EB Daily Market Report - Tuesday, May 26, 2020
Executive Market Summary
- Futures soared overnight as the U.S. stock market seems to be looking beyond COVID-19
- In what's becoming more and more common, beaten-down areas are leading today's surge
- The Dow Jones is our leading index, rising 628 points, or 2.53%, moving past 25,000 in the process
- It's fashionable to be an airline ($DJUSAR, +10.73%) or recreational services company ($DJUSRQ, +9.21%) today
- Financials (XLF, +4.88%) and industrials (XLI, +4.09%) are the best performing sectors
- All 11 sectors are higher, but health care (XLV, +0.54%) and technology (XLK, +0.74%) trail
- Only a handful of industry groups are lower, so there's broad participation, but recent laggards definitely have the upper hand
- The 10 year treasury yield ($TNX) is up 5 basis points to 0.71%
- New home sales crushed estimates, a big surprise to many, including me
Market Outlook
I cannot even begin to tell you how bullish I am given the market developments today. Yes, the Weak AD ChartList is crushing the Strong AD ChartList today, but that's okay. The fact that the beaten-down stocks in our indices are rallying and breaking out is a signal from Wall Street that these companies have been oversold due to this pandemic. In other words, the original thoughts about how badly these companies would be impacted by the virus now appear to be overblown. Wall Street is re-valuing these companies and they're rising rapidly. While it would obviously be better to own these companies (which I don't), I am even more bullish about the overall market prospects by what I'm beginning to see from these companies.
Small caps ($SML) are up more than 4% today and threatening a very significant breakout:
I love seeing the more aggressive small caps beginning to lead and threatening to break out. A close today over 806 adds to the overall market bullishness that I've been discussing for several weeks.
Sector/Industry Focus
Two of the industry groups that would likely be crushed if the virus extended into the fall and winter months and a second wave of cases surged would be airlines ($DJUSAR) and cruise lines, which are part of recreational services ($DJUSRQ). These two groups are soaring today, especially the latter. Check out the DJUSRQ chart:
Let me be clear. I am in no way suggesting that I'd rush out and load up on cruise line stocks. But it is clear to me that Wall Street is looking at this group differently than it was a few weeks ago.....and that's good news for the entire market in my view.
The smart folks on Wall Street have access to some of the best health care experts on the planet. If they're buying airlines and cruise lines, that simply makes me feel better about my prospects holding companies in other areas of the market.
ChartLists
I reviewed each of the following ChartLists that we maintain here at EarningsBeats.com and found several very interesting trading candidates.
Strong Earnings ChartList (SECL):
I wrote about clothing & accessories ($DJUSCF) strengthening on Friday. The following stock has been a leader in that space and continues to post impressive quarterly results. Despite its group's shortcomings the past few months, LULU has broken out to an all-time high:
While I typically don't like to trade stocks in weak industry groups, stocks like LULU are exceptions. LULU is a leader among its peers and is easily outperforming the benchmark S&P 500. The breakout is simply further confirmation that you own a winning stock, especially in this current environment.
Strong AD ChartList (SADCL):
Many companies on this ChartList benefited from the pandemic as we began to experience a paradigm shift to online collaboration, online retail, at home exercise, take out food, biotech stocks, etc. As Wall Street looks to revalue companies that it severely punished in March and April, many of these Strong AD ChartList stocks will see some fallout - and already are. I believe it will present opportunities as these companies fall to key support levels. I fully expect that the secular bull market I've been discussing throughout the pandemic is in the early stages of resuming. We may hit all-time highs much quicker than I anticipated. I try not to ignore the messages sent by Wall Street. As I've said on many occasions, the stock market is the best leading economic indicator. Never underestimate the power of its message and what it sees at it looks out over the economic horizon.
As far as opportunities on this ChartList, we're already seeing them develop. Watch for key 20 day EMA tests, or perhaps even 50 day SMA tests. Reversing candles off recent downtrends could provide setups for significant reversals and rallies. Here are two to consider:
ZM:
ZM is extremely volatile, so if risky trades are not your style, I would certainly avoid this one. The blue circle represents the start of a reversal that I wrote about in a DMR at that time. We've now reached resistance and are pulling back. I suspect we'll see the rising 20 day EMA hold as support with earnings just a week away (June 2nd after the close).
GH:
The support range is from 87-89 and the rising 20 day EMA is just above this area. Eventually, I see a return back to test the recent highs before breaking out again. I happen to like the biotechs ($DJUSBT) quite a bit as we move through the summer months as well.
Weak AD ChartList (WADCL):
I would look for stocks breaking out here, but be careful if reversals hit at the close today. I ran a scan of unusually heavy volume against this ChartList, then looked to see which were breaking out or on the verge of doing so. Here are two examples:
CAR:
Travel & tourism stocks ($DJUSTT) are getting hotter and CAR could benefit with a breakout.
RL:
RL is no LULU in terms of relative strength among clothing & accessories stocks ($DJUSCF), but it's up 10% today and nearing a critical area of resistance. It would be bullish to see a breakout confirm on heavy volume. Volume is solid today. Of particular note, RL will be reporting earnings tomorrow.
Short Squeeze ChartList (SSCL):
The only thing I'd look for here are breakouts. We want short sellers to become emotional and add to the buying pressure. In Friday's DMR, I mentioned TWTR. Here are three others that you might find interesting, although the first one has already made the breakout:
BGFV:
The breakout here has already occurred, but is a great example to show what we're looking for. The volume surged and key price resistance was cleared. That begins to put pressure on short sellers to cover (buy). Then buying begets more buying.
TDG:
TDG has been a leader in the weak aerospace group ($DJUSAS), but if these areas begin to show relative strength, a stock like TDG could really begin to move, especially with the help of short sellers covering their positions.
WYNN:
WYNN has been trending higher, and while it hasn't been the best gambling stock ($DJUSCA), it is moving closer and closer to a critical area of resistance at 90. Keep this one on your radar. I wouldn't anticipate a breakout in any stock that's heavily shorted, but I'd definitely be paying attention if a breakout occurs.
Earnings Reports
Here are the key earnings reports for today and tomorrow, 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. 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:
Tuesday, May 26:
BNS, AZO, KEYS, HEI, BAH, PLAN
Wednesday, May 27:
RY, ADSK, WDAY, BMO, HPQ, VIPS, NTAP, RL, NTNX, TOL
Economic Reports
March Case-Shiller HPI: +0.5% (actual) vs. +0.3% (estimate)
March FHFA house price index: +0.1% (actual) vs. +0.6% (estimate)
May consumer confidence: 86.6 (actual) vs. 88.3 (estimate)
April new home sales: 623,000 (actual) vs. 495,000 (estimate)
Happy trading!
Tom