the states where cases are surging do get it under control, it might be interesting to see how the market responds.

Despite the early softness and virus worries, there is some positive news out there. European PMI data for June came in pretty strong, almost at a level that would indicate growth. There’s also more talk here at home about the administration possibly starting to back another stimulus effort, something the Fed has been urging.

On the not so positive side, there was a media report this morning about the U.S. potentially imposing more import duties on goods from Europe, and everything around trade tends to make people nervous.

Gold Shining Bright this Morning

With nerves on edge, people are gravitating toward that age-old defensive asset, gold. The shiny metal hit $1,790 an ounce this morning, a new nearly eight-year high that surpassed its April peak. This can be a contrary indicator for the stock market (if you think back to 2011 when stocks fell several months in a row as gold climbed the ladder to all-time highs). It’s also often correlated with a soft dollar, and that seems to be the case again today as the dollar index traded slightly higher but below 97 and near recent lows.

A weak dollar sometimes helps crude, but that’s not happening this morning. U.S. crude values fell back below $40 a barrel as an industry report showed rising stockpiles. Also, every time there’s nervousness about the economy opening up, it raises concerns about crude demand.

With virus fears higher, travel stocks often drive the opposite way. It was true again this morning as Carnival Corp (NYSE: CCL) fell 5% in pre-market trading. If the case count remains front and center today, that could continue to support “stay at home” stocks in the tech sector.

Headline Hunt

The market is likely to remain headline-sensitive for a while, partly because corporate news is kind of light ahead of earnings. That means concerns about rising virus caseloads can often dominate the proceedings, which we’re seeing this morning. When you think about how far stocks have come—with the S&P 500 Index (SPX) possibly on its way to its third-straight monthly gain in a row—it’s not too surprising to see a little backtracking as negative headlines appear.

Until we have some true earnings that allow analysts to actually make some more projections, we’re probably going to operate in a market where any piece of news can send indices up and down in a matter of seconds. In this between earnings period, people are looking for something they can hang their hat on, so to speak, when it comes to trading. It may be why the slightest bit of headline news can send things flying.

That’s what happened in overnight trading earlier this week, but the volatility hasn’t really worked its way too much into the day sessions. The Cboe Volatility Index (VIX) finished Tuesday at around 31, splitting the difference between recent lows in the upper-20s and highs in the upper-30s. Levels like these still indicate a pretty strong chance of sharp up and down moves in the weeks to come.

“Sharp” isn’t necessarily the word that comes to mind when you think about Tuesday’s session. The Nasdaq (COMP)—dominated by $1 trillion tech names like Apple Inc (NASDAQ: AAPL) and Microsoft Corporation (NASDAQ: MSFT)—continues to probe the stratosphere as many investors apparently plow money into a part of the market they feel is safer from COVID-19 worries (though calling any part of the stock market “safer” is kind of a misuse of words). However, the SPX and the Russell 2000 (RUT) didn’t make particularly strong moves upward Tuesday, and finished on a defensive note.

Over the last week, Information Technology has picked up the baton again after passing it to sectors like Financials and Industrials for a while earlier this month. The COMP keeps hitting new intraday highs above 10,000, and valuations have skyrocketed for many of the biggest names.

Travel Sector on the Skids

We’re not seeing much love for travel stocks the last few days, and Tuesday was no exception. American Airlines Group Inc (NASDAQ: AAL) is taking a real beating, mainly because it announced a $3.5 billion new financing effort earlier this week. Boeing Co (NYSE: BA) also has been getting punished, though a couple other travel-related stocks including Delta Air Lines Co (NYSE: DAL) and Carnival did find some bids yesterday. Still, the overall news from travel remains bleak, with the “big-four” airline stocks down between 37% and 59% so far this year.

On a positive note, new home sales data for May released Tuesday became the latest statistic to show some economic  life, coming in well above Wall Street’s expectations. That comes ahead of earnings from KB Home (NYSE: KBH) after the closing bell today. It might be helpful to check what executives there say about current housing industry fundamentals in light of the new data.

Speaking of data, tomorrow looks like a big day. Some of the reports include a final government read on Q1 gross domestic product (GDP) and weekly initial jobless claims. Wall Street consensus for initial claims is 1.25 million, down from 1.51 million the previous week, according to Briefing.com.

Analysts expect Q1 GDP to drop 5%, the same as the previous estimate. Things look like they could be a lot worse for the quarter we’re in now, with the Atlanta Fed’s GDP Now indicator projecting a 45.5% decline in Q2. That data is due for an update tomorrow, by the way.

