After a seesaw session on Wednesday, major indices finished higher as the ten-year treasury yield settled comfortably above 3.00% to 3.03%. However, investors adjusting to the idea that a 3.0% yield on the ten-year isn’t the death knell for stocks is a critical part of reigniting the next rally attempt.
In addition to learning to live with higher rates, the market needs continued strong earnings and economic data. I see too many signs and signals that the economy and stock market have not peaked, nor are the current lower valuation metrics warranted.
Earnings
Without a doubt, the stock of the day was Boeing (BA), also known as the poster child of President Trump’s misguided notion of forcing smart and fair trade with China. It wasn’t known as that yesterday because the shares were higher - actually going up on good news. Going into the session, conventional wisdom (if I may call it that) was to sell into pops on good news because it couldn’t get any better than this… or so they say.
I liked yesterday’s session not because the market finished higher, but because investors fought off the urge to sell great stocks on great news.
I don’t believe this is an Orwellian groupthink thing or a Pavlovian response, but the herd is being manipulated. A lot of investors are selling, and someone was buying that weakness -witness the reversals:
- Dow: 200 points
- Netflix: 14 points
- Amazon: 45 points
Thus far, earnings season has been a smashing success with respect to actual results and guidance. This is something investors must keep in mind as they grapple with increased volatility and the anxiety that comes with trading ranges of 300 to even 700 Dow Points in a single session
Economic Proxies
As the stock market grapples with the notion that this is as good as it gets, there are so many other signs this locomotive is just leaving the station. Housing is on fire with existing and new home sales and strong earnings coming from PulteGroup (PHM) and other homebuilders. The labor shortage and higher lumber prices will continue to be a challenge, but people are saying “home sweet home,” again and that’s great.
That brings us to the stock of the day (not named Boeing) Norfolk Southern (NSC), which rallied on financial results that saw numerous records, including operating ratio, net income, and earnings per share. The key business segment was intermodal which has powered truck and rail earnings beats for the quarter. I like intermodal as a proxy for the economy, especially the online retail economy.
Intermodal Macro Drivers:
- Higher Oil Prices
- Stronger Demand
- Lower Truck Capacity (driver shortage)
Crude Gushing
The most compelling action came in the oil patch, which saw crude climb higher, even after a huge increase in inventories when a huge drawdown was expected. Crude-oil related stocks continue to act great, making energy the top performing sector.
S&P 500 Index | +0.18% | |
Consumer Discretionary (XLY) | +0.41% | |
Consumer Staples (XLP) | +0.18% | |
Energy (XLE) | +0.80% | |
Financials (XLF) | -0.07% | |
Health Care (XLV) | +0.45% | |
Industrials (XLI) | +0.29% | |
Materials (XLB) | +0.54% | |
Real Estate (XLRE) | -0.33% | |
Technology (XLK) | +0.02% | |
Utilities (XLU) | +0.02% | |
Market Breadth
Although major indices rebounded, market breadth wasn’t anything impressive:
NYSE
- 26 New Highs
- 166 New Lows
NASDAQ
- 43 New Highs
- 114 New Lows
After the close, there was a parade of earnings releases:
Stocks Rocketing Higher
- Facebook (FB) beat on revenue and posted earnings of $1.69, beating the Street by $0.34 as revenue per user surged to $5.53. There are 1.45 billion daily average users and management announced a fresh $9.0 billion buyback.
- Visa (V) beat on the top and bottom lines, allowing management to raise its full-year financial outlook.
- For Chipotle Mexican Grill (CMG), perhaps the turnaround has begun as the company saw revenue of $1.15 billion in line, but earnings of $2.13 or 36% were better than consensus.
- PayPal Holdings (PPYPL)
- O’Reilly Automotive Inc (ORLY)
Stocks Under Pressure
- AT&T (T) missed on revenue
- eBay (EBAY) missed on revenue with earnings coming in-line
Today’s Session
I’m a little surprised that equity futures aren’t higher on the strength of Facebook and other high-profile names indicating much higher before the opening bell. We have been combing through all those results, not just to assess those companies, but also for implications for the broad economy. Speaking of leadership, I’m watching the chips closely, as Micron is poised to make a huge percentage move at the start of trading.