Markets Recover Some Losses, While Eyeing Georgia

Stocks gained on Tuesday (Jan. 5) after the major indices all sold off to start the year on Monday (Jan. 4).

News Recap

  • The Dow Jones closed 167.71 points higher, or 0.6%, at 30,391.60. The S&P 500 advanced 0.7% and the Nasdaq climbed nearly 1%
  • The Georgia Senate run-off elections on Tuesday (Jan. 5) were the main focus of investors. At the time of publication, Democrat candidate Raphael Warnock was declared the winner over the incumbent Republican Kelly Loeffler for the first Senate seat up for grabs. The other contested seat between Democrat Jon Ossoff and incumbent Republican David Perdue had yet to be called.
  • The balance of power in the Senate depends on these results and markets could be volatile. Many believe that if the Democrats sweep the Georgia seats and win control, then higher taxes and progressive policies could hurt the market. On the other hand, others believe that a Democrat sweep could bring on larger and quicker stimulus relief.
  • Better-than-expected ISM U.S. manufacturing data came in and helped stocks higher. According to the ISM, manufacturing rose to 60.7 in December from 57.5 in November. The consensus was that the index would slightly decline to 57.
  • Energy stocks led the S&P higher and soared by 4.5% after Saudi Arabia agreed to voluntary production cuts in February and March. Oil giants such as Chevron (CVX) rose 2.7% as a result.
  • Oil futures surged by 4.9% and briefly broke past $50 a barrel for the first time since February.
  • Copper is a precious metal traditionally seen as a leading indicator for the global economy. On Tuesday (Jan. 5), it hit its highest level in nearly eight years and gained more than 2%.
  • Gold also reached an 8-week high due to more declines from the dollar.
  • Boeing (BA) was the best-performing Dow stock and gained 4.4%.
  • U.K. Prime Minister Boris Johnson on Monday (Jan. 4) announced a national lockdown to slow the spread of a new, more contagious, coronavirus strain. Under these restrictions, people are only allowed to leave their homes for essentials, work (if they can’t from home) and exercise. Most schools, including universities, will also move to remote learning.
  • According to data compiled by Johns Hopkins University , more than 85 million COVID-19 cases have been confirmed globally, including 20.8 million in the U.S. and 2.7 million in the U.K.
  • Meanwhile, over 5 million people in the U.S. have now received a COVID-19 vaccination.

After stocks sharply dropped on Monday (Jan. 4) to kick off 2021, widespread gains on Tuesday (Jan. 5) offset some of these losses. While Monday (Jan. 4) was the first time since 2016 that the Dow Jones started a year off with declines, two major catalysts sent the major averages higher: the oil production agreement reached between OPEC and Russia, and better than expected manufacturing results from December.

This tug of war between good news and bad news can be expected in the early part of this new year. Although Monday (Jan. 4) witnessed a sharp pullback (and in my opinion, a predictable one), Tuesday (Jan. 5) witnessed a reversal. In general, though, I still believe that markets have overheated and that between now and the end of Q1 2020, a correction could likely happen.

Markets have overheated, and I believe that much of the good news ranging from economic stimulus to vaccines has been baked in. Eventually, the reality on the ground will outweigh the positive news in the short-term.

National Securities’ chief market strategist Art Hogan put it best in my opinion, saying that he believes we could see a 5%-8% pullback as early as this month. Hogan said that

“we have a tug of war between virus news and vaccine news the better part of six months, and that’s been balanced off by stimulus…That seems to be behind us, and right now I think the virus news takes over a little bit.”

Additionally, if the Georgia elections on Tuesday (Jan. 5) go as I think they’ll go (Democrat sweep), it could be a short-term catalyst leading to a potential correction. The balance of power in the U.S. Senate is at stake with these elections. Investors are likely to prefer a divided Senate. If the Democrats sweep and wrestle away Senate control from the Republicans, it could leave President Biden’s powers largely unchecked, and enable him to pass more ambitious, progressive, and less market-friendly policies.

At the time of this publication, Democrat candidate Raphael Warnock was declared the winner over the incumbent Republican Kelly Loeffler for the first Senate seat up for grabs. The other contested seat between Democrat Jon Ossoff and incumbent Republican David Perdue had yet to be called.

According to John Stoltzfus , chief investment strategist at Oppenheimer Asset Management , the S&P 500 could fall by 10% if the Democratic candidates sweep the Georgia runoffs.

