Despite glowing results from Netflix, Inc. (NASDAQ: NFLX), it looks like the market might pull back early Wednesday after Tuesday’s
huge advance. Profit taking could be a factor, and investors also might have their eyes on a slight uptick in Treasury yields.
The big story today is arguably NFLX earnings, which we’ll get to in a moment. There are items on Wednesday’s calendar,
including the release of Fed minutes this afternoon and earnings from Abbott Laboratories (NYSE: ABT) and U.S. Bancorp (NYSE: USB). Earnings season is in its infancy, but so far nearly 90 percent of reporting
companies have topped Wall Street analysts’ expectations.
Still, the bias appears to be mostly lower for now, in part due to slightly higher Treasury yields and the dollar advancing vs.
the euro and pound. A sharper than expected drop in United Kingdom inflation reported Wednesday might be helping prop the dollar,
leading to some commodity market weakness. Crude appears to be one of the victims, falling slightly in the early going.
At the moment, it’s unclear if Tuesday’s rally was a “dead cat bounce,” or the the market setting a base. We’re coming off of an
incredible day, so it wouldn’t be unusual to see some profit taking, especially from investors who bought the dip and now might be
taking a little off the table. The market might give back some ground early and we’ll see what happens after that.
However, unlike the major losses in February—when things relaxed relatively quickly—this back-and-forth pattern we’re in appears
like it might last a while, with continued volatility. The VIX was under 18 early Wednesday after climbing above 25 last week, but
consider keeping a close eye on it for any move back above 20.
NFLX Engineers a Reversal
To reverse a call in football, a coach has to throw a red flag onto the field. Well, Netflix (NFLX) arguably did its version of
flag throwing Tuesday and reversed the prior quarter’s subscribership miss. The video streaming giant reported 3Q subscriber growth
of nearly 7 million, far surpassing management’s guidance for 5 million, and up from 5.15 million in Q2.
It definitely looked like a reversal from last time out when NFLX over-promised and under-delivered on subscriber numbers and
the stock got smacked. This time shares rose 11 percent in pre-market trading, and could help give the Nasdaq (COMP) a boost. These
were strong results.
Earnings of 89 cents a share for NFLX easily beat the third-party consensus estimate of 68 cents, while revenue of $4 billion
matched expectations. So the FAANGs look to be off to a positive start, with one company down and four to go.
IBM Revenue Growth Back in Red
The news didn’t look so buoyant over at IBM (NYSE: IBM), where revenue fell after rising the previous quarter for the first time in
years. Shares dropped 4 percent in the immediate aftermath of the earnings report after IBM reported overall revenue of $18.76
billion, below third-party consensus expectations for $19.1 billion. Earnings per share of $3.42 did beat estimates by two pennies,
however.
Perhaps more importantly, the company’s share of revenue from its Strategic Imperatives businesses—which includes cloud
computing and data analytics—shrank in Q3 to less than 50 percent of total revenue at $9.3 billion, down from $10.1 billion in
Q2.
On the other hand, IBM’s woes aren’t necessarily the entire industry’s, and could be positive for other companies in the space
if they're gaining share from IBM. Demand for cloud computing isn't going away, just a possible shift from IBM to
competitors. Shares of Adobe Systems Imcorporated (NASDAQ: ADBE), another company in the cloud market, climbed nearly 10 percent after the
company forecast 20 percent year-over-year revenue growth.
Out of the Woods? Not Necessarily
So does Tuesday’s 2 percent rally in the major U.S. indices mean the fallout is over from last week’s sell-off? Probably not,
for a variety of reasons we’ll discuss below. Still, the biggest single-day surge since March did seem to indicate that investors
might be starting to focus more on earnings and less on the geopolitical and rate issues that helped drag things down earlier this
month.
It’s probably too early to get sanguine. Moves like the ones the market is in typically take three to five days to play out.
Volatility, while lower than at its peak, remains elevated. Many investors still don’t seem sure where to plant their flag as the
shifting sands from last week remain unsettled. Tuesday might end up being one of those upside days that helps set up where the
market trades from here, but to think it’s “ding dong, the witch is dead” as far as volatility and sharp market swings are
concerned would probably be a mistake.
Tuesday’s rally was led by info tech, health care, and communication services, but every sector rose and the markets ended near
their highs. It’s also perhaps worth noting that neither crude nor bond yields really moved too much as the stock market rallied.
The benchmark 10-year yield seems to be stuck in neutral near 3.15 percent this week, and crude has descended into the low-$70s a
barrel after jumping above $75 recently. Rallies in both of those markets arguably helped put the brakes on stocks last week.
