U.S. Stocks Set To Open Higher As Big Tech Reports Strong Earnings

Big Tech Beats Earnings Estimates

Amazon, Apple, Alphabet and Facebook have recently provided their second quarter reports.

Amazon revenues were up 40% year-over-year while its earnings of $10.30 per share beat analyst estimates by $8.80.

Apple’s revenue and earnings were also higher than estimates. The company stated that the release of iPhone 12 will be postponed by several weeks and also announced a four-for-one stock split.

Alphabet’s earnings were less spectacular but the company comfortably beat estimates with revenue of $38.29 billion and earnings of $10.13 per share.

Facebook’s revenue was up almost 11% year-over-year despite the challenges brought by coronavirus pandemic while the company’s earnings of $1.80 per share easily beat analyst expectations.

Not surprisingly, all these stocks are gaining ground during the premarket trading session. The Big Tech was the main driver of the market’s upside move from the bottom reached in mid-March, so S&P 500 futures are also up in premarket trading.

Coronavirus Aid Package Negotiations Have Yielded No Deal Yet

While traders cheer the great results of big tech companies, their attention may later shift to coronavirus aid package negotiations.

At this point, there are no signs of progress. The $600 weekly unemployment benefits are about to expire, and failure to maintain the program in some form may put heavy pressure on consumer activity.

While there is always a chance of a last-minute deal, worries about the stimulus package may put some pressure on stocks later in the trading session.

Personal Income Fell By 1.1% In June

The U.S. has just provided Personal Income and Personal Spending reports for June.

Personal Income declined by 1.1% month-over-month, while analysts expected a decline of 0.5%. The pace of the decline has decreased compared to May when Personal Income fell by 0.5%.

Meanwhile, Personal Spending increased by 5.6% month-over-month, mostly in line with the analyst consensus which called for an increase of 5.5%.

While Personal Income is under pressure due to the negative impact of the coronavirus pandemic, Personal Spending is supported by various government aid programs.

That’s why failure to reach a deal on the new coronavirus aid package may have a significant negative impact on the market.

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

Facebook Q2 Revenue Surges 11% Despite COVID-19 Crisis; Target Price $300

Facebook Inc, the world’s largest online social network, reported revenue growth of 11% in the second quarter despite ongoing COVID-19 pandemic and advertising boycott on social media platforms, sending its shares up over 6% pre-market on Friday.

The social media conglomerate said its revenue rose to $18.7 billion in the second quarter, with a net income of $5.2 billion, or $1.80 per share.

That is despite several companies, including UnileverStarbucksCoca-ColaHonda and others, have signed for an advertising boycott of social media platforms including Facebook and Twitter in June. Ben & Jerry’s, Verizon Wireless and Eddie Bauer have also joined the race to pause advertisements for July.

Advertisement sales, the primary source of Facebook’s revenue, jumped 10% to $18.3 billion in the second quarter ended June 30. Facebook’s monthly active users increased 12% year-over-year to 2.70 billion and headcount was 52,534, an increase of 32% year-over-year.

“Due to the strong second-quarter numbers, we have increased our projections for this year and 2021 which resulted in a $265 fair value estimate, up from $245. We recommend waiting for a wider margin of safety before investing in this wide-moat and high uncertainty name,” said Ali Mogharabi, senior equity analyst at Morningstar.

Facebook forecasts its full quarter year-over-year ad revenue growth rate for the third quarter of 2020 will be roughly similar to its July performance and total expenses in the range of $52-55 billion this year, narrowed slightly from the prior range of $52-56 billion. This year’s capital expenditures are anticipated at nearly $16 billion.

Facebook’s shares rose over 6% to $248.8 pre-market on Friday. It has risen over 14% so far in 2020, registering its biggest quarterly rise of more than 35% in the June quarter.

“Facebook 2Q20 results beat on Rev/Op Inc./EPS, as user and engagement strength led to an adv. rebound in May/June vs. April’s flattish levels. FB expects 3Q20 adv revenue +10% y/y (vs. our +9% y/y pre-print estimate). The midpoint of FY20 opex guide was lowered; FY20 capex guide is a bit higher as data center construction resumes. We raised estimate, price target to $290 vs. $280, maintain Outperform. FB shares +7% AH,” said John Blackledge, equity analyst at Cowen.

Facebook stock forecast

Thirty analysts forecast the average price in 12 months at $268.31 with a high forecast of $320.00 and a low forecast of $220.00. The average price target represents a 14.42% increase from the last price of $234.50. From those 30, 27 analysts rated ‘Buy’, three analysts rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

Just after the earnings result, Credit Suisse upped its target price to $315 from $305; JP Morgan raised its target price to $300 from $290; Cowen and Company raised target price to $290 from $280; RBC raised target price to $290 from $280 and Canaccord Genuity raised it to $290 from $275. Morgan Stanley target price is $285 with a high of $340 under a bull scenario and $200 under the worst-case scenario.

We think it is good to buy at the current level and target at least $300 in the short-term and $400 in a best-case scenario as 100-day Moving Average signals a strong buying opportunity.

Analyst comment

“Monetization Potential: We are positive on FB’s monetization roll-out of Instagram as well as FB’s ability to continue to innovate and improve its monetization (Canvas Ads, Dynamic Ads, video). Combined with the high and growing engagement we see monetization upside going forward, Brian Nowak, equity analyst at Morgan Stanley noted.

“Investing from Position of Strength to Drive Faster Long-Term Growth: We are modelling 11% GAAP opex (excl. one-time items) growth in 2020, implying an incremental $5 billion in opex. Our base case model implies opex per employee moderates in ’20 while FB hiring remains roughly flat on an absolute basis. We believe FB will grow EPS at a 14% CAGR (2019-2022),” he added.

What To Expect After Facebook Earnings

Facebook Inc. (FB) reports Q2 2020 earnings after the July 30th closing bell in the United States, with Wall Street analysts looking for a profit of $1.38 per-share on $17.35 billion in revenue. The stock rose 5.1% after meeting Q1 estimates in April and then added another 21% into this morning’s opening print near 233. The company has chosen not to provide Q2 or fiscal year guidance due to the ongoing impact of the COVID-19 pandemic.

Facebook Held Back By Political Headwinds

The stock has struggled since May, with growing political headwinds persuading on-the-fence investors to stand aside for now. Activists have been pushing for an advertising boycott in the last few weeks, chastising the social media giant for publishing discredited reports and conspiracy theories, mostly from the right wing. It’s also faces Congressional scrutiny about monopolistic practices, with CEO Mark Zuckerberg and other high tech executives called to a Wednesday committee hearing.

Florida Republican Congressman Matt Gaetz filed a criminal referral against Facebook earlier this week, citing alleged censorship directed against conservatives. Gaertz insists that “Mr. Zuckerberg repeatedly and categorically denied his company engaged in bias against conservative speech, persons, policies, or politics and also denied that Facebook censored and suppressed content supportive of President Donald Trump and other conservatives.”

Wall Street And Technical Outlook

The string of controversies hasn’t fazed Wall Street, which rates the stock as a ‘Strong Buy’, based upon 30 ‘Buy’ and 4 ‘Hold’ recommendations. No analysts are advising shareholders to sell their positions at this time. Price targets currently range from a low of $185 to a street-high $305 while the stock is trading more than $25 below the median $259 target. This placement bodes well for additional upside if the company can shake off persistent political pressures.