“It is thought by not just a few folks on Main Street as well as on Wall Street that if tomorrow’s run-off results in a sweep for the Democrats — providing them with control of the Senate as well as the House — that it would bode ill for business with the likelihood that corporate tax rates could rise substantially,” Stoltzfus said.

On the other hand, a Democrat sweep could mean potentially larger stimulus packages – and soon.

There is optimistic potential, but the road towards normality will hit inevitable speed bumps and uncertainty. This Senate election and the potential market reactions reflect that.

If and when a correction does happen, I believe it will be healthy and a good thing. Corrections are normal market behaviors and happen more frequently than most realize. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017). Since we have not had one since March 2020, I believe we are long overdue, and the catalysts are there. Most importantly though, a correction could be a great buying opportunity for what I believe will be a strong second half of the year.

While there will certainly be short-term bumps in the road, I love the outlook in the mid-term and long-term once vaccines become more widely available. The pandemic is awful right now, and these new infectious strains are quite concerning. But despite this, I believe the positive manufacturing data released on Tuesday (Jan. 5) is a step in the right direction, especially considering all the restrictions that most countries are living through.

The consensus is that 2021 could be a strong year for stocks. According to a CNBC survey which polled more than 100 chief investment officers and portfolio managers, two-thirds of respondents said the Dow Jones will most likely finish 2021 at 35,000, while five percent also said that the index could climb to 40,000.

Therefore, to sum it up:

While there is long-term optimism, there are short-term concerns. A short-term correction between now and Q1 2021 is very possible. But I do not believe, with conviction, that a correction above ~20% leading to a bear market will happen.

Driving

Small-Caps (IWM)

Figure 1 – iShares Russell 2000 ETF (IWM)

After seeing a sharp pullback since Christmas week, the Russell 2000 briefly returned to its winning ways on Tuesday (Jan. 5). The IWM Russell 2000 ETF which tracks the small-cap index witnessed a 1.55% gain – its best day in a while.

Although I genuinely love small-cap stocks in the long-term as the world will eventually reopen, I believe that in the short-term the index has overheated. Until the start of this week, the RSI for the IWM Russell 2000 ETF was at an astronomical 74.54. Although the RSI is at a more manageable 62.84, I still believe that the party of seeing vertical gains is over for now.

Small-caps in the short-term will be more sensitive to bad news, and right now there is a lot. Vaccine gains have possibly been baked in by now and stocks just don’t go up vertically the way that the Russell 2000 did between November and late December. It is very possible that small-caps in the near-term could trade sideways before an eventual larger pullback. I truthfully hope small-caps decline a minimum of 10% before jumping back in for long-term buying opportunities.

For now, SELL and take short-term profits if you can – but do not fully exit positions .

If there is a pullback, this is a STRONG BUY for the long-term recovery.

Diving

US Dollar ($USD)

Figure 2 – U.S. Dollar ($USD)

I have zero faith in the U.S. Dollar as a safe asset, even if we may see some short-term volatility and “risk-off” trades. I still am calling out the dollar’s weakness after several weeks despite its low levels. I expect the decline to continue as well thanks to a dovish Fed.

Any time the U.S. Dollar rallies, it is simply “fool’s gold.” Since I started doing these newsletters about a month ago, I have consistently said that any minor rally the dollar would experience would be a mirage. Since the dollar briefly pierced the 91-level on December 9th, it has fallen over 1.8%. Despite the dollar experiencing another mini-rally and nearly piercing the 91-level again on December 22, I remained steadfast in my bearish outlook of the dollar. Since the open on December 23rd, the U.S. Dollar has declined another 1.25%. I believed the dollar would drop back below 90 before the new year, and here we are to start off 2021 with the dollar at 89.41. Since hitting a nearly 3-year high on March 20th, the dollar has plunged nearly 13.8% while emerging markets, foreign currencies, precious metals, and cryptocurrencies continue to strengthen. Gold for example reached an 8-week high on Tuesday (Jan. 5)

On days when COVID-19 fears outweigh any other positive sentiments, dollar exposure might be good to have since it is a safe haven. But in my view, you can do a whole lot better than the U.S. dollar for safety.

I have too many doubts on the effect of interest rates this low for this long, government stimulus, strengthening of emerging markets, and inflation to be remotely bullish on the dollar’s prospects over the next 1-3 years. Meanwhile, the US has $27 trillion of debt, and it’s not going down anytime soon.

