Growing Virus Fears In Asia Bring Pressure Despite Solid Earnings

If stocks fall on back-to-back days for the first time this month, you can probably blame an old culprit: COVID.

Yesterday was the biggest down day in a month, and it looks like the pullback is seeing a little follow-through, with stocks under pressure in pre-market trading despite solid earnings results. India is reporting a lot more cases, and while the U.S. has been injecting vaccine doses at a good clip, other parts of the world are struggling. We seem to have a pretty good handle on it here, but India and South America are two hotbeds.

As more earnings land, it’s becoming clear that despite optimism going in the results are actually better than expected. Several more big companies, including Procter & Gamble (NYSE:PG), Travelers (NYSE:TRV), Johnson & Johnson (NYSE:JNJ) and IBM (NYSE:IBM) have reported since the market closed yesterday, and most of the results looked impressive, especially IBM—which has been an earnings disappointment more often than not in recent years.

None of that’s helping the overall market much because stock futures extended Monday’s losses in the overnight session. It’s not too surprising to see some consolidation and profit-taking here after the long run we’ve had, but it’s been a while since the major indices fell two days in a row. You have to go back to March 29–30 for that with the S&P 500 Index.

Also, higher than expected earnings might not be packing as big a punch as normal, partly because analysts had been raising their earnings estimates before earnings season began, and at this point it’s really more about what companies forecast and less about what happened in Q1.

With stocks stepping back and COVID still creating anxiety, volatility is starting to rise. The Cboe Volatility Index (VIX) rolled past 18 this morning. It’s nothing crazy so far, and it’s also kind of what you’d expect with stocks playing defense. The main thing to watch is whether VIX starts to threaten 20 again, which might hint at more serious turbulence in the markets. Even 20 is relatively low compared with where VIX has been. It stayed above 20 for a year after the pandemic crisis hit.

Though it may feel uncomfortable (and different, let’s face it) to see stocks going down, remember that there’s nothing really dramatic happening out there to cause it and no reason to panic. As they say in baseball, keep your eye on the ball. Analysts forecast 24% earnings growth in Q1, according to FactSet, and companies are mainly outpacing analysts’ expectations. Those are good things, and recent data indicate healthiness in the economy, too. The day-to-day moves in the major indices shouldn’t knock anyone off their overall trading plans or change anyone’s minds about the firm fundamental picture.

h2 What To Watch On The Flight: Netflix And United Up Next/h2

Two big earnings highlights to watch today are Netflix (NASDAQ:NFLX), where focus is likely to be on subscriber numbers, and United Airlines (NASDAQ:UAL), where investors will listen to its call for any indications of a bottom in air travel demand.

UAL’s results bowed last night, but its conference call is this morning. UAL was an exception to analysts being too conservative. Things looked generally worse than Wall Street had expected on both top-and bottom-line for the airline, but in its release UAL did cite “emerging pent-up demand” for travel to countries where vaccinated travellers are welcome. Q1 capacity, however, was down 54% from the same quarter in 2019 before the pandemic. UAL expects Q2 capacity to be a little better, down 45% from the same quarter two years ago.

Last week, Delta Air Lines' (NYSE:DAL) earnings call offered a little optimism when their CEO said the airline is now seeing “more normal booking behavior” as customers make plans for spring and summer travel. From its release, it looks like UAL might see a similar scenario, but we’ll hopefully get a better sense of that from the call.

Lockheed Martin (NYSE:LMT) is another behemoth reporting this morning, while the transport sector receives more spotlight later today when CSX (NASDAQ:CSX) is expected to report. That might be a good chance to hear more about those supply chain backlogs some companies have been dealing with.

Stay tuned for Verizon (NYSE:VZ) and Halliburton (NYSE:HAL) tomorrow morning. HAL reports the same day as weekly crude inventories from the U.S. government. These are getting a bit more attention lately with crude prices approaching their 2021 highs and some big supply draws recently ahead of what might be a more typical summer “driving season” thanks to vaccinations. Seems like a lot of people are already out traveling.

h2 Taking A Pause, But For How Long?/h2

If you’d forgotten what a bad day feels like on Wall Street, Monday was your reminder. Losses for the major indices were the worst so far this month, but even with Monday factored in, the S&P 500 Index remains up nearly 3.5% so far in April with 10 days left on the calendar. It’s up almost 11% year-to-date.

Nothing goes straight up forever, but a day like Monday doesn’t necessarily mean the long rally is losing steam, either. One indication of continued market strength was firmness in many of the commodities like crude, lumber, and copper. These keep climbing amid a reopening U.S. economy that could provide more demand for energy, new homes, and technology products that depend on raw materials.

Another sign that Monday might have been more of a pause then a reset could be a lack of much upward movement in volatility, along with continued softness in the dollar. The recent dollar weakness—which also could be supporting higher commodity prices, by the way—might also signal that investors remain bullish about the broader markets and don’t necessarily feel the need to run toward cash as a defensive strategy.

That said, you can also find analysts out there who worry that some technical indicators, like the Relative Strength Index (RSI) , look pretty high right now, which is sometimes seen as a sign of an “overbought” market. The RSI for the SPX recently hit levels last seen in August, a month that came right before a pretty tough autumn for the market. Obviously there’s no guarantee of the same scenario happening again this time, but it might be something on peoples’ minds.

Yesterday’s selling hit the Tech market particularly hard, knocking the NASDAQ Composite down a full 1%. It’s worth noting that unlike the SPX and the Dow Jones Industrial Average, there’ve been no new highs this month for COMP, which is loaded with Tech stocks. Also, the Russell 2000 index of small-caps took it on the chin yesterday and hasn’t made a new high since mid-March.

Rising Treasury yields might have helped give Tech a pounding Monday, and Tech is under pressure again in pre-market trading Tuesday. The 10-year yield, however, is back below 1.6% after clawing above that yesterday to gain back some of the big losses it had last week.

Don’t count out the possibility that a daily dose of robust earnings results might be hard to trade against, if they continue. Seven S&P 500 companies reported Monday, and all seven beat the Street’s average earnings estimates. In addition, S&P Capital IQ raised its Q1 S&P 500 earnings growth estimate to 19.8%, from the previous 14.8%, based in part on that huge wave of positive bank earnings last week.

If there’s more weakness on Wall Street in the days ahead, look for possible technical support first at the 20-day moving average for the SPX, recently near 4045. Below that, there’s potential psychological support at 4,000 and at the 50-day of 3956 (see chart below).

Written By: TD Ameritrade