Earnings Mostly Solid To Date, But It’s Still Early
So far this young earnings season, reporting companies are delivering earnings beats at a higher than historic rate. That said,
we’ll only be about 20 percent done with S&P 500 earnings by the weekend, so there’s a long way to go.
Investors do seem to finally be rewarding the big banks for their strong quarters. Morgan Stanley (NYSE:
MS) rose more than 5 percent Tuesday after beating Wall
Street’s estimates and coming up with robust investment banking results. Goldman Sachs Group Inc. (NYSE: GS) shares rose 3 percent after a similar strong Q3 performance.
Financials still remain down for the year and well behind the broader market, but Tuesday might have helped reinforce an industry
picture that looks pretty good.
Health care came in second among the sector leaders after info tech Tuesday, climbing nearly 3 percent on the coattails of
strong Q3 showings by Johnson & Johnson (NYSE: JNJ) and UnitedHealth Group Inc. (NYSE: UNH). Biotech shares out-performed health care as a whole with Tuesday gains of well
over 4 percent, but the biotech sector remains well off last month’s highs. Some analysts are concerned about the chance of new
pressure from Washington on drug pricing in coming months possibly weighing on biotech stocks, but that didn’t seem to get in the
way Tuesday, at least.
FIGURE 1: FIGURE 1: Healthier Climate? Healthcare, which went into the sick bay last week along with the
rest of the stock market, helped lead the way higher Tuesday with a nearly 3 percent gain. That was only topped by info tech
(purple line), which rose just over 3 percent after slumping the last two weeks. Data Source: S&P Dow Jones Indices. Chart
source: The thinkorswim® platform from TD Ameritrade. For
illustrative purposes only. Past performance does not guarantee future results.
Trail of Breadcrumbs
If you want to get “technical” about it, the S&P 500 (SPX) has arguably left a trail of key levels in its wake as it rapidly
plunged through technical support last week. These levels could be like proverbial breadcrumbs for investors to watch if the market
finds a way to keep climbing out of the valley. The SPX has already pushed through what might be called “level one,” or the 200-day
moving average, which stood at 2767 heading into Tuesday. That average has been a key support level most of the year. The next stop
could be the 100-day moving average of 2823, followed by another resistance point at 2872—the reading where the market topped back
in late January before correcting.
Way up above that is the late September all-time high of just under 2941 recorded just a few short weeks ago. That’s still a
long hike, and there’s no guarantee that the market won’t once again test last week’s low of 2710. Though past isn’t necessarily
prelude, remember that stocks rebounded sharply at first in February from their lows before retesting them and actually carving a
new low point for the year (so far) in April. We’re not necessarily out of the woods yet, so let’s hope the breadcrumbs don’t run
out.
Looking to Hire?
Normally, job openings hitting an all-time high might be a cheerful sign for stock market investors, but that’s not necessarily
the case this time. The August Job Openings and Labor Turnover Survey (JOLTS) climbed to 7.14 million, according to Labor
Department data released Tuesday. To get a sense of just how that number has surged this year, consider that there had never even
been a month with 6 million until mid-2017. This demand for workers probably underscores the hardy corporate environment, and might
speak to companies expanding their businesses.
All this is arguably positive for the economy and the market. The one thing to possibly worry about is that the number of
unemployed people per job opening keeps on falling. Just four years ago, there were two unemployed people for every job opening. In
August, there was less than one, the Labor Department said. Companies facing a hard time filling positions might have to pay up for
the right worker, or might not be able to find the right worker at all. Higher wages and a shrinking worker base can sometimes
translate into inflation, or stifle companies’ plans to grow.
Risk Embrace
As the stock and Treasury markets slumped last week, investors also pulled billions of dollars out of corporate bonds, The Wall
Street Journal notes. However, the paper noticed what looks like a discrepancy: Investors sold more investment-grade bonds than
high-yield, or “junk” bonds. That, the newspaper reported, might signal lack of “systematic flight from risk.” All year, The Wall
Street Journal noted, investment-grade bonds have performed worse than higher-risk debt. Bonds rated BBB—the lowest for
investment-grade debt—make up half the investment-grade index, the most in more than 15 years. For investors, that means greater
risks of downgrades to junk status and possible losses, The Wall Street Journal pointed out. A lot of really risky companies have
been borrowing in booming loan markets. With interest rates still rising, investors might want to re-assess positions in corporate
bonds to make sure their portfolios remain properly balanced and not weighted too heavily toward higher-risk assets, which would
conceivably find it harder to pay back their loans if the economy slows due to rates going up.
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