EB Daily Market Report - Wednesday, September 2, 2020
Executive Market Summary
- Futures were strong right out of the chute once again, but this time we saw rapid, heavy volume selling in key names
- In less than 30 minutes, AAPL lost 8% of its value; in just over 24 hours, TSLA fell nearly 20%
- We've seen the overall market rise throughout the day, however, with value stocks leading
- The Volatility Index ($VIX) continues to climb, suggesting fear is on the rise
- Utilities (XLU, +3.06%), real estate (XLRE, +1.71%), and health care (XLV, +1.71%) are pacing this advance
- Energy (XLE, -0.45%) is the only sector in negative territory
- Rising fear and rotation to defensive stocks is certainly a combination to be somewhat concerned about
- A falling 10 year treasury yield ($TNX) - now back below its 20 day EMA - is also raising eyebrows
- Semiconductors ($DJUSSC) is powering forward more than 3%, more than making up for the weakness in computer hardware
Market Outlook
Will this extreme sentiment matter? I would say that it usually does, although sentiment is much better at calling bottoms than it is at calling tops. Still, there's no denying that the stock market is sending us major warning signals, but only in the short-term. Here's a reprint of the 5 day moving average of the VIX that I provided last week:
The fear is ramping up as stock prices advance and the positive correlation is very clear. It's the strongest positive correlation that we have seen in the past 5 years. The last three times we saw the positive correlation between these two (readings above 0), it did not end well for short-term longs. I believe it's prudent to be cautious - even if the stock market goes higher. We had readings like this during 2017 without much fallout in stocks, but I believe it makes sense to protect yourself after a huge advance in equities the past several months.
Sector/Industry Focus
Diversified industrials ($DJUSID) are approaching a key overhead resistance level, established back in June. Given the very bullish backdrop in equities, I fully expect we'll see the group breakout. The big question, though, is whether that breakout happens now or if we see a pause at resistance first:
ChartLists
I scanned our Strong Earnings ChartList (SECL), Strong Future Earnings ChartList (SFECL), and Strong AD ChartList (SADCL) to look at diversified industrials, which I illustrated above was approaching a major price resistance level. If the group breaks out, here are two component stocks that could benefit:
SWK:
SWK is showing strength vs. its peers, but like the DJUSID, it's approaching a major price resistance level. Should the DJUSID break above its June high, I'd look for the SWK to clear its early-2020 high.
ETN:
ETN is showing excellent relative strength and has already broken out, solid action considering the overall underperformance of its peers in 2020. Also, check out that AD line - very bullish.
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 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.
Wednesday, September 2:
BF/B, CPRT, CRWD, GSX, MDB, GWRE, SMAR, FIVE, SAIC, PVH, CLDR, PD, M, AMBA, ZUO, GES, SPWH
Thursday, September 3:
AVGO, DOCU, COO, CPB, TTC, DCI, MDLA, MOMO, PDCO, YEXT, KFY, MIK, DOMO, SIG
Economic Reports
August employment report: 428,000 (actual) vs. 900,000 (estimate)
July factory orders: +6.4% (actual) vs. +6.0% (estimate)
Happy trading!
Tom