Pain in the neck. Stocks gave traders whiplash yesterday, opening strong on the vaccine front and ultimately selling off on California’s reopening reversal. Tech stocks were especially vulnerable to the selling, ending an epic winning streak.
N O T E W O R T H Y
Flashing before your eyes.
Stating that there have been ups and downs in the market this year seems to be a bit of an understatement. Indexes have undulated up and down and side to side, confounding investors and analysts alike. The prevalent themes appear to be: 1) buy the dip, 2) you can’t lose with tech, 3) good news is good news, 4) everyone loves a good cruise, 5) ignore the bad news…mostly. If you read through those themes once or twice you might think that I am poking fun at the recent rally in stocks, but I am not. Those themes have always been common in the stock markets… except for maybe the cruise lines thing… that is truly unique to these times. Buying the dip has been quite common over the years. First of all, it is in our nature to buy things when we think they are cheap, though it doesn’t always work out for individual companies. Generally speaking though, it has worked out for casual investors in the past decade, especially those that stayed in to ride the longer term gains. Good news is almost always welcomed by the stock market unless it is so good that it will cause something else to be taken away, such as Fed or Government stimulus. With the Fed’s accelerator stuck down to the floor, good news can be appreciated for what it is - good. Ignoring bad news appears, on the surface, to be somewhat of an anomaly and stocks react to it differently at different times, while displaying no real identifiable pattern. Many mornings I wake up with early birds to read the prior day's virus statistics, convinced that the markets will sell off in response to a surge, but alas I find myself scratching my head as indexes rally. There are two take-aways from that. First, markets have been, are currently, and will always be vagrant. One cannot time the market successfully with any consistency. We have statistics to prove that. Second, stocks exist to enable investors to take a stake in a company that they expect to perform well going forward. Understanding that there will be bumps in the road, investors are generally optimistic, so healthy companies always have a way of attracting investors. Though recent rallies have pushed that optimism to some extremes, positive sentiment for long term investment is still justified, especially when it comes to well run companies with strong financial positions. Technology stock buying is always in fashion. Technology has a way of avoiding large cyclical gyrations in the economy because, for the most part, there is always demand for some form of technology, even when the economy is contracting. Tech stocks are however, vulnerable to short-term gyrations in product demand and, in some cases, their profits can be impacted by supply chain disruptions. But the prospects of astronomical future earnings growth ultimately proves to be irresistible, and if those prospects pay off, the volatility is justified. I wrote about it in last Thursday’s note.
Yesterday’s session was an interesting one which essentially touched on all of these recent themes. Stocks had been edging up over the past few weeks as investors looked to snap up bargains created by June’s fall out - dip buying. Much of the gains in the past several weeks have been led by technology. Not only has the tech-heavy Nasdaq been making new all-time highs, but the S&P 500 has been piling on some gains due to its heavy reliance on a few large tech stocks - tech buying. Recent weeks have shown a noticeable spike in COVID cases in states with less stringent restrictions and markets seemed to ignore the warning signs - ignore the bad news. As yesterday’s session began, we got some legitimately good news as Pfizer (PFE) and its partners BioNTech (BTNX) announced that they received fast-track approval on their vaccine candidates from the FDA. Markets rallied on the hopes of a possible vaccine in the short run - good news. By mid-day it appeared that all of our recent themes were playing out. The Nasdaq was trading at a new intraday, all-time high while the S&P500 was in breakeven territory for the year. Then it all changed with California’s announcement that it would be reversing its reopening of bars, restaurants, and movie theaters in response to a recent surge in cases. Stocks gave up early gains to close lower. Technology was hit hardest with the sector giving up -2.12%. Wouldn’t you know it, the S&P500 Hotels & Cruise Lines sector lost -2.66% after gaining +4.42% in last Friday’s rally. Starting this morning, we will hopefully get some data points on corporate health with the start of Q2 earnings season. Second quarter was no ordinary quarter. It started in the depths of the lockdown (April), it included a resurgence of demand as some states reopened (May), and it ended with a surge in new cases (June). The focus of this earnings season will be less on whether or not a company beats earnings, but rather, more on its health, liquidity, and forward guidance. We can therefore expect a lot of dip-buying, tech-buying, good news buying, and bad news buying in the days ahead. Cruises? Well that might be a topic for another day.
THE MARKETS
Stocks ended yesterday’s session mostly lower as traders reacted to California’s re-closing announcement. Tech stocks sold off after posting significant gains in recent sessions as traders likely took profits ahead of earnings season. The S&P500 slipped by -0.94%, the Dow Jones Industrial Average squeaked out a +0.04% gain, the Russell 2000 dropped by -1.34%, and the Nasdaq Composite Index sold off by -2.13%. Bonds advanced and 10-year treasury yields fell by -3 basis points to 0.61%.
NXT UP
- This morning NFIB Small Business Optimism (June) came in at 100.6, beating expectations and higher than last month’s read of 94.4.
- Consumer Price Index Core (June) may have climbed by +0.1% month over month, compared to last month’s slip of -0.1%.
- Today’s Fed speakers include Brainard, Bostic, Bullard, and Harker.
- This morning’s earnings included beats by Fastenal and JPMorgan Chase with misses by Delta Airlines and Wells Fargo. Citigroup is scheduled to announce before the bell.