(Wednesday Market Open) A ray of sunshine poked through the clouds this morning in the form of some pretty decent earnings news and a rebound in the anemic crude complex.
Netflix (NFLX) and Chipotle (CMG) both looked good with their results last night, and AT&T (T) is getting a little boost, too. There’s nothing here you’re really going to hang your hat on, but the little things can help.
It also might help that traders won’t have the May crude contract to kick around anymore. It mercifully went off the board yesterday after its unprecedented stumble into negative territory. For a while, it looked like June crude wanted to follow its older brother right over the waterfall. June plunged Tuesday to below $15 a barrel—levels that haven’t been prevalent since the historic energy bear market of 1998–99. However, the contract rebounded 12% early Wednesday, though it’s still well under $15.
The crude situation remains dicey at best, and for retail investors it comes down to two things: Risk and reward. By trading the crude market now, you might get a small reward, but risk is off the charts.
There’s nothing wrong at all with the concept of futures trading or the crude futures complex itself, but you’ve got to ask yourself if you have insight into crude when the pros are completely stumped. People getting involved there have to realize the amount of risk and know what they’re doing. If you’re tempted to trade crude now, ask yourself if you feel comfortable rushing into a burning building when the firemen can’t put out the flames.
Netflix Crushes on Subscriber Adds
After all the analyst hype and hoopla about how many new homebound subscribers dialed in globally to NFLX in Q1, the streaming services giant didn’t disappoint.
Some 15.8 million subscribers jumped on board, crushing the company’s seven million forecast and propelling its global total to 182.9 million, with most of the surge in March. But investors shouldn’t get too comfortable with those kinds of numbers going forward, NFLX said in its letter to shareholders.
As stay-at-home mandates are lifted across the world, NFLX expects its subscription flows will ebb considerably. “Intuitively, the person who didn’t join Netflix during the entire confinement is not likely to join soon after the confinement,” according to the letter.
On its post-earnings conference video, NFLX CEO Reed Hastings said the strong March numbers are probably a pull-forward for the rest of the year. “It’s super hard to say if there are strategic long-term implications,” he said.
NFLX shares didn’t seem to get much traction in post-market trading despite the huge “sub-adds,” as people familiar with the company refer to new subscribers. It’s possible a lot of the good news had been baked into the stock ahead of earnings.
If you have kids at home—whether grade-schoolers or college kids who are finishing the semester at home—you know how hard it's been for them to stay connected during these shelter-in-place times. On that note, Snap (SNAP)—the go-to communication portal for many of them—impressed with 20% daily active user growth and revenue that was 44% higher than the year-ago quarter. SNAP shares climbed 20% in pre-market trading.
In other earnings news, AT&T fell short of analysts’ expectations but said it’s keeping its dividend in place, which counts for something in times like these. Also, chipmaker Texas Instruments (TXN) rose overnight after beating Wall Street’s earnings and revenue expectations. That got the chip quarter off to a solid start, and TXN became one of the few companies this quarter to provide investors some guidance for Q2.
Later today the wrapping comes off results from chipmaker Lam Research (LRCX) and casino company Las Vegas Sands (LVS).
Quick Economic Comeback? Crude Suggests Maybe Not
This constant pressure on crude, now down from above $60 at one point early this year, might reflect investors’ concerns that the economy can’t engineer a quick comeback despite some re-openings in sight. Even if stores and restaurants start letting us in, as they might be in a handful of states, people are likely to head back with caution. Let’s not get ahead of ourselves as investors by hoping for too much, too soon.
Americans are likely to remain cautious for an extended period, and that could mean continued volatility for markets amid worries about possible deflation. The Cboe Volatility Index (VIX) marched right back up to the mid-40s by Tuesday’s close after its brief fling with the upper 30’s late last week.
At least stocks are trading in narrower ranges than the 1000-point declines and spikes of a few weeks ago. Still, it’s a bit disappointing that the SPX couldn’t hold technical support at 2750 on Tuesday and closed below it—though the futures market crossed back above 2750 in the premarket. Looking to the downside, the test might be whether the SPX can defend 2700 should the selling pressure return.
