foxex: Phase 2

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The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. US markets close higher behind Nasdaq's record high

2. Gilead to start human trials of inhalable antiviral treatment

3. Cash and money markets hit record highs

4. Foreign investors love US stocks

5. Stocks hitting new record highs

Markets Closed

Dow
26,024.96
+153.50 (+0.59%)

S&P
3,117.86
+20.12 (+0.65%)

Nasdaq
10,056.47
+110.35 (+1.11%)

VIX
31.77
−3.35 (-9.54%)

Bitcoin
$9,520.96
+$220.65 (+2.37%)

US 10-Yr Yield
0.704
+0.007 (+1.00%)

Image courtesy Thomas Barwick/Getty

Markets Today

U.S. markets closed higher to kick off the summer behind the strength of stocks like Apple and Microsoft, which both hit all-time highs today. They have some pull around here, as we know. The Nasdaq closed at another all-time high.

Positive vaccine news from Gilead Sciences also buoyed investor sentiment, overshadowing concerns about a resurgence in COVID-19 cases in many U.S. states, Brazil, Australia, and Germany.

Equity markets continue to trudge higher, especially in China, Europe, and the U.S., despite the health concerns and uneven nature of the economic recovery. Several Wall Street research shops expect the markets to stay on this course absent a major resurgence in cases that leads to new lockdowns. Foreign investors believe it, as they have been big buyers of U.S. equities. U.S. investors ... not so much.

New York City was among several U.S. cities today that entered Phase 2 of reopening with restaurants, salons, and some office buildings welcoming customers and workers on a limited basis. This will be an interesting test of human behavior, especially as the summer heats up.

Dome yoga, anyone? This is how they are getting their downward dog on in Toronto.

photo courtesy TheInsider

[NEW READER SURVEY: As promised, we are running another two-week survey of our U.S.-based readers to gauge your sentiment and see what moves, if any, you have been making with your money given the market recovery. We'll share the results, as always, and we thank you for your time and participation.]

Headlines:

Existing home sales tumbled in May, but realtors expect that it will represent the bottom. Sales of existing homes in May fell 9.7%, compared with April, to a seasonally adjusted annualized rate of 3.91 million units, according to the National Association of Realtors. Sales were down 26.6% annually. That is the largest annual decline since 1982, when interest rates were about 18%. It is also the slowest sales pace since Oct. 2010.
Gilead Sciences will begin human trials for an inhaled version of its antiviral drug remdesivir in August, the biotech company said Monday. Remdesivir, which was granted an emergency use authorization (EUA) from the Food and Drug Administration to treat patients hospitalized with COVID-19, is administered intravenously. The company told investors in April that it was looking to develop easier-to-administer versions of the drug, including an inhaled version. The drug can't be administered in pill form because its chemical makeup would impact the liver, the company noted.
Ant Financial Services Group, an affiliate of e-commerce giant Alibaba Group, said it received approval from China's top business and commerce regulator to change its name to Ant Technology Group in its business-registration records. The move comes as Ant has faced scrutiny over its role in financial services from regulators in the U.S. and abroad. Ant owns Alipay, which is now one of China's two largest mobile-payment networks, with more than 900 million active users. Ant also operates one of the country's largest investment platforms for money-market funds. The company's legal name in Chinese is currently Zhejiang Ant Small and Micro Financial Services Group Co. Ltd.
American Airlines plans to raise $3.5 billion in new financing, it said in a statement. This includes an offering of $1.5 billion in secured senior notes due 2025, a new $500 million Term Loan B Facility due 2024, and selling $1.5 billion in common stock and convertible senior notes due 2025.
Shares in Tyson Foods (TSN) fell 2.4% today after China halted poultry imports from its Springdale, Arkansas, plant due to coronavirus cases reported at the factory. The country has also stopped imports of pork from a German company for the same reason.
German payment processor Wirecard's (WCAGY) stock continued to plunge today. The company has been unable to locate $2 billion on its accounts and today said there is a likelihood "it doesn't exist." The CEO resigned on Friday amid the scandal. Short sellers made $2.25 billion in mark-to-market profits in a single day last week, according to S3 Partners.
Future Macs will use Apple-designed chips, Apple announced today at its virtual WWDC. Apple previously used Intel chips on Mac laptops and desktops, but CEO Tim Cook said it was designing its own chips specifically for the Mac to provide more performance while using less power. Apple currently uses its own chips on its iPhones, iPads, Apple Watches, and Apple TVs and said it had shipped over 2 billion chips so far.
Virgin Galactic (SPCE) has signed a deal with NASA to fly private astronauts to the International Space Station, the company said Monday. Under the contract, the commercial space-flight company will find would-be space travelers, train them, and organize transport to the ISS. Shares rocketed 16% higher on the news.

chart courtesy MorganStanley

What Market Phase Are We In, Again?