Another headwind to consider for the dollar is the Georgia Senate election. If Democrats sweep, there could be more aggressive stimulus in the near term. With Democrats controlling both the House and the Senate, more stimulus could be bearish for the dollar.

Additionally, according to The Sevens Report , if the dollar falls below 89.13, this could potentially raise the prospect of a further 10.5% decline to the next support level of 79.78 reached in April 2014. With the dollar now at 89.41, we are coming dangerously close.

The dollar’s RSI is also nearly oversold once again and is trading significantly below both its 50-day and 200-day moving averages.

For now, where possible, HEDGE OR SELL USD exposure.

Thank you for reading today’s free analysis. I encourage you to sign up for our daily newsletter – it’s absolutely free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matthew Levy, CFA, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Levy is not a Registered Securities Advisor. By reading Matthew Levy, CFA’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading, and speculation in any financial markets may involve high risk of loss. Matthew Levy, CFA, Sunshine Profits’ employees, and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Dow, S&P Dip Again on Lockdown Fears

Stocks closed largely down on Monday (Dec. 14) as fears of stricter lockdowns outweighed vaccine optimism.

News Recap

  • The Dow Jones closed lower by 185 points, or 0.5% after earlier rising by as much as 200 points and hitting a record intraday high. The S&P 500 also declined by 0.4%, while the Nasdaq outperformed and gained 0.5%. The small-cap Russell 2000 once again rose, gaining 0.26%.
  • Although the day started with optimism as Pfizer began the rollout of its vaccine, comments from New York City Mayor Bill De Blasio put pressure on the Dow and S&P, and spooked investors about further lockdowns. De Blasio warned earlier in the day that New York could experience a “full shutdown” soon, due to infection levels not seen since May.
  • There is some cautious optimism that some sort of stimulus could be passed before the end of the year, however, congress remains deeply divided on several fronts. Namely, these partisan divides stem from liability protections for businesses, the scope of state and local aid, and weekly unemployment benefits.
  • We have reached the deadliest weeks of the COVID-19 pandemic. More than 300,000 total COVID-related deaths have now been confirmed in the U.S., with over 16 million confirmed cases.
  • After the U.S. FDA. officially cleared Pfizer (PFE) and BioNTech’s (BNTX) vaccine last Friday (Dec. 11), the roll-out officially began on Monday (Dec. 14). The first doses were administered to healthcare workers and nursing home staffers. Approximately 2.9 million doses were shipped to 636 sites across the country. Pfizer also said it would roll out a second batch of 2.9 million doses shortly after this initial batch. The FDA is also slated to publish its assessment on Moderna’s vaccine this week, before mass deployment.
  • Despite the start of the vaccine roll-out, shares of Pfizer and BioNTech both sharply fell 4.65 and 14.95%, respectively.
  • Companies dependent on an economic reopening lagged the “stay-at-home” and tech winners from early on in the pandemic. United Airlines (UAL) dropped 3.4% and Chevron (CVX) fell 3.26% compared to Netflix (NFLX) which gained over 3.8%, and Amazon (AMZN) which popped more than 1%.
  • Tesla (TSLA) also surged 4.90% as investors anticipate its inclusion into the S&P 500 after this week.

While the short-term may see some pain and/or mixed sentiment, the mid-term and long-term optimism is certainly very real. Overall, the general consensus between market strategists is to look past short-term painful realities and focus more on the longer-term – a world where COVID-19 is expected to be a thing of the past and we are back to normal.

According to Robert Dye, Comerica Bank Chief Economist : “I am pretty bullish on the second half of next year, but the trouble is we have to get there…As we all know, we’re facing a lot of near-term risks. But I think when we get into the second half of next year, we get the vaccine behind us, we’ve got a lot of consumer optimism, business optimism coming up and a huge amount of pent-up demand to spend out with very low interest rates.”

Other Wall Street strategists are bullish about 2021 as well. According to a JPMorgan note to clients released on Wednesday (Dec. 9), a widely available vaccine will lift stocks to new highs in 2021:

“Equities are facing one of the best backdrops for sustained gains next year,” JPMorgan said. “We expect markets to be driven by recovery from the COVID-19 crisis at the back of highly effective vaccines and continued extraordinary monetary and fiscal support.”

JPMorgan’s S&P 500 target for 2021 is 4,400. This implies a nearly 20% gain.

On the other hand, for the rest of 2020, and maybe early on into 2021, markets will wrestle with the negative reality on the ground and optimism for an economic rebound.

