On The Cusp: With Earnings Season Just Days Away, Major Indices Retreat

(Monday Market Open) If it felt last week like you looked at your screen and then looked again an hour later and nothing had changed, that pretty much describes what’s been a slow-moving, low-volume market.

Things could change in a big way over the next few days as earnings season starts and Wall Street shakes off its spring doldrums. Big banks lead the way with a parade of results starting Wednesday (see more below). Judging from analysts’ estimates and notes, it looks like the banks had a very nice Q1. The proof is in the pudding, however.

A couple things to keep in mind before we jump into Q1 earnings include watching to see if more companies provide guidance, and tracking whether overall earnings growth can outpace analysts’ estimates like they did in Q4.

That second one might be hard because the average Street earnings growth estimate has risen sharply from earlier this year. Analysts are even more optimistic about Q2 earnings. Keep in mind, however, that comparisons are pretty easy considering we were in lockdown during part of the year-ago quarter.

What seems pretty clear going in is that if a company doesn’t match expectations, it’s likely to get crushed in the market. We saw that a lot last quarter, because coming out of a recession, investors generally expect the macro environment to lift all boats.

Some of the key companies reporting this week who will probably get the most attention include the six biggest Wall Street banks starting Wednesday, along with PepsiCo (NASDAQ:PEP) and Delta (NYSE:DAL). For more on what to look for with earnings beyond the banks, see below.

Today doesn’t feature a lot of earnings and data. However, Fed Chair Jerome Powell said on “60 Minutes” this weekend that “The outlook has brightened substantially” and that it’s “highly unlikely” the Fed would raise rates this year.

If people want something to provide an excuse for more buying, there’s arguably worse ones out there. So far, buyers are a little scarce, with major indices tracking a little off their highs of last week in overnight trading. Bonds were down slightly but not anything too dramatic, and volatility looked pretty tame.

h2 Climbing Back Aboard The FAANGs/h2

Apple (NASDAQ:AAPL) still appears to be one of the most popular stocks for retail traders, and after several months of disappointment, its shareholders are finally finding something to cheer about. The widely-held stock—which at one point last month fell almost into bear territory (down 18.6% from its recent high)—appears to be back. It’s risen 12% from last month’s low to $133, which is still down from the all-time high of $145.

It wasn’t alone in what looks like a FAANG revival going on lately. Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) , Alphabet (NASDAQ:GOOGL) and their cousin Microsoft (NASDAQ:MSFT) have all been on the move lately. Even a hot read last Friday on March producer prices didn’t cool things off for the Tech sector, despite a lot of the recent downturn being blamed on inflation worries.

It’s hard to read exactly what’s going on (though AMZN might have gotten some help Friday from a failed vote by its workers in Alabama to unionize), but some analysts say the initial move into “value” and cyclical stocks that began late last year when the vaccines got approved might be having its last fling. Investors, sensing this, appear to be moving back into perceived “high quality” growth stocks for the next stage of the economic cycle.

That’s one explanation, anyway. Another is that the Treasury yield parade basically got halted over the last week or two, suggesting the so-called “bond vigilantes” are either taking a break or got convinced that the Fed is right when it says current rising levels of inflation are probably “transitory.”

For a while there, the yield was moving up more than a basis point a day, but since touching a 14-month high of 1.78% on March 29, it’s been very quiet on the Treasury front. The 10-year yield finished near 1.66% on Friday, basically unchanged for the week and unable to test what some analysts see as a key resistance point near 1.72%. Support is seen at 1.6%, by the way, but there hasn’t been much traction in bond buying when yields have fallen near that level, lately.

So apparently we’re a bit stuck in place, which is allowing growth and particularly Tech stocks to benefit. Many of those shares got pounded last month by worries about rising yields that could eat into future profit and margins.

The interesting thing, technically, is that the yield rally seems to be running into thin air right where it did in Q4 of 2019, if you can remember that far back before the pandemic. It spent weeks that Fall testing levels above 1.9% and failing to hit 2%. It hasn’t been above 2% since early August of that year. We’ll see if this time it can break through, but so far that same resistance from way back then appears to be holding up. For now.

h2 Brick And Mortar Boost/h2

Tech wasn’t the only sector that got a nice boost late in the week. Brick and mortar retailers had a very nice Friday as Ralph Lauren (NYSE:RL), Gap (NYSE:GPS), L Brands (NYSE:LB), and PVH (NYSE:PVH)—owner of brands like Tommy Hilfiger, Calvin Klein, and IZOD—jumped.

The reopening trade, so to speak, doesn’t appear to be running out of steam despite mounting COVID cases in parts of the country. That caseload remains something to keep an eye on this week, especially with talk of new shutdowns starting to flare up in places.

Retailers are probably benefitting from ideas that those stimulus checks might be getting spent on clothes and other personal items. We’re still a month out from the main part of retail earnings season, but Bed, Bath & Beyond (NASDAQ:BBBY) does report later this week and might be able to provide a view from the ground.