It feels like we've been through about a dozen market cycles in the past three months, but if you zoom out, we've only been in two major cycles that defined the spring. According to Morgan Stanley Research, we are in the second market cycle, known as the Early Stage Recovery. That is characterized by:

Solid underlying fundamentals
Abundant bargains for many stocks
Doubt, reflection, and ultimately conversion by investors who believe in the rally

Morgan Stanley believes this will lead to a Mid-Stage Bull Market characterized by the following:

A sweet summer of growth
Stretched valuations as stocks become overbought
Faith, hope, and charity

This implies that Morgan Stanley believes this recovery rally has legs, and will ultimately lead to higher highs before irrational exuberance returns to humble investors. It's not an atypical market cycle, but it is on an accelerated timetable given the pandemic.

This forecast also assumes no major resurgence in COVID-19 cases later this year nor a vaccine. Those are two big variables.

chart courtesy LPL Financial

Record Amount of Sideline Cash

Another variable is the record amount of cash on the sidelines. According to the Fed and data from ICI and LPL Financial, there is $15.4 trillion cash in U.S. bank accounts right now, a new record. That grew 15% in the past three months, another record. Combined with the record of nearly $5 trillion in money markets, that's a lot of buying power that has sat idly by as the market has soared back from the abyss.

chart courtesy Goldman Sachs

Foreign Investors Like U.S. Stocks

Day by day, we get a little more insight into who—besides day traders—are pushing up equity prices. It turns out, foreign investors bought $187 billion in U.S. equities during the last quarter, making them the biggest buyers during the recent bear market, according to Goldman Sachs. They are expected to be net buyers this year and replace corporations as the largest source of equity demand.

Remember, stock buybacks are out of vogue in 2020 due to stipulations in the CARES Act, and it's kind of a bad look right now if you are laying off employees but buying back your own stock. Analysts predict net corporate equity demand (buybacks) will drop by 80% in 2020 to $100 billion.

Pension funds (-$119 billion) and mutual funds (-$66 billion) were the biggest net sellers of equities in the first quarter, and they are expected to remain net sellers for the year. Households (which includes hedge funds, aka "family offices") bought just $7 billion of U.S. stocks in Q1, but they are expected to be net buyers in 2020 with $280 billion in equity demand.

All-Time Highs

Another record high close for the Nasdaq means record highs for a variety of stocks that call it home. Microsoft (MSFT) and Apple (AAPL) both hit new all-time highs today—what else is new? So did Netflix (NFLX) and Zoom Video Communications (ZM). Those four are basically the essential companies of the lockdown for at-home consumers.

But a few other stocks breaking through their peaks caught our attention:

Peloton (PTON) shares hit new highs as its subscription model finally found its stride, and no one is in a hurry to go back to a gym.
Square (SQ) hit a new record high as contact-less payments are not a thing of the future anymore. It's the way we pay.
Wayfair (W) has quietly been the best performing stock of the coronavirus lockdown. Shares are up more than 650% since the lows of March 20. That's not a typo... that's a lot of lawn furniture being ordered by locked-down consumers who plan to spend a lot of time at home.

More News:

Ackman Files IPO for Company to Chase 'Master Unicorns'

Nike Earnings: What to Look For

Walmart Stock Rebounds From Support After Analysts Weigh In

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(chart courtesy YCHARTS)

Shares of Gap are up by over 9.5% after the clothing retailer received a double upgrade from Wells Fargo. Similarly, Carrier Global's stock price rose by 6% amid UBS assigning the HVAC systems manufacturer a Buy rating.

Shares of American Airlines fell by nearly 6.5% amid the airline seeking $3.5 billion in new financing. Cruise line stocks, such as Norwegian (5.5%) and Royal Caribbean (over 5%), are down following the Cruise Lines International Association (CLIA) announcing a voluntary extension of the cruise operations suspension until Sept. 15.

Word of the Day

Relative Strength

The relative strength index (RSI) is a momentum indicator used in technical analysis that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can have a reading from 0 to 100. The indicator was originally developed by J. Welles Wilder Jr. and introduced in his seminal 1978 book, New Concepts in Technical Trading Systems.

image courtesy coins.nd.edu

Today in History

June 22, 1775:

Congress authorizes the first issuance of Continental Currency, or U.S. paper money. Officially known as "Continentals," the money is soon rendered nearly worthless by runaway inflation. Local wits rechristen Continentals as "shinplasters," useful only for mixing with flour and water to make casts for broken bones.