Technically speaking, Facebook broke out above two-year resistance around 220 in May and stalled above 240 just one week later, easing into a sideways pattern that’s posted 4 failed breakout attempts into July. Selling pressure is now increasing, favoring a bearish reaction if quarterly results fail to top modest expectations. Short-term sentiment may also come into play on Thursday if Zuckerberg’s Wednesday testimony sets of a new round of controversies.

Twitter Trading Higher Ahead Of July 23 Earnings

Twitter Inc. (TWTR) is inching toward the February 2020 high in the upper 30s in Monday’s U.S. session, as speculators place their bets ahead of the July 23rd Q2 2020 earnings release. The stock fell nearly 8% after missing Q1 2020 profit estimates in April, when the company disclosed that advertising revenue fell 27% in the last three weeks of March, as a result of the COVID-19 pandemic. It bottomed out quickly and has risen nearly 30% since that time.

D.C. Critics Take Aim At Twitter

The uptick comes less than two weeks after a report the social media giant is getting ready to build a subscription service that could significantly reduce spam, bots, trolls, and other user distractions. Growing disputes with the Oval Office have dampened renewed buying interest to some extent, with the President and members of Congress complaining that Twitter and Facebook Inc. (FB) are exhibiting bias against conservative opinions.

A July job listing on the Twitter site appears to confirm the initiative, declaring “we are a new team, codenamed Gryphon. We are building a subscription platform, one that can be reused by other teams in the future. This is a first for Twitter! Gryphon is a team of web engineers who are closely collaborating with the Payments team and the Twitter.com.” The company has neither confirmed nor denied the contents of the listing.

Wall Street And Technical Outlook

The news hasn’t impacted cautionary Wall Street consensus in the last two weeks, with a ‘Hold’ recommendation computed from 5 ‘Buy’, 19 ‘Hold’, and 2 ‘Sell’ ratings. If confirmed at this week’s earning’s release, the subscription platform is likely to lift a number of Hold ratings into the Buy column, adding to rally momentum. Price targets currently range from a low of $23 to a street high $43, while the stock is now trading $4 above the median $31 target.

Technical speaking, Twitter could easily add to recent gains and lift into 2019 resistance at 45.85. That price level also marks the 2013 initial public offering’s first trade, which has acted as resistance since a 2014 breakdown. A breakout above that barrier could have a highly-positive impact on sentiment, perhaps allowing this perennial laggard to finally break out of a multiyear range and post new highs.

 

 

‘No Company is Entirely Immune From a COVID-19 Led Economic Slowdown’ Says Fidelity’s Simnegar

No business is completely immune from a COVID-19 led economic slowdown and the ongoing global pandemic isn’t affecting all industries and its stocks in the same way, said Sammy Simnegar, portfolio manager in the equity division at Fidelity Investments.

So far, the deadly coronavirus has infected over 14 million people in 188 countries and killed more than 600 thousand, impacting day-to-day businesses worldwide.

“We shouldn’t think of how COVID-19 is affecting the stock market in monolithic terms because the opportunities and risks are very different at the company level… we try to identify the potential ‘winners’ and ‘losers’ in a post-pandemic world,” noted Fidelity’s Simnegar.

Microsoft

Fidelity’s Simnegar thinks Microsoft is resilient. Microsoft has two main businesses – its Office software suite and its Azure cloud-services operation. Because Office and Azure help customers to be more productive and competitive, Simnegar believes spending on these products is not likely to be hurt much by an economic slowdown, Fidelity noted.

Twenty-four analysts forecast the average price of Microsoft in 12 months at $219.11 with a high forecast of $260.00 and a low forecast of $190.00. The average price target represents an 8.00% increase from the last price of $202.88. From those 24, 23 analysts rated ‘Buy’, one rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

Morgan Stanley target price is $230 with a high of $290 under a bull scenario and $150 under the worst-case scenario. We think it is good to buy at the current level and target at least $230 as 50-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity.

Amazon

Amazon is another name Simnegar thinks could continue to take market share during this uncertain time. The company’s logistical advantages allow it to ship essential items to Amazon Prime customers with same-day shipping, Fidelity noted.

Thirty-nine analysts forecast the average price of Amazon in 12 months at $2,991.34 with a high forecast of $3,700.00 and a low forecast of $1,987.00. The average price target represents a 0.99% increase from the last price of $2,961.97. From those 39, 36 analysts rated ‘Buy’, two rated ‘Hold’ and one rated ‘Sell’.

Morgan Stanley target price is $3,450 with a high of $4,200 under a bull scenario and $2,200 under the worst-case scenario. We think it is good to buy at the current level and target at least $3,400 as 50-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity.

Facebook and Google

Large media and entertainment holdings in the fund as of the end of May included Facebook and Google-parent company Alphabet. Simnegar thinks usage of these services has increased among many customers since they started sheltering at home due to COVID-19.

Thirty-four analysts forecast the average price of Facebook in 12 months at $257.04 with a high forecast of $300.00 and a low forecast of $185.00. The average price target represents a 6.20% increase from the last price of $242.03. From those 34, 29 analysts rated ‘Buy’, five rated ‘Hold’ and none rated ‘Sell’.

Morgan Stanley target price is $270 with a high of $325 under a bull scenario and $185 under the worst-case scenario. We also think it is good to buy at the current level and target at least $270 as 50-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity. Check this for Google stock forecast.

Others

Other top holdings included credit card companies Visa and MasterCard, as well as Home Depot. The first two continued to ride the strong secular trend toward electronic payments, while Home Depot has benefited from customers who have spent more time in their homes and, therefore, have dedicated more money toward home improvement, Fidelity noted.

Europe Set for Negative Start, US-China Tensions Rise, US Tech Giants Fell

Pfizer and BioNTech are working on four drugs that they are hoping will go on to be coronavirus vaccines, and the FDA put two of the four on a fast track for approval. At the back end of last week, BioNTech said they could receive approval as early as Christmas, but in light of yesterday’s news, it might even be sooner.

European equities closed higher and US stocks got off to a good start on the back of the news. The FDA update carried on nicely from Friday’s news that Remdesivir, the antiviral drug produced by Gilead Sciences, can reduce the fatality rate in coronavirus sufferers by 62%. In the past couple of trading sessions there was a feeling that big pharma stands a chance of taking on the virus.

That being said, many countries are still battling against Covid-19. There were in excess of 60,000 new cases yesterday in the US, while there were 312 deaths. The infection rate remains high, but at least the fatality rate is relatively low. The situation in Florida is getting worse as the growth in the number of new cases was 4.7%, while the seven day average was 4.4%.

Robert Kaplan, the head of the Federal Reserve Bank of Dallas, issued a mixed statement yesterday. The central banker expressed concerns in relation to the infection rate, and he said the Fed might be required to do more should assistance be needed. Mr Kaplan also said the Fed might row back on its stimulus packages should the economy improve.

The NASDAQ 100 set a fresh record high yesterday, a few hours into the trading session. The bullish run didn’t last long as the tech focused index finished down more than 2%, and the S&P 500 closed down nearly 1%. The usual suspects – Apple, Amazon, Netflix, Facebook and Google’s parent, Alphabet – all set all-time highs, but finished lower.

US earnings season will kick-off today as the latest quarterly numbers from JPMorgan, Wells Fargo and Citigroup will be posted. In April, the major banks collectively put aside more than $25 billion for provision for bad debts, the view is that the rate of loan defaults will surge on account of the pandemic.

Last month, the Fed carried out a stress test, and in one extreme scenario, the central bank cautioned that total bad debts provisions could be $700 billion. Dividends will be in focus as the Fed said that pay-outs must be capped at current rates, and there has been speculation that dividends could be cut in an effort to conserve cash.