Tie Your Shoes for Nike on Thursday

Tomorrow also brings Nike Inc (NYSE: NKE) earnings after the close. As we noted earlier this week, NKE can be a good barometer for consumer sentiment, both in the U.S. and in China. People don’t tend to spend a ton on athletic gear when they’re struggling to pay bills, so NKE could give a close-up view on spending habits during these pandemic months. It could be interesting to see initial results after many stores reopened both here and across the Pacific.

Guidance could be worth checking as well, if NKE provides it. That’s one of the big questions going into Q2 earnings season next month—whether companies might start to provide more clarity around the future. So far, a couple big names have, and the news wasn’t particularly good earlier this month from either Wells Fargo & Co (NYSE: WFC) or Starbucks Corporation (NASDAQ: SBUX). Consider keeping an eye out for what might be more warnings over the next week or two ahead of the Q2 reporting period. If they’re negative, it could potentially put a damper on this amazing rally.

Last but not least, the SPX scored a technical victory Tuesday in closing just above frontline resistance at 3130. That’s a level it hadn’t closed above in two weeks, right before the big selloff that took the SPX down nearly 6% in one day June 11. Looking to the possible resistance point, consider last week’s intraday high of 3155. The SPX topped out just below that on Tuesday. The 3090 area remains a possible zone of support. The SPX bounced off of that one pretty convincingly earlier this week but futures fell below it overnight.

The SPX kind of faded into Tuesday’s close, maybe a sign that buying interest isn’t incredibly strong above current levels. It also wasn’t the most bullish signal for today’s session. Worries about the trading relationship with China got blamed by some analysts for the late weakness Tuesday.

CHART OF THE DAY: ACTING A LITTLE GUARDED. The S&P 500 Index (SPX–candlestick) is hovering around its 78.6% Fibonacci retracement level. So far it looks like there’s a lot of resistance there. Earlier this month it broke above that level but didn’t last very long there. Will it push through it or trade between the 61.8% and 78.6% levels? 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.  

Trying to Determine SPX Value? Try Incorporating Bonds: One traditional way many analysts determine market value—price-to-earnings (P/E)—may be losing its potency in this COVID-19 economy. Instead, with interest rates so low, some market watchers are turning toward a different valuation method that incorporates the bond market, research firm CFRA said in a recent note to investors. The “Fed Model” places a value on the S&P 500 Index (SPX) by dividing its forward earnings per share estimate by the current interest rate for investment grade (IG) bonds (target=EPS/rate). The IG rate is selected as investors continually compare the relative attractiveness of stocks vs. bonds.

Using the June 19 Moody’s Baa yield of 3.57% and the S&P 500’s next-12-month EPS projection of $127.21, according to S&P Capital IQ consensus estimates, the Fed Model implies that the market could be trading around 3563 a year from now, or 15% higher than its June 19 close. Obviously, that’s just one estimate from one firm based simply on one type of calculation. Other valuation methods result in less cheery outlooks, so we shouldn’t get sanguine.

Stimulus Phase 2? One element that conceivably could get in the way of the rally is confusion over the next phase of the government’s stimulus program. The initial mailing of $1,200 checks to many Americans might have helped support retail sales in May. Now there’s debate on Capitol Hill how and whether to send a new round of checks and whether to extend the current program of regular $600 payments to people who lost jobs. That additional payment program expires July 31. Also, tax day was pushed back from April 15 to July 15 and now looms for many. Tenants of apartment buildings financed by a federally backed mortgage, such as Fannie Mae or Freddie Mac, couldn’t be evicted for failing to pay rent for 120 days, a grace period that ends July 25, under the CARES Act.

Why mention all this? Because it all could affect consumer spending. People worried about their next paycheck or how to pay rent aren’t likely to purchase big-ticket items. That has ramifications across just about every S&P 500 sector, with more than 20 million Americans still unemployed even as some businesses start to come back. It also means a chance that economic data, which has trended mostly better lately, could start to slump again. We’re not out of the woods yet.

Apple Keeps it Vertical: A lot of the spirit in tech could be flowing from AAPL’s developers conference that’s been going on since Monday. It sounds like Wall Street analysts appreciate what they’re hearing from the company about more vertical integration as AAPL decided to use its own chips instead of Intel Corporation's (NASDAQ: INTC) in building new Mac computers. UBS raised its price target for AAPL this week, and shares made new record highs.

Meanwhile, so-called “defensive” sectors like Utilities, Real Estate, and Staples are falling behind a bit. This is kind of surprising when you consider the yield picture, where the 10-year yield remains pinned down at around 0.7% after flirting with 0.9% earlier this month. At times like these, “defensive” dividend-payers in the Utilities and Staples sectors sometimes get more love. We’re not seeing that, at least not so much this week.

 

TD Ameritrade® commentary for educational purposes only. Member SIPC.

 

Image by Paul Brennan from Pixabay

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