Market steps back after historic rally

05/04/20
  • April was best month for US stocks in more than 30 years
  • Small caps and energy stocks strong, oil market rebounds
  • This week: Jobs report, 1,600-plus earnings

US stocks wrapped up their best month in a generation last Thursday, but a late-week sell-off dragged the broad market into the red (by a hair) for a second-straight week.

Hopes for a potential coronavirus treatment and anticipation of the economy reopening may not have been enough to overshadow more dismal economic data (and perception the rally may have been overdone), as the S&P 500 (SPX) erased a robust Monday–Wednesday jump with a sharp Thursday-Friday downturn:

Chart 1: S&P 500 (SPX), 2/6/20–5/1/20. S&P 500 (SPX) price chart. Late-week pullback.

Source: Power E*TRADE


The headline: Stocks pull back after record-setting rally.

The fine print: As of Friday, the current pullback was just the SPX’s the third (and smallest) decline of two days or more since March 23. It began a day after the index reached a widely watched technical level.

The move: +32%, the SPX’s rally off its March 23 low as of last Wednesday—the index’s biggest 26-day rally in history.1 The SPX’s 12.7% April return was its biggest monthly gain since January 1987.

The quote: “This is a sector that’s probably going to recover faster than others in an upturn. It’s also priced relatively conservatively.” Bank of America strategist Savita Subramanian on bank stocks.2

The numbers: -4.8%, the initial estimate of Q1 GDP—the worst reading since Q4 2008. Last Thursday’s 3.8 million unemployment claims brought the six-week total to 30.3 million.

The scorecard: Small-cap stocks led the market for a second-straight week:

US stock index performance table for week ending 5/1/20. S&P 500 (SPX), Nasdaq 100 (NDX), Russell 2000 (RUT), Dow Jones Industrial Average (DJIA).

Source: Power E*TRADE


Sector roundup: The strongest S&P 500 sectors last week were energy (+2.9%), communication services (+2%), and materials (+1.9%). The weakest sectors were utilities (-4.3%), health care (-2.6%), and consumer staples (-2%).

Highlight reel: Arcturus Therapeutics (ARCT) rallied 35% to $30.53 on Monday, and Syndax Pharmaceuticals (SNDX) jumped 69% to $19.50 on Tuesday. On the downside, Chesapeake Energy (CHK) gave back almost all of the previous week’s monster gain, falling 21% on Monday, 35% on Thursday, and 14% on Friday to end the week at $14.98.

Futures action: Oil traders have stayed busy, as June WTI crude (CLM0) crumbled again last Monday and Tuesday, falling to $10.07/barrel before nearly doubling to around $19.75 by Friday. June gold (GCM0) drifted lower most of last week, falling to $1,676/ounce early Friday before recovering to close above $1,705.

Last week's biggest futures up moves: May VIX (VXK0) +8.5%, May hogs (HEK0) +6.3%, July sugar (SBN0) +5.8%. Last week's biggest futures down moves: July platinum (PLN0) -4.2%, June E-Mini Russell 2000 (RTYM0) -3.8%, June E-Mini S&P Midcap (EMDM0) -3.6%.

Coming this week

It’s all about jobs this week, with the second monthly employment report of the pandemic era due on Friday:

●Monday: Factory Orders

●Tuesday: Trade Balance, Markit Services PMI, ISM Non-Manufacturing Index

Wednesday: ADP Employment Change

●Thursday: Jobless Claims, Unit Labor Costs, Productivity

●Friday: Employment Report, Wholesale Inventories

And here’s a taste of the more than 1,600 companies that will release earnings this week:

●Monday: Aptiv (APTV), Cirrus Logic (CRUS), Tyson Foods (TSN), XPO Logistics (XPO)

●Tuesday: Activision Blizzard (ATVI), Verisk Analytics (VRSK), Electronic Arts (EA), Allstate (ALL), Beyond Meat (BYND), Occidental Petroleum (OXY), Marathon Petroleum (MPC), Walt Disney (DIS), Virgin Galactic (SPCE), LGI Homes (LGIH), Henry Schein (HSIC), Wayfair (W), Martin Marietta Materials (MLM), Pinterest (PINS)

●Wednesday: Apache (APA), Spirit AeroSystems (SPR), Spirit Airlines (SAVE), Marathon Oil (MRO), Chesapeake Energy (CHK), Vulcan Materials (VMC), General Motors (GM), Etsy (ETSY), Fastly (FSLY), Global Payments (GPN), RingCentral (RNG), Wingstop (WING), LYFT (LYFT), Shopify (SHOP)

●Thursday: Bristol-Myers Squibb (BMY), Raytheon Technologies (UTX), Paylocity Holding (PCTY), Murphy Oil (MUR), Dropbox (DBX), Trade Desk (TTD), EPAM Systems (EPAM), HP (HPQ), Qorvo (QRVO), ViacomCBS (VIACA), Moderna (MRNA), Uber (UBER), Wynn Resorts (WYNN)

●Friday: Exelon (EXC), Ubiquiti (UI), Exxon Mobil (XOM), Colgate-Palmolive (CL), Chevron (CVX)

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.

May reality check

Although many, if not most, bits of stock-market folk wisdom don’t hold water, one old saw that stands up to scrutiny is “Sell in May and go away.” Well, sort of.

First, it’s a verifiable fact that the US stock market’s returns in the seven months from October–April have, historically, dwarfed those from May–September. But what most people don’t realize is that May was sneaky, shifting its allegiance over the years from the bears to the bulls:

1. From 1960–1989 the SPX’s average May return was -0.7%, and the month closed up only 47% of the time.

2. From 1990–2018, though, May had the third-highest winning percentage (71.5%) of any month of the year, and an average return of +1.1%. During these 29 years, an investor who waited until June to “go away” would have earned 11% more than a sell-in-May investor.3

So, depending on how you look at it, last year’s May sell-off was either an anomaly or a reversion to the old historical pattern.

A more important consideration, though, is whether such seasonal patterns are even relevant in the context of this year’s extraordinary market conditions. After all, asking whether investors are likely to “go away in May” this year misses the point. They already went away—big-time—in February and March, before piling back in last month.

A more relevant question right now may be, do investors tend to stick around after five-week, 30%-plus rallies in the face of continued, acute economic stress? As noted in “Making (more) history,” the SPX has tended toward weakness for a couple of weeks after the type of rally that concluded last Wednesday.

Whether last week’s Thursday–Friday pullback was the opening move in a larger decline remains to be seen. But whatever happens will likely be driven by pandemic and economic facts on the ground, not by what month it is.

 

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1 Reflects the percentage change in the S&P 500 (SPX) from the close of one day to the high 26 trading days later, between May 1, 1957–May 1, 2020. Supporting document available upon request.

2 CNBC.com. Bank stocks could surge in economic recovery, Bank of America strategist says. 4/30/20.

3 Reflects S&P 500 (SPX) monthly closing prices from 12/31/56–5/30/2019. Supporting document available upon request.

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