It was a mixed day for commodities yesterday. The slide in the US dollar helped gold. Silver, copper and palladium were also helped by the move in the greenback, and the overall feel-good factor helped the industrial metals too. Oil on the other hand lost ground as there was talk that OPEC+ are looking to taper off the steep production cuts that were introduced in May. Last month WTI and Brent crude hit three month highs, but they failed to retest those levels since, because of the pausing of the reopening of economies.

Overnight, China posted its trade data for June. Imports were 2.7%, and economists were expecting -10%, keep in mind the May reading was -16.7%. Exports came in at 0.5%, and the consensus estimate was -1.5%, while the May reading was -3.3%. The rebound in imports and exports points to a turnaround in the global economy. It is possible the positive exports reading was largely because of Western government’s demand for personal protective equipment.

Rising tensions between the US and China in relation to Beijing’s territorial claims in the South China Sea has weighed on sentiment. Hong Kong is reintroducing tougher restrictions and a rise in coronavirus cases in Victoria, Australia, has impacted the mood too. Stocks in Asia are in the red, and European markets are called lower.

At 7am (UK time) the UK will release a number of economic reports. The GDP reading for May on an annual basis is tipped to be -20.4% and that would be an improvement on the -24.5% posted in April. The monthly reading is expected to be 5.5%, and keep in mind the April reading was -20.4%. UK industrial output, manufacturing output and construction output are expected to be 6%, 8% and 14.5% respectively.

At the same time, the final reading of German CPI for June will be posted and the consensus estimate is 0.8%.

The German ZEW economic sentiment report for July is tipped to be 60, and that would be a dip from the 63.4 recorded in June. It will be released at 10am (UK time).

Eurozone industrial production will be announced at 10am (UK time) and the May reading on a monthly basis is tipped to be 15%, and that would be a huge rebound from the -17.1% posted in April.

US headline CPI is expected to rebound to 0.6% from 0.1% in May. The core reading is tipped to be 1.1% and that would be a fall from the 1.2% that was posted in May.

EUR/USD – since late June it has been in an uptrend, and a break above the 1.1400 zone might put 1.1495 on the radar. A break below the 1.1168 area might pave the way for 1.1049, the 200-day moving average, to be targeted.

GBP/USD – has been in an uptrend recently, and should the positive move continue, it might target 1.2690, the 200-day moving average. A move through that level should put 1.2813 on the radar. Thursday’s candle has the potential to be a gravestone doji, and a move lower could see it target 1.2432, the 100 day moving average. A drop below 1.2251, might bring 1.2076 into play.

EUR/GBP – yesterday’s daily candle has the potential to be a bullish reversal, and if it moves higher it could see it target 0.9067 or 0.9239. A break below the 50-day moving average at 0.8949, could put the 0.8800 zone on the radar.

USD/JPY – has been drifting lower for the last month and support could come into play at 106.00. A rebound might run into resistance at 108.37, the 200-day moving average.

FTSE 100 is expected to open 78 points lower at 6,098

DAX 30 is expected to open 239 points lower at 12,560

CAC 40 is expected to open 91 points lower at 4,965

By David Madden (Market Analyst at CMC Markets UK) 

Facebook Testing All-Time High Despite Growing Boycott

Facebook Inc. (FB) price action has shaken off a boycott by top tier advertisers in reaction to alleged ‘hate speech’, in the wake of nationwide protests following the George Floyd killing. The initial boycott news triggered a 4-day 38-point slide, which was promptly scooped up by traders and investors looking to ‘buy the dip’. The stock is now situated less than a point under the all-time high, flaunting harsh corporate criticisms.

Zuckerberg Takes Rebellious Tone

CEO Mark Zuckerberg has advised that Facebook will team up with civil rights groups and experts in an effort to forestall the boycott, but organizers are standing firm, awaiting more concrete action. It’s understandable because Zuckerberg has established a poor track record on privacy and political issues since the 2016 election, when foreign agents attempted to influence U.S. opinion through fake accounts.

Zuckerberg has taken a rebellious tone despite those conciliatory actions, stating “my guess is that all these advertisers will be back on the platform soon enough”. He also insists that “we’re not gonna change our policies or approach on anything because of a threat to a small percent of our revenue, or to any percent of our revenue”. He could be right because big advertisers leading the boycott make up just a small percentage of the company’s $70-billion advertising revenue.

Wall Street And Technical Outlook

Wall Street has ignored the boycott so far, with a Canaccord Genuity upgrade marking last week’s only institutional activity. Consensus remains highly bullish, with 28 ‘Buy’ and just 4 ‘Hold’ ratings. No analysts are recommending that investors sell the stock at this time. Price targets currently range from a low of $185 to a street high $300 while Facebook is now trading about $5 under the median $249 target.

The technical outlook looks outstanding despite the latest controversy, with the stock already in breakout mode and trading just below the all-time high. Accumulation-distribution indicators have actually surged to new highs in the last week, generating a bullish divergence that predicts price will soon follow. The sky’s the limit given these technical tailwinds, with Wall Street’s lofty $300 target easily attainable in the next one to three months.

 

U.S. Stocks Set To Open Lower As Traders Take Profits After The Recent Upside Move

With No Important Economic Reports Scheduled To Be Released Today, Traders Focus On The Spread Of The Virus

S&P 500 futures are losing ground in premarket trading as the stock market shifts its attention to virus data.

Yesterday, stocks were boosted by better-than-expected U.S. Services PMI and Composite PMI reports. There are no major economic reports scheduled to be released until Thursday when the market will digest the new data on Initial Jobless Claims and Continuing Jobless Claims.

In this environment, traders’ attention naturally turns to the developments on the coronavirus front. The situation does not look good as the pandemic shows no signs of a slowdown.

According to data from Johns Hopkins University, more than 11.6 million cases of coronavirus have been recorded since the beginning of the pandemic. In recent days, the world has recorded more than 200,000 new cases per day which is the all-time high.

U.S. May Ban Social Media Apps From China

The U.S. is set for another round of tensions with China as it may ban the country’s social media apps as they may share information with the Chinese government.

Meanwhile, companies like Facebook and Twitter have announced that they would not take requests for user data from Hong Kong’s government due to the new security law.

China will likely try to retaliate against any restrictive measures so U.S. – China relations will continue to follow their downside trend.

European Commission Revises Its Economic Forecast To The Downside

While stocks trade as if there is no pandemic at all, the situation is challenging for the real economy. According to the new forecast from the European Commission, Euro Area’s economy will decline by 8.7% in 2020 and rebound by 6.1% in 2021.

The previous forecast called for a decline of 7.7% in 2020 and growth of 6.3% in 2021. The reopening of the economy is not proceeding as fast as previously expected as governments have to balance their economic priorities with virus containment measures.

The slowdown in the EU will directly impact U.S. multinationals. At the same time, it also raises questions regarding the recent optimism about the rebound of the U.S. economy which currently faces a surge in the number of virus cases.

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

Concerned on Parts of Tech Sector, But Sees Continued Growth Tied to Two Megatrends: Fidelity

The recent recovery in stock markets has been at odds with economists maintaining a gloomier global economic outlook. The rally is largely driven by the optimism of economic recovery and a much stronger recovery in the technology sector.

The S&P 500 information technology sector has returned about 10% in 2020, including reinvested dividends. Although during the tech bubble of 1990s the sector has never booked over 14% of the S&P 500’s earnings, its profit contribution surged to more than 20% of S&P 500 net income in recent years.

