EB Daily Market Report - Wednesday, March 4, 2020
Executive Market Summary
- Futures were quite strong this morning and the Dow Jones opened higher by roughly 2.3%
- The 10 year treasury yield ($TNX) has been volatile, but it's still down for the day, falling 3 more basis points to 0.98%
- Gold (GLD) is attracting buyers today, which is likely due to both (1) fear and (2) a weakening dollar
- The three top performing sectors are healthcare (XLV, +4.43%), utilities (XLU, +3.88%), and consumer staples (XLP, +3.22%) - defensive areas of the market
- Super Tuesday results are in with Joe Biden winning the majority of delegates and now leading Bernie Sanders in the race for Democratic presidential nomination
- The February ADP employment report showed no adverse effects from the coronavirus, exceeding expectations
- We have no active trade alerts at this time
Market Outlook
Technology (XLK) is obviously a very big part of the secular bull market, so it's probably a good idea to take a look at the sector on both an absolute and relative basis, and let's stretch that analysis out over a 3 year weekly chart:
I know many are panicking and calling this the end of the bull market. I have to say I disagree wholeheartedly. Look at the relative strength of technology shares, even during this coronavirus scare. While this serious health risk will likely have a fairly significant short-term impact on our economy and stock prices, keep in mind that market valuations are based on future earnings growth, discounted back at current market rates of interest. Interest rates have NEVER been this low and, the lower the interest rate, the higher the valuation of future earnings.
Personally, I believe these historically low interest rates, while scaring one group of investors, is encouraging another group of interest to buy these technology names at big discounts.
Sector/Industry Focus
I've discussed biotechs ($DJUSBT) a lot of late and I'm going to do it again today. The following is a 5 day chart, but it visually shows how the market is looking at the entire biotech space right now:
The inverse head & shoulders pattern is very bullish, in my view. And it's very difficult to interpret the bottom panel, which is biotech's relative price performance to the S&P 500 ($DJUSBT:$SPX), as anything other than extremely bullish. Wall Street certainly appears to be using this weakness to rotate into the group.
Active Trade Alerts
We have no active trade alerts at this time.
Strong Earnings ChartList (SECL)
I will be updating our SECL very soon, hopefully later today or tomorrow. At the latest, it'll be this weekend. After it's updated, we're almost definitely going to have more companies on this list than we've ever had before. I know many are saying the stock market is overpriced and due for a sharp correction, but our work with the SECL tells me exactly the opposite. We have a record number of companies meeting our earnings and technical criteria for inclusion, and interest rates are dropping even further, making future earnings growth even more valuable. I firmly believe when the dust settles on the coronavirus, we will see another major move higher in U.S. indices, and most likely, global indices as well. It very well could be a coiled spring, or rubber band.
As far as technology companies go, here are a few of my favorites in software ($DJUSSW):
DOCU:
NLOK:
SHOP:
AYX:
For each of these four stocks, I've provided two key support levels that could be reached if fear ramps up again and we see a quick selloff. There is no guarantee we see that type of selling, however. If you're interested in any of these names, accumulating from the current price down to those support levels might make sense for a swing trade.
On the AYX chart, I provided an accumulation/distribution line instead of the standard RSI that I typically show on my charts. The AD line on AYX is actually breaking out, even though price action is much lower. It's a clear sign to me that institutional investors are using this panic-driven selling to accumulate AYX shares.
Movers & Shakers
Here's a pharmaceutical that's having a very strong day today and is feeding off strength over the past 5 weeks or so to attempt to clear important price resistance:
To be sure, this is a very risky trade for a number of reasons. First and foremost, SNDX is already up 20% today. But these pharmas can really take off when they clear key price resistance. A second reason to be a bit cautious is that SNDX many times will trade 75,000-150,000 shares a day. That's not a lot of liquidity, although volume has picked up in recent days.
Earnings Reports
Here are the key earnings reports for this week, featuring stocks with market caps of more than $10 billion. I also include a few select companies with market caps below $10 billion. Finally, any portfolio stocks (or active trade alerts) that will be reporting results are highlighted in BOLD. An asterisk (*) is placed next to stocks that are showing excellent relative strength heading into their respective earnings report. In my judgment, I'd expect strong results and guidance, although correctly predicting which way a stock might gap after an earnings report is much more difficult. If you decide to hold a stock into earnings, please understand the significant short-term risk that you are taking. Please be sure to check for earnings dates for any companies you own or are considering owning:
Wednesday, March 4:
ZM*, BF.B, SPLK, DLTR, CPB, MRVL. Others less than $10 bil: GWRE, NAV*, BLDP*, VNET*
Thursday, March 5:
COST, CNQ, KR, COO, OKTA*, BURL*. Others less than $10 bil: VIPS*, TTC, CIEN*, DCI, TECD, ADT, HRB, BJ, PGNY*, REGI*, SGRY*
Friday, March 6:
None
Economic Reports
February ADP employment report: 183,000 (actual) vs. 165,000 (estimate)
January ADP employment report: 209,000 (revised) vs. 291,000 (original)
February PMI services index: 49.4 (actual) vs. 49.4 (estimate)
February ISM non-manufacturing index: 57.3 (actual) vs. 55.0 (estimate)
Beige book to be released at 2:00pm EST
Happy trading!
Tom