Last week, we noted that a range for the SPX seemed to be forming between the 20-day and 50-day moving averages. The SPX (which best reflects the overall large-cap market–which is why we talk about it the most) has been trading roughly between those moving averages for two weeks now, and the averages have narrowed a bit over that time period. The 20-day is now near 2664, with the 50-day up at 2840. Any breach of either of those could conceivably generate follow-through buying or selling, but it’s also just as likely the index could keep bouncing around between them.
Lower Earnings Projections Darken the Picture
Normally, we say earnings drive markets. These days, with so many companies pulling guidance and not providing new outlooks for the rest of the year, it’s a lot harder to pinpoint how earnings play into the action. However, some analysts see things getting worse as the year continues, and their lower recent projections could be weighing on the market this week.
For instance, S&P Capital IQ has reduced its S&P 500 earnings estimates for each quarter in 2020 and for the full year. It now sees Q1 earnings falling 13% and Q2 earnings falling nearly 30%. For the full year, it sees earnings falling 16.4%, followed by a huge comeback in 2021 with earnings growth of 24.3%.
With the lower earnings projections, there was some “risk-off” sentiment the last two days. You could sense that in the fixed income market, where bond yields are up a bit today but remain just above last month’s historic lows. There’s also an element of “risk-off” in the way investors on Tuesday seemed to abandon last week’s stampede toward Information Technology. Other so-called “horsemen of risk” like volatility and the dollar tell the same story, and the S&P 500 Index (SPX) is down nearly 5% to start the week.
One session doesn’t give you much insight into any trends, but consider watching Information Technology closely today to see if there’s some sort of rotation underway. Tech led things higher the last two weeks and then took a serious beating Tuesday after IBM (IBM) disappointed with earnings. The chip sector, Apple (AAPL) and Microsoft (MSFT) had bad days.
Mr. Moneybags: The companies whose stocks have done best coming out of the hole dug in March are the ones with deep pockets. One thing remains true: When things are at their worst, investors often turn toward companies with big cash positions like Microsoft (MSFT), Alibaba (BABA), and Cisco (CSCO). A lot of Information Technology companies sit on cash, and that attracts people.
Tech, and to some extent Communication Services—dominated by Amazon (AMZN) and Alphabet (GOOGL)—also attract investors now because they’ve been stalwarts of the economy. Many of these companies have been through tough times like the 2000–2001 dot-com selloff, the 2008 financial crisis, and the 2011 European debt crisis. There seems to be hope that there’s opportunity for many of these firms on the other side of the crisis we’re in, and that can be seen now in the demand for cloud computing, for instance. Chipmakers also are hanging in there, and so are software firms like Oracle (ORCL).
“Cream” Sinking? The problem when only a few sectors dominated by a handful of big companies rise to the top is this: What happens when the glow fades for those? With the rest of the economy stumbling along, it’s hard to imagine other traditionally powerful sectors like Industrials and Materials picking up the slack. Automobiles and housing—two industries that normally might give those sectors a lift—have been hibernating as the crisis flexes its muscles. Financials are under pressure from the Energy sector and weak rates. A day like Tuesday, when Tech and Communication Services experience a slump, might indicate how the rest of the market can sag without their help.
It might also mean something that the small-cap Russell 2000 (RUT) didn’t slide as much as large-cap indices yesterday. Many analysts have pointed out that any strength in the RUT could indicate a little more investor confidence in the domestic economy. It’s been trailing larger-cap indices for most of the recent rally. A reversal of that wouldn’t necessarily be a bad thing.
Green Rises to the Top: The dollar has quietly gained some currency with investors recently. The dollar index is back above 100, not far off of nearly three-year highs posted in March. The combination of a stronger greenback along with Tuesday’s rise in volatility and the continued slow drip lower in yields forms a pretty toxic brew if you’re hoping for stocks to gain ground. One thing that stood out last month when things fell apart was a big push into the dollar as many investors sought what they hoped would be protection in the currency. It’s this kind of retreat into so-called “defensive” regions that might have some investors concerned here.