Other than earnings, we’ve had almost no numbers to crunch so far this week. That changes starting today.
Weekly crude inventories come out today, followed by initial jobless claims tomorrow. The claims number looms large, considering last week’s 576,000 was the lowest by far since the pandemic began. People are going to be watching tomorrow’s data maybe a little closer than usual to see if this is a blip or a trend. Consensus on Wall Street is for 600,000 new claims, according to research firm Briefing.com.
There’s an unsettled feeling as trading gets underway today. The NASDAQ Composite is under pressure after yesterday’s disappointing Netflix (NASDAQ:NFLX) earnings (see more below). Other indices looked like they’re trying to muster some buyers following two down days, at least earlier in pre-market trading, but then veered lower as the open approached. Today could be a test of sentiment. Will we see more follow-through to the downside? Or do people see the recent selling as an opportunity to “buy the dip?”
People are still trying to figure out whether to be in defensive or growth stocks, and that tug-of-war is likely going to continue even longer. Part of that is because we’re getting good earnings but still not a lot of clarity. Everyone’s talking about the economy coming back, but this quarter looks a little cloudy.
For instance, railroad company CSX (NASDAQ:CSX) said it had a tough earnings period due partly to surcharges on coal, but it did say it sees the economy coming back. That’s important to hear coming from a company that carries goods back and forth across the country, and it’s a good sign for the economy.
A Little Bit Of Deja Vu And Some Perspective
For the first time since the end of March, Wall Street opens today sitting on back-to-back losses for the major indices. Worries about Covid gaining steam in India and South America, inflation concerns as companies announce price hikes, and general exhaustion with the long rally all play a role. The selling Tuesday was pretty widespread across growth and value, reopening and “stay at home.” The last time we had three consecutive down days for the S&P 500 Index (SPX) by the way, was the three sessions that ended March 4. That was the only time this year that happened. So far, anyway.
Buying interest didn’t disappear completely yesterday. It was just concentrated, mainly as investors nibbled at shares of Real Estate, Health Care, Utilities, and Staples. Those were the four sectors in the green Tuesday, and as you probably know, tend to be ones people flock to when they’re feeling defensive. So are bonds, which also got a lift. The dollar index also had some bids Tuesday after being weak most of the month. That could be another sign of investor caution if people are starting to embrace cash.
It helps to keep things in perspective. That doesn’t mean the long rally will never stop, because eventually it will. It also doesn’t mean two days of selling are the end of the line. While a lot plays into the weakness, one thing to watch is whether buyers step in if the market moves a little lower. If they do, there’s hope for a rally extension. If they don’t, it could mean some pile-on technical selling. We’ll have to wait and see.
Remember that for most of 2021, short spurts of selling almost always got met with a “buy the dip” mentality. This proved to be the case during market weakness in late January, late February, and late March. At one point, the Nasdaq 100 even entered correction territory down 10% from its highs, but the buyers re-emerged. After hitting an intraday low of 12,208 on March 5, the NDX put on its rally shoes and gained 15% from there to its peak of 14,050 on April 16. Since then, it’s fallen 1.7% and volume hasn’t been exactly overpowering on this leg lower. Things don’t look too scary when you put them into that context.
In the S&P 500, we’re still way above levels that might make people wonder if anyone’s buying the dip, so to speak. One key point to watch is the 50-day moving average, now near 3960. That’s about 170 points under current levels, and the SPX has bounced off the 50-day almost every time it’s been down there the last few months. We’ll see if it tests that again. If the 50-day gets broken and buying interest doesn’t surge in a big way, that could be a sign of a change in tone that has more staying power.
Sometimes, one event can contribute to a change in the weather on Wall Street. This time, it might have been The Wall Street Journal article we talked about yesterday that pointed out how 95% of S&P 500 stocks were above their 200-day moving averages. The SPX itself was around 17% above its 200-day when the week began. Historically, it’s hard to maintain this sort of bullishness long term, and the article might have been a splash of cold water on everyone’s face reminding how much the market resembles a certain fictional town where all the children are above average.
NFLX Subscribers Disappoint, But 2020 Pace Seemed Tough To Maintain
The NDX won’t get much help finding buyers from FAANG member Netflix, or at least that’s how it looks now. Earnings seemed pretty decent from a top- and bottom-line standpoint, but the stock is getting beaten up amid disappointment over a subscriber number miss.
Remember how many times last year NFLX execs said they were sure they were “pulling subscriber numbers forward” as the pandemic wore on? “Don’t count on another epic quarter,” they kept saying. Well, you can’t say investors weren’t warned. It was hard to imagine NFLX continuing to add subscribers at the 2020 rate, considering how many folks are getting ready to break out of the house as soon as they’re fully vaccinated.