It is likely that technology will play a significant role across different countries and cultures in future, generating better returns in the long run for these tech companies.

“I remain concerned about the impact of recession on parts of the tech sector, but I see continued growth driven by 2 megatrends: the shift to digital experiences and the shift to cloud computing,” wrote Nidhi Gupta, information technology sector leader and portfolio manager of Fidelity Select Technology Portfolio.

Gupta said she believes in companies that are moving traditional offline experiences online, and firms that are helping these companies to make better business decisions with their data, Fidelity added.

Socialising online and doing some of the things, like watching a movie and shopping with friends, virtually is a long-term megatrend that is expected to remain for years, regardless of global economic conditions amid the COVID-19 crisis. That’s why companies like Netflix, Facebook, Amazon.com, and Latin American e-commerce provider MercadoLibre are favoured.

“A related megatrend is that digital businesses with this treasure trove of data are increasingly looking to cloud computing to draw data-driven insights to improve their businesses. This is happening, via cloud services being offered at all levels of the information technology stack—infrastructure, platform, and software,” the American multinational financial services corporation added.

“Many companies are shedding their hardware and becoming software-led in every way,” Gupta adds. Companies that provide the cloud services to help their customers make better business decisions, which include HubSpot, Microsoft, Salesforce.com, Elastic, and MongoDB – all overweighted fund positions as of May 31.

According to Tipranks’ analyst consensus by sector, 148 technology stocks out of 595 were rated “Strong Buy”, 306 were rated “Moderate Buy”, 122 were rated “Hold”, 19 were rated “Moderate Sell” while none were rated “Strong Sell”.

E-mini NASDAQ-100 Index (NQ) Futures Technical Analysis – Underpinned by Fed Stimulus Hopes

September E-mini NASDAQ-100 Index futures are inching higher during the pre-market session on Tuesday as investors clung to hopes of a stimulus-backed economic rebound. The index was boosted by a rise in Apple Inc and a strong recovery in shares of Facebook.

The rise in the number of new COVID-19 cases at hot spots throughout the country has been largely ignored by investors with most expecting the U.S. Federal Reserve to step in with additional monetary easing if economic conditions get really bad.

At 06:08 GMT, September E-mini NASDAQ-100 Index futures are trading 9978.50, up 4.75 or +0.05%.

In other news, data on Monday showed contracts to buy previously owned homes rebounded by the most on record in May, suggesting the housing market was turning around. Later this week, investors will focus on employment and consumer confidence data for June.

Daily September E-mini NASDAQ-100 Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart, however, momentum is trending lower. A trade through 10296.25 will signal a resumption of the uptrend. A move through 9368.25 will change the main trend to down.

The minor trend is down. This is controlling the momentum. The minor trend changes to up on a move through 10120.50. A trade through 9728.75 will indicate the selling pressure is getting stronger.

The first minor range is 10296.25 to 9728.75. Its 50% level at 10012.50 is potential resistance.

The second minor range is 9368.25 to 10296.25. Its 50% level at 9832.25 is potential support.

The short-term range is 8841.00 to 10296.25. Its retracement zone at 9568.50 to 9397.00 is a key support zone.

Daily Swing Chart Technical Forecast

Based on the early trade, the direction of the September E-mini NASDAQ-100 Index on Tuesday is likely to be determined by trader reaction to the 50% level at 10012.50.

Bullish Scenario

A sustained move over 10012.50 will indicate the presence of buyers. This could trigger a quick move into the minor top at 10120.50. Taking out this level could trigger an acceleration into the contract high at 10296.25.

Bearish Scenario

A sustained move under 10012.50 will signal the presence of sellers. If this created enough downside momentum then look for the selling to extend into 9832.25. If this level fails then look for further selling pressure into 9728.75, Monday’s low.

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

Facebook’s Advertiser Diversification to Cushion Boycott Impact; Buy on Weakness: Morgan Stanley

Aiming to pressurize Facebook, an American social media conglomerate corporation based in California, to crack down on fake news and hate speech has prompted several corporate advertisers to pull out their advertising from the biggest social media site platform.

Over the past week, several companies, including Unilever, Starbucks, Coca-Cola, Honda and others, have signed for an advertising boycott of social media platforms including Facebook and Twitter.

Ben & Jerry’s, Verizon Wireless and Eddie Bauer have also joined the race to pause advertisements for July. Following this, Facebook’s shares plunged over 10% from high of $245.18 on June 23.

Morgan Stanley: “We’d buy on weakness”

“Key points that could minimize any material Facebook impact: In our view, it is important to remember that 1) Facebook’s advertising dollar base is highly diversified, as on its 1Q 2019 earnings call, the company said that ‘our top 100 advertisers represented less than 20% of our total ad revenue. “Facebook’s advertiser base likely has grown by more than 10% since then, meaning their ad base could be even more diversified. 2) Facebook has an incredibly strong direct-response transaction-driven ad product most recently seen in 1Q results that DR advertisers will step in and bid with if/when pricing drops. The ability for DR advertisers to spend more is likely very strong right now given the current macro strength in e-commerce,” said Brian Nowak, equity analyst at Morgan Stanley in a note to clients.

“While the current boycott cancellations don’t look troubling, uncertainty around the breadth and duration of this boycott could create tactical pressure on Facebook. We intend to lean on the above math as our proxy as we try to gauge the impact on Facebook’s ad business…and are buyers on weakness when near-term sentiment on this scaling platform becomes overly bearish and valuation gets depressed.”

Brian Nowak, equity analyst at Morgan Stanley further wrote that “we are positive on Facebook’s monetization roll-out of Instagram as well as Facebook’s ability to continue to innovate and improve its monetization. Combined with high and growing engagement we see monetization upside going forward. We see the monetization of Instagram adding $4 billion of incremental ad revenue in 2021.”

“Investing from a position of strength to drive faster long-term growth: We are modelling 11% GAAP opex (excluding one-time items) growth in 2020, implying an incremental $5 billion in opex. Our base case model implies opex per employee moderates in ’20 while Facebook hiring remains roughly flat on an absolute basis. We believe Facebook will grow EPS at a 14% CAGR (2019-2022),” Morgan Stanley’s Nowak added.

Facebook target price

Morgan Stanley target price is $230 with a high of $280 under a bull scenario and $160 under the worst-case scenario. Thirty-two analysts forecast the average price in 12 months at $248.21 with a high of $300.00 and a low of $185.00. The average price target represents a 12.50% increase from Monday’s price of $220.64, according to Tipranks. From those 32, 29 analysts rated ‘Buy’, three rated ‘Hold’ and none rated ‘Sell’.

U.S. Stocks Set To Open Higher As Traders Buy Stocks After The Recent Pullback

Coronavirus Continues To Spread Actively Across The World

According to data from Johns Hopkins University, more than 10 million coronavirus cases have been registered in the world since the beginning of the pandemic. The U.S. is at the top of the list with more than 2.5 million cases.

Lately, the increase in the number of new cases has pushed Texas, Florida and California to close bars which are believed to play a big role in the spread of the virus. As reopenings lead to the increase in the number of new cases in some parts of the world, the pace of additional reopenings is unclear.

Nevertheless, S&P 500 futures were able to shrug off virus worries during the premarket trading session and are pointing to a higher open as traders rush to buy stocks after the recent pullback.