While Tech and retail revived, volatility continued to sag last week. The Cboe Volatility Index (VIX) finished the week below 17, the first time that’s happened since mid-February 2020. Remember that the VIX tends to trade in ranges of around five points on the chart, meaning it spent a lot of time between 25 and 30, then between 20 and 25.

Now it looks like it’s taking another leg downward to between 15 and 20, and the low end of that is typically a level that’s hard to stay under for long. Any sign of VIX moving higher during a stock rally should be considered a warning, because when that happens either volatility or stocks often changes direction.

With that in mind, you might find some investors who don’t feel convinced by last week’s rally to all-time highs for the S&P 500 Index ({{166|SPX}) because those highs came on weak volume. Typically, it’s more convincing when you make new highs with heavy volume, but we’re coming out of a period where many people appeared to be taking spring break or just stepping away ahead of earnings.

Volume is likely to start moving back to more normal levels this week and next when earnings season gets underway, meaning people might put more stock, so to speak, in any market move.

The other thing worrying some investors is what’s called “flow” of money into markets, which according to BofA Securities—an American multinational investment banking division under the auspices of Bank of America—indicated that total global equity inflows over the past five months ($576 billion) has exceeded total inflows for the past 12 years ($425 billion).

That could be a bit worrisome because it leads to thinking that maybe there’s not as much money left on the sidelines to take stocks to another level from here. However, it’s very difficult to assess that sort of data, so no one should jump to conclusions.

Looking ahead at data this week, the consumer price index (CPI) is a big one to watch (see more below). The other major data point this week is retail sales. With so much stimulus to the economy and government checks hitting peoples’ mailboxes, it seems possible March could have been a banner shopping month following a weak February slammed by winter storms. Did the stimulus checks go right to retailers? We’ll find out Thursday.

h2 Chart Of The Day: FAANGS Sharpened/h2

After a rough March, the so-called “FAANG” stocks ($NYFANG:IFUS—candlestick) roared back starting late that month and into April. They appeared to be getting some traction from a flattening out in the 10-year Treasury yield that began around the time April opened. Can these FAANG stocks stay hot if the yield starts climbing again? Data Sources: NYSE, Cboe Global Markets (NYSE:CBOE). Chart source: The thinkorswim® platform . For illustrative purposes only. Past performance does not guarantee future results.

h2 Big Finance In The Spotlight/h2

Earnings season gets officially underway with JP Morgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), and Wells Fargo (NYSE:WFC) on Wednesday, followed by Morgan Stanley (NYSE:MS), Bank of America (NYSE:BAC) and Citigroup (NYSE:C) later this week.

We’ll be previewing all these companies in separate articles, but in a nutshell, it looks like a solid Q1 for many if not most of the big players. The sector got slammed with body blow after body blow the last five years and still hung in there, like a boxer taking its lumps but refusing to go down. Now, fundamentals are finally going the big banks’ way, and earnings results are likely to reflect that.

Blistering Treasury yields, cutbacks on “loan reserves” that the banks put aside during the pandemic in case of default, and government stimulus designed to spur business and consumer spending all could play right into banks’ sweet spot, with Q1 being the time period where a lot of that started going straight to the bottom lines.

The earnings projections from Wall Street for all six of these banks look out of this world as far as year-over-year earnings comparisons, though it’s worth noting most of them have rallied pretty hard the last few months and might have built in a lot of the enthusiasm already. Fasten your seatbelts.

h2 Beyond The Banks/h2

As a reminder, it’s not just the big banks reporting earnings later this week. A bunch of other major companies, including many in the consumer discretionary and transport sectors, also open the books. BBBY might have had its quarter benefit from strong demand for furnishings as people who can’t spend as much on travel or restaurants decide to redecorate instead.

The Dow Jones Transportation Average got off to a strong start this year and is up almost 80% over the last 52 weeks as investors await earnings from Delta Air Lines (NYSE:DAL), JB Hunt Transport Services (NASDAQ:JBHT), and Kansas City Southern (NYSE:KSU).

Listen on the transport calls for any feedback on supply chain issues that recently began to be a problem for some companies and could be contributing to that loud producer inflation reading we got on Friday. .

h2 Speaking Of inflation/h2

The March consumer price index (CPI) is scheduled for today, and is likely to get a very close look after that big 1% month-over-month jump in producer prices last month (which was way above analyst expectations for 0.5%). There’s always concern that eventually producers could be forced to pass along some of those higher prices to consumers, and also that higher producer prices could weigh on margins down the road for companies that buy raw materials for their products.

Things may be even more worrisome than the headline number indicated. As research firm Briefing.com observed:

“The key takeaway is the pipeline pressures evident in the index for processed goods for intermediate demand, which increased 4% month over month in March (the largest jump since August 1974), and in the index for unprocessed goods for intermediate demand, which surged 9.3% month over month (the highest since November 2006).

“Those large increases point to inflation issues that are apt to linger for producers and which could potentially spill over into consumer prices."

Looking back, CPI rose 0.4% in February, so any major jump from there might get a fish-eye, especially if it’s above the Street’s average estimate of 0.5%.

Good Trading

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Written By: TD Ameritrade