Additionally, the rally since election week invokes concerns of overheating with bad fundamentals. Commerce Street Capital CEO Dory Wiley advised caution in this overheated market. He pointed to 90% of stocks on the NYSE trading above their 200-day moving average as an indication that valuations might be stretched:

“Timing the market is not always well-advised and paring back can miss out on some gains the next two months, but after such good returns in clearly a terrible fundamentals year, I think taking some profits and moving to cash, not bonds, makes some sense here,” he said.

In the short-term, there will be some optimistic and pessimistic days. Some days, like Monday (Dec. 14), will reflect what the broader “pandemic” trend has been – cyclical and recovery stocks lagging, and tech and “stay-at-home” stocks leading. On other days (and in my opinion this will be most trading days), markets will trade largely mixed, sideways, and reflect the uncertainty. However, if a stimulus deal passes before the end of the year, it could mean very good things for short-term market gains. It is possible that there could be a minor compromise reached before the end of the year, however, a more large-scale comprehensive package may not be agreed to until 2021.

In the mid-term and long-term, there is certainly a light at the end of the tunnel. Once this pandemic is finally brought under control and vaccines are mass deployed, volatility will stabilize, and optimism and relief will permeate the markets. Stocks especially dependent on a rapid recovery and reopening, such as small-caps, should thrive.

Due to this tug of war between sentiments, it is truly hard to say with conviction whether another crash or bear market will come.

Therefore, to sum it up:

While there is long-term optimism, there is short-term pessimism. A short-term correction is very possible. But it is hard to say with conviction that a big correction will happen.

On Pessimistic Days, Tech is Crucial…But There are Concerns

Tech shares led the markets on Monday (Dec. 14) and reflected a return of the “stay-at-home” trade – possibly due to Mayor De Blasio’s “shut down” comments about New York City. However, I believe these are short-term moves rather than a return of long-term trends. I do not believe there is “market nostalgia” for the way the indices traded largely from April through the end of October.

Although I believe tech exposure is important during pessimistic trading days, I have many concerns about tech valuations and their astoundingly inflated levels. Last week’s IPOs of DoorDash (DASH) and AirBnB (ABNB) reflect this and invoke traumatic memories of the dotcom bubble era. I believe that more pullbacks along the lines of last Wednesday (Dec. 9) are inevitably coming in the short-term and would make me feel far more confident about initiating tech positions at lower valuations for the long-term.

After exceeding an overbought RSI level of 70, the pullback last Wednesday (Dec. 9th) brought it back down to a healthier level. While its current RSI of 63.30 is still pretty high, it is not quite overbought and still a hold. But monitor this . If the index goes on another bull-run and exceeds 70, then you may want to consider selling some. While an overbought RSI does not automatically mean a trend reversal, it does not help the overvaluation of the market and possible correction. The NASDAQ’s pullback last Wednesday (Dec. 9), after it exceeded a 70 RSI, reflects that.

The decline in volume since the start of the month is also quite concerning for volatility purposes. Low volume, especially a declining trend, means that there are fewer shares trading. Lower volume also means less liquidity across the index, and an increase in stock price volatility.

On pessimistic days, like Monday (Dec. 14), having NASDAQ exposure is crucial because of all the “stay-at-home” stocks that trade on the index. However, positive vaccine news always induces the risk of downward pressure on tech names – both on and off the NASDAQ. But what concerns me most are sharp sell-offs due to overheating and mania. Don’t ever let anyone tell you “this time is different” if fears of the dot-com bubble are discussed. History repeats itself – especially in markets.

It is very hard to say with conviction to sell your tech shares though. A further correction would not shock me in the least. But again, there is so much unpredictability right now, and truly anything could happen. The one thing I can confidently say though, is that if the RSI exceeds 70 again, then you should consider selling. For now, however, the NASDAQ stays a HOLD .

For an ETF that attempts to directly correlate with the performance of the NASDAQ, the Invesco QQQ ETF (QQQ) is an excellent option.

Thank you for reading today’s free analysis. I encourage you to sign up for our daily newsletter – it’s absolutely free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matthew Levy, CFA, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Levy is not a Registered Securities Advisor. By reading Matthew Levy, CFA’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading, and speculation in any financial markets may involve high risk of loss. Matthew Levy, CFA, Sunshine Profits’ employees, and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Record High Markets, Despite Poor Jobs Report

The markets closed the week at record highs and booked weekly gains for the fourth time in five weeks. This comes despite a disappointing U.S. jobs report.