Facebook In Spotlight As More Advertisers Join The Boycott Campaign

Shares of Facebook have suffered an 8% loss on Friday as the company found itself under pressure due to a boycott campaign aimed at improving the moderation process and removing hate speech from the platform.

Many companies have already joined this campaign and refused to buy ads from Facebook, and new names are added every day. According to a FOX Business Network report, Pepsi has joined the campaign over the weekend.

Facebook shares have already fully recovered from the losses they incurred during the acute phase of the coronavirus crisis and are up 5% year-to-date even after the recent sell-off.

However, the stock looks set to continue the current downside move as it is already losing ground in the premarket trading session.

Traders Await Key Employment Reports

On Wednesday, the U.S. will provide ADP Employment Change report for June. On Thursday, the market will have to digest new data on Initial Jobless Claims, Continuing Jobless Claims and Non Farm Payrolls.

These reports will likely have a major impact on market sentiment. At this point, the market is worried about the spread of coronavirus but these worries are offset by optimism about the economic recovery.

Currently, global markets are undecided about future direction. The U.S. dollar, which serves as the safe haven asset of last resort, is losing ground, while the other safe haven asset, gold, continues its upside move.

The release of the employment reports should provide traders with more data on the health of the economy and set the trend for the next few weeks.

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

 

E-mini NASDAQ-100 Index (NQ) Futures Technical Analysis – Minor Trend Changed to Down, Shifting Momentum

September E-mini NASDAQ-100 Index futures are trading sharply lower shortly before the cash market close. The selling is being primarily driven by a report that the U.S. intervention in Chinese interests could risk the Phase 1 trade deal.

After opening lower due to worries over a surge in coronavirus cases, the index accelerated to the downside in reaction to a report from The Wall Street Journal that said U.S. ‘meddling’ in Hong Kong, Taiwan and other matters put the trade deal at risk.

At 19:30 GMT, September E-mini NASDAQ-100 Index futures are trading 9873.75, down 223.75 or -2.32%.

Also weighing on the technology-based index was a steep drop in shares of Facebook. The social media giant was down nearly 8.0% late in the session after Verizon Communications Inc. and Unilever joined an advertising boycott that called out Facebook for not doing enough to stop hate speech on its platforms.

Daily September E-mini NASDAQ-100 Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart, however, momentum has shifted to the downside. A trade through 10296.25 will signal a resumption of the uptrend. The main trend will change to down on a move through the nearest main bottom at 9368.25.

The minor trend is down. It turned down on Friday when sellers took out 9843.50, shifting momentum to the downside.

The minor range is 9368.25 to 10296.25. Its 50% level at 9832.25 is controlling the near-term direction of the index.

The short-term range is 8841.00 to 10296.25. If the minor trend changes to down then look for the selling to possibly extend into the short-term retracement zone at 9568.50 to 9397.00.

Short-Term Outlook

The minor 50% level at 9832.25 is a potential trigger point for a break into at least 9568.50. This is followed by a support cluster at 9397.00 to 9368.25.

We’re not too worried about this break because it would be a normal 50% to 61.8% correction.

However, we are going to start focusing on the short-side if 9368.25 fails as support because this would break the bullish uptrend pattern of a series of higher-tops and higher-bottoms.

Furthermore, if short-sellers are able to take out 9368.25 with major volume then we could see an eventual break into 8841.00, followed by 8547.00 and the major 50% level at 8461.00.

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

Unilever Latest Advertiser to Jump Ship on Facebook, Twitter Amid ‘Polarized Atmosphere’ in US

The two major social media stocks – Facebook and Twitter – are both under pressure on Friday, falling 9% and 7% respectively, as more advertisers joined the list of more than 90 marketers pausing their ad spending during the month of July for social media giant Facebook. Twitter shares fell in sympathy with Facebook as investors anticipate the other shoe to drop on its platform as well.

At 17:02 GMT, Facebook is trading $216.93, down $18.75 or -7.96% and Twitter is at $29.12, down $2.25 or -7.17%.

Growing List of Major Advertisers Shunning Facebook

CNBC wrote, “In the week since a group of organizations called on Facebook advertisers to pause their ad spending during the month of July, more than 90 marketers including Verizon, Patagonia, REI, Lending Club, The North Face, Ben & Jerry’s have announced their intention to join, according to a running list from Sleeping Giants. The group of organizations includes the Anti-Defamation League, the NAACP, Sleeping Giants, Color of Change, Free Press and Common Sense.”

“The organizations said they’re asking Facebook to more stringently police hate speech and disinformation by taking a number of actions, including creating a ‘separate moderation pipeline’ for users who say they’ve been targeted because of their race or religion, or to let advertisers see how frequently their ads appeared near to content that was later removed for misinformation or hate, and allow them refunds for those advertisements.”

Daily Facebook

No Response from Facebook Yet

Last year, Facebook brought in $69.7 billion in ad revenue globally through its millions of advertisers. The platform said earlier this year it has more than 8 million advertisers, CNBC said.

In a recent memo to advertisers obtained by CNBC, the company’s VP of global marketing solutions Carolyn Everson said “boycotting in general is not the way for us to make progress together.”

“I also really hope by now you know that we do not make policy changes tied to revenue pressure,” she said in the memo. “We set our policies based on principles rather than business interests.”

Unilever Pauses Facebook and Twitter Advertising for Rest of 2020

Unilever on Friday said it would be pausing brand advertising on Facebook, Instagram and Twitter in the U.S. “through at least the end of the year.”

“Given our Responsibility Framework and the polarized atmosphere in the U.S., we have decided that starting now through at least the end of the year, we will not run brand advertising in social media newsfeed platforms Facebook, Instagram and Twitter in the U.S.,” the company said in an emailed statement it attributed to Luis Di Como, the company’s EVP of Global Media.

“Continuing to advertise on these platforms at this time would not add value to people and society. We will be monitoring ongoing and will revisit our current position if necessary.”

Daily Twitter

Twitter’s Response

Twitter’s VP of Global Client Solutions Sarah Personette responded to the move from Unilever in a statement.

“We have developed policies and platform capabilities designed to protect and serve the public conversation, and as always, are committed to amplifying voices from underrepresented communities and marginalized groups,” she said. “We are respectful of our partners’ decisions and will continue to work and communicate closely with them during this time.”

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

Zoom Surges 13% Ahead Of Earnings

Zoom Video Communications (ZM) shares surged past $200 on June 1 to end the day with a 13% gain. The latest price action came as a result of the optimism surrounding the first-quarter earnings of the company which would be released after the market close on June 2.

Investors never really paid attention to Zoom before the pandemic, but the company emerged as the go-to video conferencing platform for stay-at-home professionals and students in the last few months. This virus-proof nature of the company has helped shares soar 200% in 2020 so far.

Even as shares continue to rise, some analysts are questioning the ability of Zoom to remain relevant in the long run as billion-dollar tech giants such as Facebook Inc. (FB) and Alphabet Inc. (GOOG) have unveiled plans to grab market share in the booming video conferencing industry.

Zoom Has A History Of Beating Estimates

Empirical evidence suggests that Zoom is likely to beat estimates for the first quarter. Since its IPO in April 2019, Zoom has beaten earnings and revenue estimates 100% of the time, and the same thing could happen later today as well. However, this is not a guarantee for a surge in the stock price. For instance, shares dropped by 10% following a strong earnings report in the previous quarter.

Latest Analyst Actions

Rosenblatt boosted its target price for Zoom from $95 to $150 on June 1, and the research firm now has the highest price target among Wall Street analysts for Zoom. However, even this revised target represents a downside of over 25% from the current market price of $204.

