Battery Check: Tesla, Others Share Firm Results, But Can Rally Keep Going?
TD Ameritrade | Oct 25, 2018 12:03PM ET
(Thursday Market Open) Stocks looked ready to snap back Thursday from Wednesday’s late collapse, but the question is whether any rally attempt can carry through to the closing bell.
Lately, it seems like every time the market tried to mount a recovery, sellers showed up late in the day to kick things back down. That doesn’t mean the same thing will happen this time, but it’s hard to blame investors if they feel skeptical about the stamina of this morning’s green numbers. Early morning rallies after a big sell-off are pretty common, but they don’t always last, and the rout isn’t necessarily over. Anyone trying to participate today should consider taking special care, especially in the first half hour.
h3 Twitter, Merck, Tesla—Strong Numbers Provide Pep/h3One element that potentially could give today’s fledgling rally a little more battery power is another batch of healthy earnings data. Tesla (NASDAQ:TSLA), Twitter (NYSE:TWTR) and Merck (NYSE:MRK) are the latest high-profile companies to beat Wall Street analysts’ estimates. Microsoft (NASDAQ:MSFT) also reported a positive quarter Wednesday afternoon and saw shares climb 3% in pre-market trading.
TSLA, in particular, seemed to genuinely surprise analysts by generating a profit, and shares popped more than 10% early Thursday. Stronger margins on the Model 3 appeared to help profitability, along with spending cuts. Some analysts said the company appeared to achieve better pricing on the Model 3, the company’s lower-priced electric car model. One earnings report doesn’t mean TSLA’s recent troubles are over, but it does provide a different twist.
TWTR shares also got a big lift early Thursday, jumping more than 14% after the company beat expectations and said it was taking measures to wipe the site clean of spam accounts. Merck inched higher, too, on what looked like a strong quarter. Remember that MRK is a component of the Dow Jones Industrial Average, so its positive results could conceivably lend the DJIA a hand, as Boeing (NYSE:BA) did early yesterday.
The earnings news wasn’t all sunny. Advanced Micro Devices (NASDAQ:AMD) shares plunged 18% in pre-market trading after the chip company missed analysts’ estimates for revenue and provided guidance that seemed to displease Wall Street.
Aside from earnings, there were other positive signs percolating early Thursday, including a slight uptick in Treasury yields and crude oil futures again flirting with $67.50 a barrel after falling below $66 earlier this week partly due to demand concerns.
Two Fed speakers are scheduled later today, including Cleveland Fed President Loretta Mester, so that could be something to monitor. Most of the recent Fed speeches have taken a pretty hawkish tone.
h3 Charts Torn Up As Panic Seems To Surface Late Wednesday/h3
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Late Wednesday, for the first time in the current sell-off, a note of panic selling appeared to hit the market, and that might have been the final ingredient taking stocks down below what had been key technical support areas. The S&P 500 has done a lot of damage to the technical charts lately, leaving little in the way of support points below it. One possible support level could be 2647, which represents a 10% drop from the all-time high and would officially send the SPX into correction territory. However, that’s not really very far down from where the SPX closed yesterday.
Last February, the most recent time the SPX posted a correction, the 10% decline was about the limit of it. That doesn’t mean the same will necessarily be true this time around. However, with the economy outside of housing continuing to look strong, and earnings mostly good so far, there could be an argument for things to not get much worse. Still, these elements aren’t predictable, and when markets fall this fast and dive below technical support they often trigger electronic selling that investors have set up to limit losses. This can exacerbate a market decline, and might have played a role in the late tumble yesterday.
h3 Amazon, Alphabet In The Wings/h3More earnings are on tap after the close as the two “Big A’s”—Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, GOOGL)—report. AMZN is expected to report adjusted EPS of $3.12, up from $0.52 in the prior-year quarter, on revenue of $57.1 billion, according to third-party consensus analyst estimates. Revenue is projected to increase 30.5% year over year.
While there’s always a lot going on at the company, analysts and investors appear to have honed in on three areas lately: ecommerce, cloud services and advertising, which the company has been rolling out in recent quarters. Amazon Web Services, or AWS, the company’s cloud division, has been the company’s most profitable from a margin perspective. AWS revenue in Q2 increased 49% year over year to $6.1 billion, and generated $1.64 billion in operating income, more than half of the total $2.98 billion.
Investors will likely parse the cloud data particularly closely after both IBM (NYSE:IBM) and Microsoft had hiccups in their cloud business last quarter. MSFT said yesterday that its Azure cloud platform had slower growth, though a 76% gain (down from 89% the prior quarter) still seems hard to call a slowdown.
AMZN isn’t grouped as a tech sector company, but the cloud computing aspect does fall under the tech space. All of last year and for much of 2018, info tech had been the sector helping prop the market, but during Wednesday’s late sell-off, it became the sector that helped push things lower.
