foxex: Extraordinary Uncertainty, Considerable Risk

Read in Browser

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. US markets rip higher, erasing Tuesday's losses

2. Fed minutes warn of uncertainty and risks ahead

3. Defense is playing offense

4. Small traders are moving the market

5. Stocks hitting 52-week highs

Markets Closed

Dow
24,575.90
+369.04 (+1.52%)

S&P
2,971.61
+48.67 (+1.67%)

Nasdaq
9,375.78
+190.67 (+2.08%)

VIX
27.99
−2.54 (-8.32%)

Bitcoin
$9,574.48
−$148.32 (-1.53%)

US 10-Yr Yield
0.68
−0.031 (-4.36%)

Image credit: Ashley Cooper/Getty

Markets Today

U.S. markets ripped higher today with all sectors of the market posting gains. Tech stocks flexed again, with Amazon and Facebook making new all-time highs. The Nasdaq had its highest close since February 21, back when markets were making record highs almost daily. The S&P 500 had its highest close since March 6.

Investors chose risk today, after backing away from it yesterday. That thrust and parry has been the dance all spring, but the last few days have had a little more spice in the mix. Cautious words from the minutes of the Federal Reserve's last monetary policy meeting in April did little to curb investor enthusiasm today.

"In addition to weighing heavily on economic activity in the near term, the economic effects of the pandemic created an extraordinary amount of uncertainty and considerable risks to economic activity in the medium term," the minutes said.

One of the biggest risks, according to the Fed, is a resurgence of the virus in the fall. That would require another stoppage of the economy, which would derail any recovery. We've already seen some hints of that lately. Parts of China have seen new cases, and two Ford plants in the U.S. were forced to halt production when workers tested positive for the virus.

This will be tricky.

Headlines:

The U.S. Senate passed legislation on Wednesday that could ban many Chinese companies from listing shares on U.S. exchanges or raising money from American investors without certification from the Public Company Accounting Oversight Board. The PCAOB is the nonprofit body that oversees audits of all U.S. companies that wish to raise money in the public markets.
Ford was forced to temporarily shut down production at two of its plants—one in Dearborn and the other in Chicago—because of workers testing positive for COVID-19. The Dearborn Truck Plant, where Ford assembles the F-150 and Raptor pickups, halted production Wednesday, and the Chicago plant temporarily closed earlier this week, but has since reopened.
Facebook is making a big push into the e-commerce market with its launch of Facebook Shops. The free feature allows businesses to set up a single online store for users on Facebook and Instagram. Customers will be able to place orders, checkout, track deliveries, and get support within the app. The company is partnering with others like Shopify and BigCommerce.
Target reported strong sales but lower earnings than expected as labor costs and sales of high margin products fell in the past quarter. The retailer has remained open throughout the pandemic. In the first quarter, net income fell to $284 million, or 56 cents per share, from $795 million, or $1.53 per share, a year earlier. Revenue grew 11% to $19 billion.
Lowe's reported a surge in same-store sales and earnings that beat expectations as the home repair retailer remained open through the lockdowns. For the first quarter ended May 1st, Lowe's reported net income rose to $1.34 billion, or $1.76 per share, compared to earnings of $1.05 billion, or $1.31 per share, a year ago.
Brazil saw its largest single-day jump in coronavirus cases and deaths yesterday, according to official figures. President Trump told reporters he is considering imposing a travel ban on the country, which is now the third-worst affected after the U.S. and Russia.
Daily global fossil fuel emissions plunged to 2006 levels by early April due to lockdowns enforced in several countries, according to a new study published in Nature Climate Change. Just under half of the decline came from changes in surface transport (road vehicles and shipping). The changes are expected to be temporary and scientists warn of a rebound with an even higher emission trajectory than before. Today the IEA said new renewable power installations worldwide are set to fall this year as a result of the crisis, marking the first annual decline in 20 years.

chart courtesy Nature Climate Change

Unusual Recovery

What's already different about what's driving the stock market in the beginning stages of this recovery is that defensive stocks are leading the charge, not cyclicals. In most every other recovery, cyclicals set the pace. But since the market lows of March 23, defense has been on offense, according to Schwab Research. By defensive stocks, we are not talking about military defense, but rather large cap dividend paying stocks with strong balance sheets. Think Microsoft, Intel, Home Depot, and Eli Lilly here in the U.S., but the dynamic is happening across global markets, too.

chart courtesy Schwab Research

What Does That Mean?