Even though daily active users have surged since March, some analysts have cast doubt over the ability of Zoom to monetize these users as the majority are non-paying subscribers who do not plan to pay for a video communication platform ever. The reopening of the economy, in any case, will lead to a decline in active users as well. Morgan Stanley analyst Meta Marshall recently wrote, “In order for us to get more positive on Zoom, we would need to see evidence that the monetization is higher than expected, meaning the installed base to sell additional services into is larger.”

Analysts unanimously agree that Zoom is overvalued from many perspectives.

Profit-Taking Seems To Be A Rational Decision

Zoom has many things going right for them, but at an EV/sales multiple of 80, shares are overvalued. As the global economy slowly returns to normalcy, Zoom will see a gradual decline in its daily active users, which would not be taken lightly by market participants. The company has a plethora of security and privacy issues to address as well. Booking profits now and waiting for a better opportunity seems to be the rational move.

US ‘Re-Opening Stocks’ Attracting Buyers; Amazon, Facebook Hit Record Highs

The three major U.S. stock indexes posted their fourth gain in five sessions on Wednesday as investors continued to bet on a swift economic recovery from coronavirus-driven lockdowns and the potential for more stimulus measures from the Federal Reserve. The move took place despite a medical watchdog group downplaying the upbeat coronavirus results from Moderna Inc. that earlier in the week was a catalyst by a spectacular rally.

In the cash market, the benchmark S&P 500 Index settled at 2971.61, up 48.67 or +1.85%, the blue chip Dow Jones Industrial Average finished at 24575.90, up 369.04 or +1.65% and the technology-based NASDAQ Composite closed at 9375.78, up 190.68 or +2.45%.

The Internals

Gains were broad-based, with each of the 11 major S&P sectors on the plus side. The small-cap Russell 2000 Index, which usually leads gains out of a recession, outperformed the large-cap indexes, according to Reuters.

Advancing issues outnumbered declining ones on the NYSE by a 4.05-to-1 ratio; on the NASDAQ Composite, a 3.53-to-1 ratio favored advancers.

The S&P 500 posted 13 new 52-week highs and no new lows; the NASDAQ Composite recorded 74 new highs and nine new lows.

Money Moving into Growth, ‘Re-Opening Stocks’

Since the markets bottomed in late March, technology sector growth stocks have been the catalysts leading the rally. We are now seeing demand for the stocks of companies expected to benefit from the economy re-opening.

Amazon rose 1.98% to hit an all-time high to lead the market higher. Facebook gained 6.04% and reached record levels as well. Stocks that would benefit from the economy reopening also advanced Wednesday. MGM Resorts closed 8.84 higher while United Airlines rose 5.19%.

As states across the country begin to loosen restrictions, hopes for an economic rebound have grown. The NYSE Arca airlines index jumped 5.35% as Delta Air Lines Inc.’s chief executive officer said he was confident travel will return in the next 12 to 18 months.

Moderna Responds to Criticism of Its Coronavirus Results

Moderna would never put out data on its potential vaccine for the coronavirus that was different from “reality,” the biotech firm’s chairman told CNBC on Wednesday.

The comment came a day after health-care publication STAT News reported that some vaccine experts were skeptical of Moderna’s new vaccine data, saying it did not provide critical information to assess its effectiveness. The report sent Moderna’’ stock and the broader U.S. market lower.

The Test of the S&P 500 Bulls

Already at yesterday’s open, stocks have erased Tuesday’s downswing – and as the day progressed, more gains came in. S&P 500 finished at our initial upside target, at the 61.8% Fibonacci retracement. As the Fed press conference got underway, stocks attempted to break above this key resistance, but sold off in the final 15 minutes of the trading session. What comes most likely next?

Let’s check yesterday’s developments on the daily chart (charts courtesy of http://stockcharts.com ).

S&P 500 in the Short-Run

Yesterday’s candle shows the battle between the bulls and bears. The candle’s shape is bullish by itself, because the upper knot isn’t exactly dwarfing the white body. Therefore, the higher volume of yesterday’s upswing can be chalked down to meeting a serious technical obstacle rather than experiencing heavy selling into strength.

Please note that earlier in April, we’ve seen higher volume too, and stocks still made it above the key resistance (the 50% Fibonacci retracement) back then. The daily chart examination right now leans in favor of upcoming consolidation that will be followed by renewed upswing taking on the upper border of the early March bearish gap.

Let’s explore the clues that favor exactly this outcome.

The Credit Markets’ Point of View

We’ll open this section with the high yield corporate bonds (HYG ETF) analysis.

It’s not just yesterday’s strong showing of corporate junk bonds, their ratio to short-term Treasuries (SHY ETF) performed similarly well. Primed for more gains, they are not alone in this position.

The investment grade corporate bonds to longer-dated Treasuries ratio (LQD:IEI) also moved to the upside yesterday, and appears ready to break higher out of its bullish flag. This is true despite both LQD ETF lagging behind the HYG ETF yesterday, and the weaker showing of municipals (HYD ETF).

Key S&P 500 Sectors in Focus

Technology continues to lead higher, erasing Tuesday’s setback in one go. Whether you look at Alphabet stocks class A or C (GOOGL, resp. GOOG), it’s predictably been a star performer of yesterday’s session. Microsoft (MSFT) and Facebook (FB) results also show that Big Tech can make it through the storm. How strong will Amazon (AMZN) earnings be when it reports today after the market close? In our opinion, the stock will push higher, confirming our bullish bias for the tech sector.

Healthcare recovered part of the lost ground, and appears to be in need of more time to consolidate before continuing higher. The volume of last two sessions is definitely more consistent with consolidation in the sector than with distribution.

But where would the engine of upcoming S&P 500 gains be? Energy (XLE ETF), materials (XLB ETF) and industrials (XLI ETF) have led the charge yesterday too. Consumer discretionaries (XLY ETF) have also smartly dealt with Tuesday’s setback, similarly to financials (XLF ETF).

Given the strong performance in the credit markets, financials a bit surprisingly paused yesterday. It appears likely that similarly to healthcare, this sector needs to digest recent gains before the next move. And chances are, that the move would be higher when it arrives.

The Fundamental S&P 500 Outlook

Yesterday’s Fed meeting is over, and the not so subtle Fed hints that we won’t run out of money are there. So far, so good – the implicit Powell put is in. Despite today’s premarket downswing (futures trade at around 2910 currently) stocks don’t appear ready to test the resolve in what might very well turn out to be a bear trap.

Yes, weekly unemployment claims are just in, at almost 3850K – disappointing expectations. The economy reopening is a long process (state-by-state different) and isn’t likely to bring a V-shaped consumer rebound on a lasting basis. But stocks are forward-looking, ready to bridge the view of more than one quarter ahead.

We’ll monitor the anatomy of both the up and down days for signs that this upleg is over. Right now, that still doesn’t appear to be the case.

From the Readers’ Mailbag

Q: In your latest alert, you mentioned a profit target for the S&P 500, what’s the exit strategy? To complicate matters a little more, we use your service to trade 3x ETFs, what would the stop-loss percentage be and of course, the exit profit target?

A: We didn’t exit the profitable long positions at the first rendezvous with the 61.8% Fibonacci retracement, because too many signs (credit markets, sectoral strength) point to the upswing consolidation. Sure, we’re experiencing a pullback today, but does it change the bullish short-term outlook? We’ll examine the sectors with their ratios and see whether our ducks remain as much lined up in a row as they were going into this session. And naturally, we’ll react and issue an intraday Stock Trading Alert if situation warrants that.