One thing seems pretty clear: At this point, earnings season remains the most important element in the picture, but many companies are having trouble coming up with numbers that seem to satisfy investors. Instead, a lot of the time even companies that beat analysts’ estimates have faced pressure in the market the last few weeks as many analysts and investors seem to be looking for something wrong instead of focusing on what’s right. Companies that fail to meet expectations often get hammered.
This still looks like it could be an excellent earnings season, with research firm CFRA expecting a 21.6% year-over-year increase in earnings for S&P 500 companies and revenues up 8.3%. Next year, however, the firm sees earnings growth of just 9.9%. That would have looked pretty good a few years ago, but after all these quarters of huge gains, some investors might be looking ahead and wondering if the market can sustain the upward pace seen a few months ago.
October continues to live up to its reputation for volatility. It’s the most volatile month of the year, on average, going back to 1950. This year it comes before an important U.S. mid-term election and as Brexit negotiations hit a standstill and the trade war with China shows no sign of ending. Even if we were in July, the market might be volatile with all that on its plate. The Cboe’s VIX—the most closely watched fear index—jumped to 25 late Wednesday, up from lows below 12 in September. It eased back to below 24 early Thursday.
h3 GDP Data Ahead, Generating Some Stress/h3Amid all the earnings, some big data loom early Friday when the government posts its first estimate for Q3 gross domestic product (GDP). Analysts expect a 3.3% gain, according to Briefing.com, which would be well under the 4.2% growth seen in Q2.
Arguably, the GDP number could spook the market by coming in either higher or lower than Wall Street expects. A number below 3% might have some investors and analysts concerned about a possible slowdown in U.S. growth, but a number of 4% or more could spark fears of an even more hawkish Fed jumping in to dial up rates in an attempt to arrest any overheating.
It might seem counterintuitive, but a GDP number that’s “too good” might pummel the market further. We’ve arguably reached a point in which the mindset has changed. A year ago, all data seemed to get a positive spin. Today, data news is often viewed as cautionary no matter how it comes out.
Figure 1: Contagion Spreads: It’s not just the three biggest indices getting hammered lately. Both the Russell 2000 (RUT) small-cap index and the Dow Jones Transportation Average (purple line) are also dramatically off their summer highs, when both posted all-time peaks. Data Source: FTSE RUT, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Safety Net? Throughout the various hills and valleys that form this year’s turbulent stock market, one thing has held true, at least so far: For the most part, the bottom has been well defined. After February’s 10% correction, levels seen at the low points held, for the most part, with only a few tests of the weakest levels after the big slump. To date this month, that had been true until Wednesday, with stocks turning around sharply Tuesday after an early 500-point plunge in the Dow Jones Industrial Average. Many times so far this year, investors who’ve “bought the dip” got rewarded for it. The bearish view is that one of these times, that just might not happen. The question is whether the current lows below 2660 in the S&P 500 can hold and perhaps help the market carve out a bottom to its current dip. The dive below technical support points in the final half hour of yesterday’s session arguably makes a quick comeback tougher, at least from a chart standpoint.
Back to the Green(back): Though the big drop in the major stock indices grabbed the headlines, yesterday's move higher in the U.S. Dollar Index might be a telling sign of the global macroeconomic mood. The rally to the mid-96 handle, within a stone's throw of the 2018 high, came on a day in which the 10-year Treasury yield softened 6 basis points—suggesting a flight to safety, rather than an interest rate play—was behind the move. Among places seeing their currencies soften versus the greenback are the British pound—where Brexit woes continue, the euro—which has been sliding on stability concerns in Italy, and currencies along the Pacific Rim—in which there's concern a flagging economy in China may have a ripple effect across the region. For U.S.-based multinationals already battling trade tensions and labor cost pressures—Caterpillar (NYSE:CAT), 3M (NYSE:MMM) and Harley-Davidson (NYSE:HOG) are among the firms pointing to such challenges during recent earnings calls—a flight to the dollar could fan the flames.
Stuck in Mud: Think you’ve had some tough weeks in the stock market lately? Imagine the plight of the pig farmer. Though many agricultural commodities have come under pressure this year due in part to the tariff battle with China, hog futures are among the ones deepest in the mud, so to speak. Prices for the front-month futures contract recently sank to one-year lows, and are down to around $57 per hundredweight, from $81 earlier this year and a five-year high of $133 posted back in 2014. A recent Wall Street Journal article noted that China—the world’s biggest pork consumer—is finding places other than the U.S. to buy the meat from, including Spain, Canada, and South America amid tariffs against U.S. pork. All this could mean higher U.S. pork supplies and maybe lower meat prices. In Arizona, for instance bacon prices are down 88 cents a pound from a year ago, according to the Arizona Daily Star. That’s good news for consumers, and also for grocery and fast food companies that can buy meat for less. It’s not such good news for big agricultural processing firms like Tyson Foods (NYSE:TSN) and Hormel (NYSE:HRL), though HRL shares are doing well this year.
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