News Recap

  • The Dow Jones gained 248 points, or 0.83, the S&P 500 gained 0.9%, and the Nasdaq advanced 0.7%. All three indices posted both intraday and closing record highs. Meanwhile, the small-cap Russell 2000 also closed at a record high and once again led the markets with gains of 2.2%.
  • The November jobs report grossly disappointed and came well short of estimates. The report stated that the U.S. added 245,000 jobs compared to the consensus estimate of 440,000.
  • November’s unemployment rate matched expectations and fell to 6.7% from 6.9%.
  • The US trade deficit widened to $63.1 billion in October from a revised $62.1 billion. Market expectations placed this number at $64.8 billion.
  • New data was encouraging for US factory orders. New orders for US manufactured goods beat expectations and jumped 1% from a month earlier. This marks the 6th consecutive month of rising factory orders.
  • As COVID-19 numbers continue to reach record highs in new infections, single-day deaths, and hospitalizations, a report from Thursday that Pfizer may have issues rolling its vaccine out was quite concerning . Judging by the markets’ performance on Friday, however, investors are not overly concerned.
  • Stimulus talks continued for another day as Republicans and Democrats attempted to break a stalemate and pass a relief package before the end of the year.
  • Chevron and Caterpillar each rose 3.9% and 4.3%, respectively, and led the Dow higher.
  • Energy was the best-performing S&P 500 sector, gaining 5.4%.
  • Friday’s jump led to the major indices booking their fourth weekly gain in five weeks. The Dow rose 1%, the S&P 500 gained 1.7%, and the Nasdaq rallied 2.2%. The Russell 2000 also gained over 2% this week.

In the short-term, there will be optimistic days where investors rotate into cyclicals and value stocks, and pessimistic days where there will be a broad sell-off or rotation into “stay-at-home” names. On other days, like Friday, the markets will broadly rise without any one specific catalyst.

In the mid-term and long-term, there is certainly a light at the end of the tunnel. Once this pandemic is finally brought under control and vaccines are mass deployed, volatility will surely stabilize, and optimism and relief will permeate the markets. In fact, CNBC personality Jim Cramer said that beating COVID-19 would feel like “the end of prohibition.” Stocks especially dependent on a rapid recovery and reopening such as small-caps should thrive.

Markets will continue to wrestle with the negative reality on the ground and optimism for an economic rebound in 2021. While more positive vaccine news continues to trickle in day by day, there is still discouraging COVID-19 news, economic news, and geopolitical news to consider. Amidst the current fears of a double-dip recession with further COVID-19-related shutdowns and no stimulus, it is very possible that short-term downside persists. However, it’s encouraging that Democrats and Republicans are speaking again, and if a stimulus deal passes before the end of the year, it could mean more market gains.

Due to this tug of war between good news and bad, any subsequent move downwards will likely be modest in comparison to the gains since the bottom in March and since the start of November. It is truly hard to say with conviction that another crash or bear market will come. If anything, the constant wrestling match between sentiments will keep markets relatively sideways.

Therefore, to sum it up:

While there is long-term optimism, there is short-term pessimism. A short-term correction is very possible, but it is hard to say with conviction that a big correction will happen.

The S&P, which has seen three record closing highs this week, has skyrocketed to unprecedented levels at a breakneck pace. However, there are a few indicators that show that the S&P could face some near-term volatility after this run, but again, it is hard to say with conviction there will be a major downturn.

The RSI of 67.96 keeps the S&P in a HOLD category. However, it is certainly higher than it was to start the week and continues creeping towards an overbought 70 level.

The volume has stayed relatively stable since Thanksgiving though. While the sharp decline in volume after November 9th was concerning, especially relative to its record closes, the stabilization is encouraging.

Low volume, especially a sharp drop in volume, means that there are fewer shares trading. Lower volume also means less liquidity across the index, and an increase in stock price volatility. Therefore, this stabilization of volume adds some confidence in the volatility of the index.

Because of how far and fast the S&P 500 has risen, a further pullback from these elevated levels would not be a shock… but another surge based on good news would not be a shock either. Because of all of the uncertainty, a HOLD for the S&P is an appropriate call. For an ETF that attempts to directly correlate with the performance of the S&P, the SPDR S&P ETF (SPY) is a good option.