Thanks in no small part to the early March bearish gap, the 61.8% Fibonacci retracement offers a stronger resistance than the 50% Fibonacci resistance. And it took quite a few attempts to overcome this weaker resistance, which is why we expect that overcoming the 61.8% one wouldn’t be piece of cake either. We’ll monitor the tape and money trail thanks to the sizable upside potential in this trade – the next strong resistance zone is at the July and September highs (at around 3050).

Coming to the leveraged ETFs part of your question, please note that it really depends on their underlying assets (i.e. the ETF’s construction). Generally speaking, they are designed to magnify the intraday moves. If I were in your place, I would look at how the instrument performed during the recent upswings and downswings in the S&P 500 – did it roughly match the index move? That will serve as a useful guideline on where it’s sensible to place any kind of limit or market orders. If it hasn’t exactly matched that index move, a recalculation of what to reasonably expect from the instrument should the S&P 500 move to this or that level, is a sensible approach.

Finally, you’re asking about the stop-loss percentage. In the overview of Trade Results at the Performance page of my home site, you’ll see the percentage of account risked on each past trade. That’s a key building block in the money management, because it allows you to risk only as much as you are comfortable with in any trade. At the same time, we manage our open trades according to the prevailing outlook, which means that not every take-profit or stop-loss order has to be hit to take us out of the open position. Capital preservation is the rule number one. The offense wins matches, while the defense wins championships.

Summary

Summing up, S&P 500 challenged the 61.8% Fibonacci retracement yesterday, and today’s premarket trading shows that it won’t be that easily overcome. But the index still remains primed for further gains, and the credit markets keep on providing tailwinds. Powered by positive earnings reports, the tech sector looks far from having topped. While healthcare and financials are likely to consolidate, the stealth bull market trio (energy, materials and industrials) continues to perform. And so do consumer discretionaries. As the bulls’ resolve get tested and stocks digest recent gains, the balance of risks still remains skewed to the upside and our long position justified.

We encourage you to sign up for our daily newsletter – it’s 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 our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

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Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, 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, Przemyslaw Radomski, 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. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA 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. Przemyslaw Radomski, 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.

 

U.S. Stocks Set To Open Lower As Economy Continues To Lose Jobs

Initial Jobless Claims

The U.S. Initial Jobless Claims report has just been released. It showed that 3.84 million Americans filed for unemployment benefits last week, higher than the analyst consensus of 3.5 million.

Continuing Jobless Claims were lower than expected at 17.99 million. Since the beginning of the crisis, more than 30 million Americans filed for unemployment benefits.

Clearly, this is an unprecedented disruption of the job market. However, the equity market has previously managed to shrug off the bad news. Currently, S&P 500 futures are indicating a lower open of about -0.5% but things may change quickly.

In addition to the employment data, U.S. has also released Personal Income and Personal Spending reports. Both came below expectations at -2% and -7.5% respectively.

The Fed Left Rates Unchanged And Signaled That Economic Recovery Might Be Gradual

Yesterday, the U.S. Federal Reserve decided to leave the interest rate unchanged. This was not a surprise since an additional rate cut would have put the rate into the negative territory.

In this light, the market focused on Fed’s commentary. On the positive side, the Fed promised to support the economy as long as necessary and also hinted that it was not out of ammo to do so.

For now, the Fed will have to wait a bit to see how the measures that have already been implemented impact the economy.

On the negative side, the Fed stated that the near-term blow to the economy was very heavy, and that the current situation also presented risks for the medium term.

Big Tech Earnings Reports May Provide Support To The Market

Earlier, I wrote about good earnings reports from Tesla, Facebook and Microsoft. The rebound from mid-March levels was very strong, and the market certainly needs good reports from big-cap companies to continue the upside trend.

With no new measures announced by the Fed, solid reports from big companies could serve as the main catalyst for market upside in case investors and traders are willing to buy stocks at current levels.

The economic data looks very grim, and it remains to be seen whether the market will continue to ignore the economic reality which will hurt second-quarter results of most companies.

The Lockdown, The Fallout and the RoadMap to Recovery

Global Lockdown

In an abrupt and unprecedented manner, the world witnessed a mass halt to global activities due to the pandemic. Governments and central banks rushed in to intervene and support the global economy with unconventional measures to cushion the impact of the coronavirus on their economies and ease market strains.

As the virus spread quickly across the globe, the world forcing employers and employees to work remotely and rethink how to operate in a new ‘virtual reality’. Similarly, investors are faced with a new normal and are at an inflection point where there is a pressing need to reshape their investing strategies.

Oil Crash

The oil price war is over for now and the OPEC+ group has also agreed to a historic production cut in early April; though . Aa little too late considering how the situation unfolded during the month. Oil demand took the biggest hit seen in years at a time where production was reaching new highs.

The world is running out of spare room to store the fast-expanding glut that the pandemic has created. The damage initially caused by the price war was irreversible during such pandemic. The lack of storage capacity triggered a big plunge in crude oil prices.

Crude oil futures markets were in chaos, triggered by the inability of investors or traders to take on physical deliveries of oil barrels. The storage problem is so dire that investors or traders holding oil contracts are willing to sell their contracts at a loss, causing crude oil futures to turn negative for the first time in history.

A situation of more sellers than buyers.

On April 2020, WTI futures for May delivery traded at around negative 37 for the first time ever, reflecting the urgency of sellers to offload their contracts to avoid taking physical deliveries given the pandemic-induced circumstances.

Source: Bloomberg

What to expect in the coming months?

There is no quick fix for rebalancing the oil market. In such volatile markets, it is hard to predict what will happen with the June contract as the storage capacity will remain a primary source of concern.

Oil future prices took another blow when one of the largest oil funds, the United States Oil (USO), filed an SEC filing and revised its investment in oil future contracts to concentrate on contracts that are further out in the future.

Crude oil prices have remained under heavy selling pressure throughout the month. The near-term outlook for the oil market remains grim but investors are hopeful some recovery will take place when:

  • Production cuts will slow down the speed at which storage tanks are being filled; and
  • Major economies will ease lockdowns and activities will gradually pick up.

In the last few days, WTI for June delivery lost more than 15% and is trading at $14.26 a barrel while Brent recovered from earlier losses for June settlement and is trading at $21.42 a barrel.

GDP Contraction

The International Monetary Fund (IMF) has predicted in its 2020 World Economic Outlook that the economic impact of the COVID-19 pandemic might result in the “worst recession since the Great Depression”. The IMF expects the world economy to contract by 3% in 2020 due to the magnitude and speed of the collapse in activity following the various forms of lockdown seen across the globe.

Attention was on the GDP figures of the world’s two largest economies!

Earlier this month, China reported a deep contraction of 6.8% in GDP in the first quarter. It was not surprising given that China exercised strict lockdown measures and put a halt to activities throughout most of the quarter.

China has slowly resumed activities since the beginning of the month as the worst of the pandemic appears to be over. Manufacturing and trade data has been more upbeat which has risen expectations of a gradual return to normal if China avoids another wave of the virus.

Investors will be ending the month with the US GDP report that will show the first wave of the impact of the pandemic. After more than a decade of expansion, the US economy was expected to contract by 4% with a steeper contraction in the second quarter.

As of writing, the preliminary figures show a worse-than-expected contraction of 4.8%, which is the first sharpest decline since the Great Recession.

The figures echoed the IMF warnings!

