Big Tech stocks
When we asked yesterday how far Chinese technology like BABA could be stretched against the big Nasdaq names without pulling FAANMG lower, we got some pushback today. Not so much because China is a threat to US technology as it is because the overlap in ownership means that a collapse in China tech creates portfolio stress and an excuse to sell overbought Nasdaq giants.
Here’s a look at the rotational effort, with industrials and banks rallying as the Nasdaq 100 continues to fall.
The S&P500 had been absorbing the overnight weakness each day, and tried again this morning before succumbing to what appears to be a basic pullback/digestion.
As previously stated, most breakout attempts to a new high are eventually tested with a trip to the previous high. A gap on the chart from just under today’s low of 4,369 on the S&P could be expected to be “closed” as a minor test, according to many traders (circled).
This hiccup, however, comes quickly after last week’s strong rebound. And the pre-Fed trepidation, stormy seasonal window, Chinese yuan drop, CDC mask reversal, and sell-the-news earnings reflex are all likely making this slippage feel even more tenuous. So far this month, defensive stocks, staples, and utilities have outperformed the S&P500.
The nagging flaws that have accompanied the market’s recent surge remain: unimpressive breadth (today will be the ninth session in the last 14 when new 52-week lows on the Nasdaq outnumber new highs), and some signs of buyer’s fatigue (fund flows slower, margin debt rate-of-change dropped).
These issues, seasonal forces, and other signs of upside “exhaustion,” according to Bank of America technical analyst Steven Suttmeier, are reasons why investors should raise some cash into the 4,400s on the S&P500.
Earnings are outperforming published figures in general, but there is more noise in the details. UPS muddled guidance due to industrial margin issues. Earnings season has not been when this market has done the majority of its upside work: there are too many opposing currents.
Today’s FAANMG pullback may help the stocks prepare for Apple, Alphabet, Microsoft, and Visa earnings tonight. Every three months, the stunning, automatic profitability of these companies is highlighted; it’s simply a matter of what the market is willing to pay for already-expensive but highly reliable profit streams at a given time.
Aside from the trading churn and delta noise, the earnings bonanza demonstrates that we are living in an era of abundance and no hard choices in Corporate America. Directionally, the Fed taper, slowing GDP growth, and slightly tighter financial conditions should make the market more selective, possibly compressing the overall price-earnings multiple.
But, with real yields so low and so much pent-up consumer and corporate spending power, it’s difficult to be too pessimistic. It makes the S&P’s 21.5x forward multiple seem reasonable.
Market breadth is low, but it is not a washout. Volume is roughly 1:3 up:down. Despite this, weeks of poor breadth have resulted in fewer than half of all stocks being in a short-term uptrend. Repair is most likely required if the market is to regroup and have a long-term ride higher any time soon.
Treasury yields are under pressure as a result of the equity drop/delta chatter (even if the U.K., India and Netherlands case curves are rolling over hard). Credit is a little squishy, with spreads widening. For at least one day, marginal money is stepping back from risk.
The VIX has risen above 20. Volatility is likely to be agitated by Fed vigilance, complicating the longer-term downtrend. There is still no such thing as genuine fear, and one should not expect it on a 1% drop from a record high.
Apple stocks
The company is set to report quarterly earnings after the bell on Tuesday, alongside reports from Google parent Alphabet and Microsoft.
(Please keep in mind that Apple reports earnings on a fiscal year basis.) The third-quarter report due out on Tuesday will cover the period ending in June.)
In the fiscal third quarter, Apple has beaten earnings estimates 89 percent of the time and sales estimates 84 percent of the time in the past.
In addition, in 26 percent of third-quarter earnings reports, the company raised guidance.
Apple’s stock has risen 3.25 percent on average the day after third-quarter earnings, compared to a 1.27 percent average one-day gain across the board.
In fact, Apple shares rise 79 percent of the time following the company’s third-quarter report, whereas the stock rises only 58 percent of the time following earnings in general.
Apple beat on both the top and bottom lines in its fiscal year 2020 third-quarter report last July, and its stock rose 10.47 percent the next day.
Apple shares are up more than 10% this year, trailing the Nasdaq Composite and S&P500 averages.
The stock was slightly lower in the middle of the day Tuesday, ahead of the earnings report.