Thank you for reading today’s free analysis. I encourage you to sign up for our daily newsletter – it’s absolutely free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matthew Levy, CFA, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Levy is not a Registered Securities Advisor. By reading Matthew Levy, CFA’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading, and speculation in any financial markets may involve high risk of loss. Matthew Levy, CFA, Sunshine Profits’ employees, and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

AstraZeneca’s Vaccine Trial Results Boost Markets

AstraZeneca Reported Encouraging Trial Results But Its Stock Is Set To Open Lower

AstraZeneca has just reported that its COVID-19 vaccine had efficacy of up to 90%.

The company tested two dosing regimens. The first one, which showed efficacy of 90%, included a half dose of the vaccine followed by a full dose a month later. Interestingly, the second regimen, which included two full doses separated by a month, showed efficacy of just 62%.

AstraZeneca’s shares are down by more than 1% in premarket trading as traders focused on the headline efficacy rate of 70% which included results of both dosing regimens.

However, the world has just received another COVID-19 vaccine, and the markets can’t ignore it. S&P 500 futures are gaining more than 0.5% in premarket trading as traders believe that mass vaccination will soon provide huge support to the economy.

PMI Reports Indicate That The Services Segment Is Under Pressure

Soon after the market open, traders will have a chance to evaluate flash PMI reports for November. U.S. Manufacturing PMI is projected to decline from 53.4 to 53, while Services PMI is expected to decrease from 56.9 to 55. Numbers above 50 show expansion so PMI reports are projected to show that the economic recovery continues at a healthy pace.

PMI reports from other countries, which were released earlier today, indicated that services were hit hard by the second wave of the virus.

In the UK, Services PMI declined from 51.4 in October to 45.8 in November but remained well above the analyst consensus of 42.5. Meanwhile, Euro Area Services PMI declined from 46.9 to 41.3 compared to analyst consensus of 42.5.

The current analyst estimate for U.S. Services PMI looks rather optimistic, and it remains to be seen whether the services segment managed to continue its recovery at a healthy pace despite the second wave of the virus.

Oil Tries To Settle Above The $43 Level

Not surprisingly, positive vaccine news provided material support to the oil market, and oil made an attempt to settle above the $43 level.

Meanwhile, energy-related stocks are ready to continue their rebound. Shares of major oil companies like Exxon Mobil and Chevron are already gaining ground in premarket trading.

Back in August, oil’s upside move was stopped at $43.75, and oil is slowly climbing towards this important level. If oil manages to get above $43.75, oil-related equities will likely experience a major boost.

For a look at all of today’s economic events, check out our economic calendar.

U.S. Stocks Set To Open Lower As Tech Stocks Slide After Earnings Reports

Big Tech Stocks Are Losing Ground In Premarket Trading

S&P 500 futures are losing ground in premarket trading as leading tech stocks are under pressure after the release of third-quarter earnings reports.

Shares of Apple, Microsoft, Facebook and Amazon are losing ground in premarket trading, while shares of Alphabet are gaining more than 6% due to healthy growth of Google’s ad sales.

Elevated expectations are the biggest problem for tech stocks right now. For example, Apple shares are up by 57% year-to-date while Amazon stock gained almost 74% since the beginning of the year.

In this situation, it is not enough to simply beat analyst estimates on both earnings and revenue – the market wants to see a path for robust growth in the future. That said, it remains to be see whether the current premarket sell-off will  turn into a serious multi-day pressure on tech stocks as many traders are waiting for a pullback to initiate their positions in market leaders.

Oil Fails To Rebound As Coronavirus Continues To Surge

Oil remains under pressure after yesterday’s sell-off as traders evaluate risks of additional lockdowns. Yesterday, U.S. recorded more than 91,000 new cases of the disease, so coronavirus will likely get back to the headlines right after the U.S. presidential election.

Meanwhile, Exxon Mobil reported its third-quarter results, missing analyst estimates on revenue and beating them on earnings. Chevron also beat earnings estimates but failed to live up to revenue expectations.

This trading session is set to be chalelnging for oil majors as their revenues were hit hard by the pandemic while oil is trading near the $36 level amid virus fears.

Personal Spending Increased By 1.4% In September

U.S. has just provided Personal Income and Personal Spending reports. Personal Income increased by 0.9% month-over-month in September compared to analyst estimates which called for growth of 0.4%. Personal Spending grew by 1.4% compared to analyst consensus of 1%.

Both reports were better than expected and can provide some support to stocks during today’s trading session. The strength of Personal Spending is especially welcome as it shows that consumers remained confident in September.

For a look at all of today’s economic events, check out our economic calendar.