It means that many investors believe the recovery will take a long time, and they are positioning themselves in safer stocks that pay dividends. These stocks may be likely to benefit if the recovery takes six months or three years.

Cyclical stocks, which include everything from consumer discretionary companies to industrials and banks, are much more affected by macroeconomic or systematic changes in the overall economy. We've had a pretty big systematic change lately.

Are Small Traders Moving the Market?

Since we know institutional investors have been pulling money out of the market for the past five weeks, the search is on for who is actually moving the market higher. We know sovereign funds like Saudi Arabia have been buying big tech stocks, as have many individual investors, of late.

But research from Sentiment Trader shows that a lot of "small options traders," those who trade 10 contracts or less, have been very active and very bullish. Last week, small traders bought more call options (bets the market will go higher) than any time in history, except for February 14th.

The potential problem here, according to Liz Ann Sonders, the chief investment strategist at Schwab, is that these may be inexperienced traders who lack conviction. It's one thing to make bullish calls as the market is rising off of a brutal sell-off. But as volatility starts to rise again, these traders may be the first to cut and run.

Image: The Graduate/Lawrence Truman Prod

Today in Sustainability

One side effect of social distancing and more health protection for consumers may be an increased use of single-use plastics and other pollutants. There are some fears, and I share them, that the conservation and environmental protection movement may take a back seat to health concerns as economies reopen. This recent survey from BofA Research shows, however, that consumers are just as, if not more concerned about sustainability today than they were previously.

More News:

The Top 5 Costco Shareholders

Cree Stock Breaks Out After JPMorgan Upgrade

3 Charts That Suggest Biotech Stocks Are Headed Higher

SPONSORED BY FIDELITY INVESTMENTS
When Others Step Back, Fidelity Steps Up
Attracting the next generation of talented associates is a top priority for the Fidelity leadership team. Here's what they're doing to navigate the current crisis.
LEARN MORE >

(chart courtesy YCHARTS)

MGM's stock price rose by nearly 9% following a report that the hospitality and entertainment company will be participating in a COVID-19 testing program alongside two other major casinos. Shares of oil companies, such as National Oilwell Varco (nearly 8%), HollyFrontier (nearly 8%), and Baker Hughes (7.5%), are up today amid oil supply cuts and signs of stronger demand.

Shares of Royal Caribbean are down by over 3.5% after the cruise line reported a massive $1.4 billion Q1 loss. Although Target reported an increase in sales during the first quarter, the retailer's stock price still fell by over 2.5% due to its Q1 earnings falling short of expectations.

Word of the Day

Put to Call Ratio

The put to call ratio is a measurement that is widely used by investors to gauge the overall mood of a market. A "put" or put option is a right to sell an asset at a predetermined price. A "call" or call option is a right to buy an asset at a predetermined price. If traders are buying more puts than calls, it signals a rise in bearish sentiment. If they are buying more calls than puts, it suggests that they see a bull market ahead.

image courtesy of Levi.com

Today in History

May 20th, 1873:

Jacob Davis, a Latvian tailor who settled in Reno, Nevada, and a Bavarian merchant named Levi Strauss, who sold cloth in San Francisco, jointly took out U.S. Patent No. 139,121. Strauss supplied the $68 in patent fees; Davis supplied the design, which he had created after one of his customers kept ripping through his pants pockets. The two men patented the process for holding indigo denim "waist overalls" together with metal rivets—the first blue jeans.