Plus, let’s not forget the developing wall of competition that includes Disney+ (DIS), a formidable opponent that topped 100 million subscribers barely a year after launch, Apple TV (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) Prime (AMZN) and AT&T's (NYSE:T) HBO, to name a few (AT&T reports tomorrow, by the way).
The stock market tends to be impatient and the attitude is always, “What have you done for me lately and what are you going to do next?” NFLX shares have flatlined pretty much all year, and now they’re getting punished despite the company’s warnings.
Hitting Expectations? Not Good Enough For Wall Street
Anyone reading media coverage of earnings is probably aware of how most companies reporting so far have beaten Wall Street analysts’ estimates—around 90%, according to some estimates. In fact, of the 23 big companies reporting Tuesday morning, only two missed consensus expectations on earnings per share and only three missed on revenue—one of which was Abbott Labs (NYSE:ABT), whose shares fell after a very rare occurrence where the company came up short.
Companies are doing well, but analysts were pretty conservative going into earnings season. They did start raising their estimates in the days and weeks before this one started, but it still doesn’t seem like companies have to work too hard to deliver a positive surprise. Anyway, more and more often, winning on the top- and bottom-lines doesn’t seem to be enough for investors. Either they want earnings and revenue to meet some sort of “whisper number” even higher than consensus, or they want to hear strong guidance (see more below).
The earnings parade continues today with Verizon (NYSE:VZ)—which reported really good earnings and revenue this morning—and Chipotle (NYSE:CMG). Tomorrow is a big day for the battered airline industry as Alaska Air (NYSE:ALK), Southwest Airlines (NYSE:LUV) (LUV) and American Airlines (NASDAQ:AAL) line up to report. Questions to ask include whether they’re able to slow the cash burn, how capacity is shaping up for the summer months, and what kind of hope do they have for any recovery in business travel.
CHART OF THE DAY: OIL AND WATER. If you want to find two sectors that tend to move in opposite directions, it’s hard to think of better examples than the ones on this year-to-date chart of the Philadelphia Semiconductor Index (SOX—candlestick) and S&P Consumer Staples (IXR—purple line). While both rose in March, the current weakness in SOX corresponds with strength in Staples. Comparing these two is a good way to get a sense of investor sentiment. Right now it looks a bit more defensive than it did earlier this year. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Watching Bearish Indicators: Lower Treasury yields have coincided with a weaker Russell 2000 small-cap index. The RUT’s been getting beaten up so far this week, and peaked over a month ago without making a new high since. When you combine weak yields with a weak RUT, the takeaway isn’t all that bullish. After all, investors don’t tend to sell small-caps and buy bonds if they’re optimistic about the economy. The small-cap weakness was pretty obvious Tuesday as RUT fell nearly 2% to do worse than any other major index. “Microcaps” also got hit pretty hard.
Having said that, It’s possible that recent yield softness reflects investors buying into the Fed’s thesis that it can keep interest rates near zero even if inflation perks up, and that any inflation we see is likely to be “transitory.” The thing that’s a bit worrisome is sometimes a weak RUT can be a canary in a coal mine for the broader market, so it’s worth tracking even if you don’t have exposure directly to small-caps. Don’t count out a RUT comeback, either. The index lost momentum going into the last two earnings seasons but then picked up the pace.
Paying Up: Another thing on peoples’ minds is inflation, though you wouldn’t know that looking at the declining Treasury yields yesterday. A bunch of companies, from Kimberly Clark (NYSE:KMB) to Coca-Cola (NYSE:KO) have said they’re raising prices. New York Times (NYSE:NYT) subscribers received an email yesterday telling them their subscription rate would rise. These tidbits, combined with the high readings on producer and consumer prices for March, play into economic overheating fears despite what the Fed says about inflation being transitory. The worry is that companies will start getting their margins pressed. The next round of consumer and producer price index reports is going to probably deserve a closer look than usual when it comes out next month.
No Good Deed...It happens every earnings season, but it’s important to remember that if you see a company beat and its stock lose ground, the most likely element is probably an outlook that didn’t impress. That wasn’t as evident in the first quarters of post-Covid earnings, because so many companies just weren’t giving guidance due to the uncertainty around the pandemic.
That’s increasingly seen as no excuse, despite worries about rising virus cases overseas. Look at how United Airlines (NASDAQ:UAL) shares did this week after declining to share guidance, for instance. Investors want to know what’s next, and if a company can’t satisfy, the stock could get punished even if earnings look good (UAL’s weren’t too pretty, however). In this environment with the economy on the rebound and so much fiscal and monetary stimulus, you pretty much have to give a decent forward-looking statement or stand back and wait for the brickbats.
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