U.S. Stocks Mixed As Traders Wait For New Catalysts

Coronavirus Aid Package Negotiations Are Back In The Spotlight

Once again, traders turn their attention to coronavirus aid package negotiations amid signs that Democrats and Republicans may agree to a smaller version of the deal.

Yesterday, U.S. House Speaker Nancy Pelosi indicated that Democrats were ready to significantly decrease the size of their proposal to speed up negotiations.

Later, Reuters reported that an official from the Trump administration stated that some negotiators were willing to agree to a smaller version of the coronavirus aid bill worth about $500 billion.

There are few doubts that the U.S. economy needs another round of stimulus so any positive news on this front will provide additional support to stocks.

S&P 500 futures are little changed during the premarket trading session as traders want to see more details about the potential deal before pushing stocks to new highs.

Oil Lacks Momentum Despite Another Inventory Draw

API Crude Oil Stock Change report indicated that crude inventories declined by 4.3 million barrels. Today, the EIA Weekly Petroleum Status Report is set to confirm these numbers.

While crude inventories continue to decline, suggesting that oil demand rebounds, oil fails to gain any significant momentum. Meanwhile, major oil stocks like Exxon Mobil or Chevron are starting to lose ground.

At this point, it looks like market participants believe that coronavirus-related problems will not go away in the upcoming months and are unwilling to increase their bets on higher oil prices.

FOMC Minutes Are Set To Provide Additional Insight Into Fed’s Thinking

Later today, traders will have a chance to digest FOMC Minutes from the recent Fed meeting.

The key question for the market is whether Fed is ready to adopt an inflation target and prepare for inflation of more than 2% to revive the economy.

The Fed’s commentary is especially important for the U.S. dollar which continues to lose ground against a broad basket of currencies. Yesterday, the U.S. Dollar Index managed to get below yearly lows at 92.50 and tried to gain more downside momentum.

For stocks, weaker dollar is a positive catalyst. In case the U.S. Dollar Index tests the 92 level, S&P 500 may get to the test of the 3400 level.

For a look at all of today’s economic events, check out our economic calendar.

East Med Acquisitions on the Uptake? US Major Enters Fray by Acquiring Noble Energy

In a statement made by Chevron it stated that it has entered into a definitive agreement with Noble Energy, to acquire all of the outstanding shares of Noble Energy in an all-stock transaction valued at $5 billion.

The total value of the deal is slated to be US$13 billion. The main underlying reason for the acquisition by Chevron is that it will provide it with additional low-cost, proved reserves and attractive undeveloped resources that will enhance an already advantaged upstream portfolio. Chevron reiterates that the Noble Energy acquisition will be bring low-capital, cash-generating offshore assets in Israel. Chevron also looks at Noble Energy to expand is in the leading U.S. unconventional position with de-risked acreage in the DJ Basin and 92,000 largely contiguous and adjacent acres in the Permian Basin.

Chevron CEO Michael Wirth stated that the Noble Energy acquisition is “a cost-effective opportunity for the company to acquire additional proved reserves and resources. Noble Energy’s multi-asset, high-quality portfolio will enhance geographic diversity, increase capital flexibility, and improve our ability to generate strong cash flow. Chevron also reiterated that “the new combination is expected to unlock value for shareholders, generating anticipated annual run-rate cost synergies of approximately $300 million before tax, and it is expected to be accretive to free cash flow, earnings, and book returns one year after close”.

Noble Energy assets:

U.S. onshore

DJ Basin – New unconventional position with competitive returns that can be further developed leveraging Chevron’s proven factory-model approach.

Permian Basin – Complementary acreage that enhances Chevron’s strong position in the Delaware Basin.

Other ­– An integrated midstream business and an established position in the Eagle Ford.

International

Israel – Large-scale, producing Eastern Mediterranean position that diversifies Chevron’s portfolio and is expected to generate strong returns and cash flow with low capital requirements.

West Africa – Strong position in Equatorial Guinea with further growth opportunities.

The Optimism shown however should be assessed still looking at the ongoing East Med and global oil and gas markets developments. Last week Noble reported that COVID has hit its operations and revenues hard. Due to a 10% volume drop and weakness in oil prices, with WTI averaging less than $28 per barrel in Q2-2020, Noble Energy’s earnings will be lower. Some of the US onshore production is being restored, concentrating low-cost DJ Basins wells online while gas production from offshore Israel will also climb.

