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Seeking Momentum: Retail Sales, Vaccine News, Europe Set Firm Tone After Impressive Comeback

There’s a firmer tone on Wall Street early on after impressive retail sales, strength in Europe, and some positive news on the vaccine front. The question is whether momentum can carry through into the weekend.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Airlines: Rally ahead of stimulus
5 min read
Photo by Getty Images

Key Takeaways

  • Major indices enter Friday amid a three-day losing streak as stimulus hopes dwindle

  • Small-caps have bucked the lower trend, perhaps in pre-election positioning

  • Retail sales charged back in September after misfire in August

(Friday Market Open) Stuck in a three-day rut, Wall Street tries to regroup before the weekend. Yesterday’s impressive march back from early lows could help set the tone, but rising virus cases in Europe and the U.S. could keep people a little hesitant. 

Today’s earnings calendar is light, but September retail sales released before the opening bell showed a little more life than many had expected. The headline number rose 1.9%, vs. the 0.7% average Wall Street estimate. This, along with Pfizer (PFE) announcing it could apply for emergency use approval of its vaccine treatment as early as November (if data show it’s safe and effective), injected some optimism as the opening bell approached. 

A bounce back in European trading also might be lending some early support after those indices got beaten up Thursday. It would be nice to see some Wall Street momentum heading into the weekend, like last Friday, but back then a lot of people left work Friday with high hopes of fiscal stimulus. 

Twenty four hours ago, those hopes sank to the basement. This morning, they may be back up the stairs and into the lobby, but they’re still not in the elevator. Investors probably will have an eye on this today but not much enthusiasm.

Since it’s Friday, keep an eye on that last hour of the session to see which direction things go. Anxiety about potential election and virus headlines over the weekend could keep some traders from wanting to carry long positions into the break. Also, remember to tune in Sunday night and check the futures market for direction ahead of the new week. 

In addition, keep an eye on volatility today as a bunch of options contracts are due to expire. Many investors have been using options to hedge stock and index positions ahead of the election, so there could be some position squaring today. Some have suggested recent options activity has given stocks a bullish boost, but it’s important to remember options expiration can exacerbate moves on the way down as well as up. 

Investors should stay on their toes, though the Cboe Volatility Index (VIX) has been stuck in the mud between 25 and 30 the last few weeks no matter what’s happened in the market. 

“Buy The Dip” Makes Encore Appearance

Major indices made it oh so close to recovering from steep early losses yesterday, but failure to end in the green shouldn’t make you overlook the rebound’s implications. 

The aggressive and impressive comeback could suggest that there’s still a lot of willingness to buy the dips, and that some of the more cyclical stocks remain popular. Notice how Energy, Financials, and Industrials all outpaced Technology and Communication Services yesterday. That’s despite a weak initial jobless claims report and mounting COVID-19 cases both here and in Europe. These “cyclical” sectors are ones that tend to do better in an improving economy.

What does this tell us? Maybe not all that much considering no single day is ever a trend. But if you want to read anything into it, there seems to be an incredible appetite among many people to buy. A “buy the dip” mentality really seemed to rule the day on Thursday, so we’ll see if people come back to do the same thing in days ahead if stocks start to lose ground.

The buying began yesterday when bonds began to sell off, moving rates higher. That appeared to help the banks, especially when you combine it with the strong earnings we’ve seen across most of that sector this week. Morgan Stanley’s (MS) were the most recent, and they had a nice day. So did regional banks, which tend to be even more rate-sensitive. 

So maybe the major metric to watch today is where rates go. They’ve been in a pretty tight range for weeks, between 0.6% and 0.8% for the 10-year yield, and recent tests of the high end of that earlier this week faded away. The yield rally did seem to put a burst of energy first into the Financials but then into other cyclicals late yesterday. Yields dropped slightly this morning.

It’s actually a little bit of a head scratcher to see bonds sell off when you consider the relatively weak initial jobless claims report on Thursday and pessimism about chances for a stimulus. Both of these had stocks playing defense early on. The dollar index, meanwhile, is getting a lift in part from a weak euro trade as virus cases go up across the pond. 

Small-Caps Defy Market’s Downward Trend

Another key metric on Thursday and maybe continuing toward the election is the Russell 2000 (RUT) small-cap index moving ahead of the other major indices. The RUT led the way yesterday and actually rose more than 1% while other indices finished in the red. What gives? 

This may be an election play, actually. If people start thinking the Democrats have a better chance, does that mean a renewal of some of the corporate taxes that could affect multinational companies more than domestics? This could be the first signs of that election-related sector rotation we’ve said might begin by mid-month. Let’s see if it continues to line up this way as we head into next week, and if RUT can remain strong relative to the rest of the market.

Support below the market might be near the 50-day moving average for the S&P 500 Index (SPX), which now rests just below 3400. A wider range of support could lie between 3332 and 3428, according to research firm CFRA. For the Nasdaq 100 (NDX), 12,000 continues to look like a stretch, but CFRA says the bias remains bullish. Any fall from here could run into support in a range between 11,225–11,495. 

