Market holds ground despite tech slump

07/20/20
  • Tech steps back, small-caps step up
  • Banks (mostly) top numbers to start earnings season
  • This week: Housing data, plus Microsoft, Tesla, and airlines report earnings

The first week of earnings season may have been relatively quiet for the broad market—the S&P 500 (SPX) climbed a modest 1%—but the real story was the divergence in tech stocks, as the Nasdaq 100 (NDX) lost ground and broke a five-week run as the strongest US equity index.

After a sharp intraday reversal on Monday (California hit the brakes on its reopening) and an equally robust Tuesday-Wednesday rebound (most of the big banks beat earnings), the SPX managed to hang around its June high, which is roughly its breakeven point for the year:

Chart 1: S&P 500 (SPX), 5/14/20–7/17/20. S&P 500 (SPX) price chart. Knocking on the door.

Source: Power E*TRADE


The headline: Tech (finally) takes a breather.

The fine print: The last time the NDX closed down for the week and the SPX closed up was December 6. The time before that was in October 2018.

The numbers: 77,255—the new one-day record for US coronavirus cases, set last Thursday. 40%—Moderna’s (MRNA) rally last week amid its announcement that all the patients participating in its initial coronavirus vaccine trial produced antibodies.1

The scorecard: The small-cap Russell 2000 (RUT), which has kept pace with the NDX since the March lows, led the US market last week:

US stock index performance table for week ending 7/17/20. S&P 500 (SPX), Nasdaq 100 (NDX), Russell 2000 (RUT), Dow Jones Industrial Average (DJIA).

Source (data): Power E*TRADE


Sector roundup: The strongest S&P 500 sectors last week were industrials (+5.8%), materials (+5.4%), and health care (+5.1%). The weakest sectors were consumer discretionary (-1.7%), information technology (-1.2%), and communication services (-1%).

Highlight reel: More than one of last week’s movers had “vax”—as in vaccine—in its name. On Tuesday Vaxart (VXRT) jumped 40% to $16.97, while Novavax (NVAX) rallied 17% to $140.49 on Friday. On Wednesday, Norwegian Cruise Lines (NCLH) jumped 21% to $18.50, then fell 16% to $15.61 on Thursday. On Friday, Chinese electric vehicle maker Nio (NIO) fell 15% to $11.09.

Futures action: September WTI crude oil (CLU0) continued to consolidate near its four-month high around $41/barrel, closing Friday at $40.75. August gold (GCQ0) held its ground to end the week at $1,810/ounce.

Last week's biggest futures up moves: September lumber (LBSU0) +10.5%, August soybean oil (ZLQ0) +6%, August hogs (HEQ0) +5.9%. Last week's biggest futures down moves: Last week's biggest futures down moves: August Ethanol (ZKQ0) -11%, August Natural gas (NGQ0) -5.3%, August RBOB gasoline (RBQ0) -4.8%.

Coming this week

Microsoft and Tesla headline the second week of earnings season, but we'll also see key airlines, aerospace and defense, and housing names:

●Monday: AutoNation Inc (AN), American Campus Communities (ACC), International Business Machines (IBM), Halliburton (HAL), Steel Dynamics (STLD), Petmed Express (PETS), Lennox International (LII)

●Tuesday: United Airlines (UAL), Coca-Cola (KO), Lockheed Martin (LMT), Raytheon Technologies (UTX), Snap (SNAP), Philip Morris International (PM), Texas Instruments (TXN), Teradyne (TER)

●Wednesday: Spirit Airlines (SAVE), Biogen (BIIB), CSX (CSX), Chipotlel (CMG), Microsoft (MSFT), Meritage Homes (MTH), Citrix Systems (CTXS), Corelogic (CLGX), Tesla (TSLA)

●Thursday: American Airlines Group (AAL), Amazon.com (AMZN), Southwest Airlines (LUV), Rockwell Automation (ROK), AT&T (T), Edwards Lifesciences (EW), Hershey (HSY), Intel (INTC), Union Pacific (UNP), Kimberly-Clark (KMB), Dow (DOW), PulteGroup (PHM), Twitter (TWTR)

●Friday: American Express (AXP), Verizon communications (VZ), Honeywell (HON), Schlumberger (SLB)

Housing numbers dominate this week’s light economic calendar:

●Tuesday: Chicago Fed National Activity Index

●Wednesday: House Price Index, Existing Home Sales  

●Thursday: Jobless Claims, Leading Indicators Index  

●Friday: New Home Sales

Go to the E*TRADE market calendar (login required) for an up-to-date earnings schedule and a complete list of splits, dividends, IPOs, and economic reports. The Active Trader Commentary also lists earnings announcements, IPOs and economic report times each morning.

All roads (still) lead to tech

In recent months we’ve noted more than once that the performance of tech was likely to hold the key to the market’s recovery and odds of sustained success.

So far, tech has held up its end of the bargain, with the Nasdaq 100 (NDX) maintaining a double-digit year-to-date percentage return for the past seven weeks—despite being the only US index to post a loss  last week.

Is the NDX’s divergence a chink in the tech armor, a canary in the market coalmine? Well, consider this:

1. In the 136 weeks since the beginning of 2018, the NDX has had 54 losing weeks, but only seven of those were weeks the S&P 500 closed up.

2. After those seven, the NDX closed higher the next week in every instance but one.

That’s not much data to go on, but if it was all the information you had at your disposal, you might be inclined to look for the NDX to rebound, at least temporarily, after last week’s pullback.

But there’s something else for traders to keep in mind. Five of the seven weeks that the NDX closed up and the SPX closed down occurred in the 14-week stretch from July 20 to October 19, 2018—the last two weeks of which were the beginning of what turned out to be a 20% downturn in the broad market. (Remember that nasty market action around Christmas?)

Even as the NDX was logging the fourth of these five down weeks on September 21, 2018, the SPX was still pushing to new highs.

One takeaway: A single week of the NDX closing lower when the SPX closes higher probably doesn’t mean much, but when it becomes a semi-regular occurrence, traders should pay attention—even if the broad market is still rallying.

 

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1 Reuters. Moderna Phase 1 results show coronavirus vaccine safe, induces immune response. 7/14/20.

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