Still, Noble Energy reiterated that due to COVID and energy markets slump earnings will fall significantly. But its outlook is now looking better. Taking into account that its US onshore production dropped by almost 8% to 248,000 b of oil equivalent per day (-3.4% oil and natural gas Israel -21%). Noble Energy still is optimistic about oil price H2 2020, as it should be significant higher.

For Israeli gas sales volume from the Tamar and Leviathan fields it expects a substantial increase. However, looking at the current Israeli COVID issues and East Med economic recovery, statements made about higher volumes should be questioned. Sales from Tamar and Leviathan to Egypt’s Dolphinus Holdings are expected to be large from this month onwards, based a long-term agreement to supply a total of 3 trillion cubic feet of gas to Dolphinus for 15 years, with supplies starting from January 2020, ramping up in July 2020, and increasing further in July 2022.

This could again be very optimistic when assessing the Israeli economic situation, Egypt’s struggling economy and a lack of interest for Egyptian LNG on the global markets at present. Some major setback should be expected. Other new projects, such as its Alen Gas Monetization project, which is slated to start up in early-2021, in Equatorial Guinea, could also be facing headwinds.

Chevron is taking significant risk at present. The combination of onshore US shale and East Med offshore gas, before COVID-19, would have been very promising and commercially attractive. At present, especially at the global gas market, and East Med especially, too many risks are out there to become very comfortable. Not only COVID-19 and economic risks are still there, or even re-emerging, East Med’s geopolitical situation is far from positive. Demand is low, while outright potential geopolitical risks (Turkey, Greece, Cyprus, Egypt-Libya) don’t bode well for optimistic investment strategies.

Chevron’s take-over agreement for Noble Energy is the second East Med linked M&A deal the last week. Today, London-Tel Aviv listed international oil company Energean announced that at its General Meeting (GM) has passed the resolution for the assets of Italian independent Edison. Energean, already holding assets offshore Adriatic, Greece and Israel, announced July 4 the conditional acquisition of Edison E&P for $750 million plus $100 million of contingent consideration. The acquisition of Edison E&P, exclusive of the Algerian assets and Norwegian subsidiary, which was the subject of the above resolution, is expected to be completed later in 2020.

 

‘Some Energy Firms Can Thrive Amid Low Prices’, Says Fidelity’s FitzMaurice

Most energy stocks, which naturally move in tandem with the price of oil, have suffered a broad sell-off as crude oil prices plunged on concerns over the lasting economic fallout from the COVID-19 pandemic that reduced global demand.

Brent crude futures, the global benchmark for crude oil, has fallen about 40% so far this year to $40.6 a barrel on Thursday. The Brent crude prices in April fell to its lowest level since June 1999 to $15.98 a barrel but has rebounded since then. That meltdown caused a massive sell-off in energy stocks, with almost entire sector collapsing over 10% on the day.

However, Maurice FitzMaurice, portfolio manager of Fidelity Select Energy Portfolio, said the sector-wide sell-off in early 2020 has lowered prices of energy stocks that he thinks could still do well, the company noted in its research note.

“Exploration & production companies have been hurting because they need higher oil prices to thrive and, in some cases, survive, but that’s not true for all segments of the energy sector,” wrote Fidelity’s FitzMaurice.

“It’s created opportunities to buy shares of companies with resilient business models and financial flexibility for well below my assessment of fair value,” he added.

The portfolio manager further noted that he is focused more on high-quality firms, companies levered to natural-gas markets, including pipeline and terminal operators and businesses with a strong order backlog.

For instance, in March and April, he added notably to the fund’s stakes in both Chevron and ExxonMobil, believing each had the financial flexibility to weather a protracted decline in the energy sector.

According to the Fidelity note, FitzMaurice also increased holdings in Cheniere Energy, which operates seven liquefied natural gas terminals, with two more under construction. About 85% of its business is subject to long-term contracts.

Mr. FitzMaurice saw a strong opportunity for the company in the next decade and possibly beyond—as natural gas takes market share from dirtier fuels.
Lastly, he boosted exposure to independent power producer and energy trader Vistra Energy, partly because a large portion of its volumes in 2020 and 2021 are hedged against price declines, according to FitzMaurice.

“It’s a stockpicker’s environment,” affirms FitzMaurice, “and I’m seeing what I think are good stocks at good prices to hold for the long term.”

Fidelity Select Energy Portfolio held securities mentioned in this article on April 30, 2020. As of June 17, Chevron accounted for 20.43% of the fund’s assets, ExxonMobil 13.95%, Cheniere Energy 5.11%, and Vistra Energy 2.86%.