Next week’s calendar looks like a who’s who of the S&P 500. It features a wide mix of firms including Lockheed Martin (LMT), CocaCola (KO), Phillip Morris (PM), IBM (IBM), Tesla (TSLA), Abbott Labs (ABT), Verizon (VZ), Intel (INTC), and our first FAANG sighting of the season with Netflix (NFLX). By a week from now, investors should have a far better picture of how reporting season is going.

Before all that, consider keeping an eye out this morning for the latest University of Michigan sentiment reading. Analysts expect a headline of 82.0, up from the previous 80.0, according to research firm Briefing.com.

And in more corporate news, Boeing (BA) shares got a lift early Friday as Europe’s aviation regulator said the company’s 737 Max aircraft is safe to fly again. 

On the subject of Europe, this is the first week in a long, long time that “Brexit” has been in the news. It’s still out there and it’s one more step on the stairway of worry.

CHART OF THE DAY: THE “NEW HIGH” BARRIER. After failing to reach its all-time high (horizontal yellow line), the FANG+ Index ($NYFANG—candlestick) reversed course and is now bouncing off its short-term uptrend line (rising yellow trendline). It almost looks like it’s forming an ascending triangle pattern, but that would mean a breakout to the upside. FANG+ could breakout in either direction and right now it looks closer to the downside. Data source: ICE Data Services. Chart source: The thinkorswim® platform from TD Ameritrade.For illustrative purposes only. Past performance does not guarantee future results.  

Brick and Mortar Revival? In early 1975, a single McDonald’s (MCD) offered the first drive-through, and now this little convenience is practically universal at fast-food outlets. It’s taken 45 years, but brick-and-mortar is finally catching up. For that, we can thank COVID-19. As of August, about three-quarters of the top 50 store-based retailers in the U.S. offered curbside pickup, The New York Times reported. Curbside sales at Target (TGT) rose more than 700% in the last quarter, while Best Buy (BBY) reported nearly $5 billion in online revenue in Q2 and said 41% of that came from curbside or in-store pickup.

We’ve spilled a lot of digital ink over the years talking about brick-and-mortar retail’s struggle to remain relevant, and this seems to be a new chapter. Curbside actually has advantages for the brick-and-mortar retailers over pure online sales, because they don’t have to deal with the cost and logistics of shipping goods to customers’ homes. It also could represent a challenge for online leader Amazon (AMZN). It’s helped Walmart (WMT) keep pace with AMZN, one analyst told The New York Times, allowing WMT and other chains the ability to make a profit on online orders, something that tends to be tough to do. TGT has said that its order pickup and curbside service cost the company about 90% less on storage than fulfilling orders from a warehouse.

Buffet Blues: If you thought the restaurant business was a challenge in these pandemic times, imagine how hard it’s been for the restaurant buffet business. Old Country Buffet, a national chain, closed its last Illinois restaurant recently, the Chicago Tribune reported. The chain is owned by a privately-held company, as is Golden Corral, another national buffet restaurant you see on so many road sides around the country. Golden Corral’s biggest franchise holder recently filed for Chapter 11 bankruptcy, an industry publication reported. As of August, sales at buffets and cafeterias were 55% lower than a year before while the overall restaurant industry was down 9.5%, according to market research firm NPD Group, the Tribune said.

So who might benefit? McDonald’s (MCD), for one, which surprised many investors with a surge in same-store sales recently. It’s tempting to say the decline of buffets could help the casual restaurant crowd, which was already struggling before COVID-19. However, last month’s fiscal Q1 earnings from Darden Restaurants (DRI), weren’t too uplifting. Same-store sales across its chains, including Olive Garden and Longhorn Steakhouse, fell 18% to 28% year over year. Its fine dining category did even worse. The company expects better times ahead, projecting total sales in its current fiscal quarter to reach 82% of year-ago levels. “Going out to a restaurant with friends and family is the number one thing consumers say they look forward to as the economy opens back up,” DRI’s CEO told investors last month. 

Early Earnings Season Checkup: We’re barely 10% of the way into earnings season, but so far, so good. About 85% of companies reporting to date have beaten Wall Street’s earnings estimates, CNBC reported Thursday, and the average beat is an incredible 29%. 

Take this in stride, because for one thing it’s so early. For another, analysts have generally been projecting too low on the EPS line for the last two quarters. Maybe COVID-19 has them feeling pessimistic. Or maybe companies are just being more innovative at cutting costs and keeping customers than analysts wanted to give them credit for.

Not all the results shined. Travel remains a headache, as United Airlines (UAL) reported worse-than-expected results following a sharp revenue downturn for Delta (DAL) earlier this week. Investors hoping for a general economic recovery might be getting less optimistic about the travel sector with chances of any near-term fiscal stimulus apparently retreating. So, travel might be getting psychologically separated in peoples’ minds from other “reopening” sectors.

Good Trading,
JJ
@TDAJJKinahan

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This week’s economic calendar. Source: Briefing.com
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Key Takeaways

  • Major indices enter Friday amid a three-day losing streak as stimulus hopes dwindle

  • Small-caps have bucked the lower trend, perhaps in pre-election positioning

  • Retail sales charged back in September after misfire in August

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