Earnings Season

Earnings results were widely expected to highlight the pain inflicted by the coronavirus-induced crisis. Even though investors were expecting a tough earnings season with withdrawn forecasts, confusion and uncertainties about the 2020 outlook, the quarterly results are also meant to reveal how certain industries are affected by the virus and how those insulated from the virus are managing the pandemic.

Everything about the pandemic is unpredictable and therefore, companies in every sector are facing the challenges to communicate their guidance. Companies within certain sectors will perform worse than others.

Financials

The earnings season kickstarted with major US banks. As widely expected, banks like JP Morgan, Wells Fargo, Citigroup, Bank of America, Goldman Sachs and Morgan Stanley all reported a significant drop in profits. Overall, the banks made significant provisions for credit losses and saw major declines in asset management revenues.

Banks like Goldman Sachs and Morgan Stanley have flared better and their share price is currently up by 15% or more.

Communication Services

Our attention move to the big tech giants like Alphabet, Facebook and Netflix which have been reclassified to the communications sector in the last few years.

Netflix was among the first few to report its quarterly results. The company reported a $5.8B in revenue with a year-on-year growth of 27.6%. The number of subscribers came above estimates and more than double its target with 15.77 million paid subscribers. The substantial growth came in March when the lockdown and social distancing measures forced many more households to join the TV and movie-streaming service.

However, the company warned that revenue and growth might decline mostly due to probable lift of the confinement measures, a stronger US dollar that is impacting international revenue growth and the lack of high-quality content following the pause in production. Its share price reached a high of around $440, but as of writing, it is currently trading at $411.

Alphabet, Google’s parent company, issued its quarterly results after the bell on Tuesday. The company reported an increase of 13% in revenue for Q1 2020, compared to a 17% increase for the same quarter a year ago and earnings of $9.87 per share. Based on expectations, it was a miss on earnings. However, the company has performed well given the challenges and is cautiously optimistic tones for the second quarter. Alphabet’s share price rose by almost 9% on Wednesday.

Facebook – The social networking giant reported earnings of $4.9B or $17.10 per share for Q1 2020 compared to earnings of $2.43B or $0.85 per share in Q1 2019. The company doubled its earnings. Similarly to its peers, Facebook warned of the unprecedented uncertainty and withdrew its revenue guidance for the rest of the year. Its share price jumped by 6% to trade at $194.20.

Both Google and Facebook have seen a significant reduction in demand for advertising, but the companies still managed to stay massively profitable and adapt in a coronavirus-fueled environment.

Tech Sector

Microsoft released strong results in the third quarter of its fiscal year 2020. Overall, COVID-19 has had a minimal net impact on total revenue. As people around the world shifted to work and learn from home, there was a significant increased in demand for Microsft’s Cloud business to support remote works and learning scenarios. Compared to the corresponding period of last fiscal year:

  • Revenue was $35.0 billion and increased 15%
  • Operating income was $13.0 billion and increased 25%
  • Net income was $10.8 billion and increased 22%
  • Diluted earnings per share were $1.40 and increased 23%

Microsoft did not only top revised COVID-19 estimates but also the earnings that were expected back in January before the coronavirus crisis.

All eyes will be on Apple Inc. which will report earnings on Thursday, April 30, 2020 after market close. Apple’s conference call to discuss second-quarter results will be held on the same say at 2:00 p.m. PT / 5:00 p.m. ET.

Consumer Discretionary

Unlike the consumer staples sector which includes companies that produce or sell essential products, consumer discretionary stocks are mostly companies that do not manufacture or sell essentials. The various forms of lockdowns have left many people without employment. For example, the US economy lost around 20 million jobs over the last few months. It took the US like a decade to add those jobs in the economy.

Amazon.com Inc has always stood out from the lot because of its status as a leading e-commerce retailer. Investors will closely watch its earnings reports for guidance. The company Amazon.com, Inc. will hold a conference call to discuss its first quarter 2020 financial results on April 30, 2020 at 2:30 p.m. PT/5:30 p.m. ET.

Stock Market

Worldwide sharp contractions in the manufacturing sectors, warnings of economic contraction and fears of a recession in the month of April have created panic and volatility in the financial markets.

A look at the All-Country World Index shows that global equities are poised for their biggest monthly gain since the Great Recession. The biggest driver is the unprecedented and unconventional actions by central banks combined with massive fiscal stimulus.

Global equities are surging even though economic data is painting a different picture.

Towards the end of the month, some positive developments on the novel coronavirus cases and the possibilities of earlier opening plans of certain major economies has driven markets higher. Mega-cap stocks like Microsoft, Amazon, Facebook and Google have also contributed to lifting sentiment and drove the rally while smaller-cap companies are bearing the brunt of the pandemic.

The Reopening Plans

There is still hope for the economy despite the tough circumstances. V-shaped or U-Shaped Recovery? New infections have slowed down but there is still no vaccine and economies are at risk of a new wave of infection.

A vaccine could have increased expectations of a swift recovery like a V-shaped immediate recovery in the third quarter or a U-shaped recovery with stability more towards the second half of the year.

However, at the moment, governments are easing lockdown restrictions and investors will be back to a New Normal to replace the current “normal”. The economy is trapped in an unusual type of recession created by the novel coronavirus.

The roadmap to recovery will be progressive and dependent on the governments approaches towards easing lockdowns. It will be different across the globe depending on how governments feel about the situation and the risk of a second wave of the virus.

The path to recovery will be a learning process given the unknown territory!

Follow us and keep up to date with the latest market news and analysis.

Deepta Bolaky, Market Analyst at GO Markets.

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Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice

U.S. Stocks To Watch Today

Tesla

Tesla reported earnings of $0.09 per share, beating analyst estimates by a wide margin despite the fact that March was a challenging month for most companies. Revenue of $5.99 billion was also higher than expected.

During the earnings call, Elon Musk promised to increase investment at times when other auto producers were cutting costs and also criticized shelter-in-place policies, calling them “fascist”.

Tesla shares gained almost 10% in the after-hours trading session and will surely have huge trading volume today. Tesla has already had several profitable quarters in a row which is a very bullish catalyst for a company whose investors eagerly tolerated multi-million losses and kept buying its stock.

Today, Tesla may gain even more ground than in the after-hours session, and a test of all-time high levels is possible.

Facebook

Facebook reported earnings of $1.71 per share, slightly beating analyst estimates. The revenue of $17.74 billion was also ahead of analyst expectations. Just like Google, Facebook noted that ad revenue plunged in March but also added that it saw signs of stabilization in April.

Not surprisingly, Facebook reported increase in the number of daily active users and monthly active users as people who were forced to stay at home spent their time online.

The original market reaction to Facebook report was positive, and the company’s shares gained about 10% during the after-hours trading session. Just like in Tesla’s case, Facebook shares are close to all-time highs.

Microsoft

Microsoft was another tech giant who reported its earnings on April 29 after the market close and whose stock will be very active today.

The company reported revenue of $35.02 billion and earnings of $1.40 per share, beating analyst estimates on both earnings and revenue.

Microsoft stated that demand for its Teams chat has increased sharply due to the shift to remote work at times of coronavirus pandemic. Xbox gaming services also experienced healthy gains.

At the same time, the company noted that it was not immune to what was happening in the world so some parts of the business will likely suffer in the upcoming quarters.

In general, the report painted a positive picture, and Microsoft shares gained about 2% in the after-hours trading session. Microsoft is also trading not far from all-time highs, and its report could have an impact on the general market which continues to rise on optimism about monetary stimulus and potential treatment for COVID-19.