US Stock Market Overview – Stock Rally Led by the Nasdaq; Microsoft and Semis Drive the Gains

US stocks moved higher on Monday, as traders anticipated a deal between the White House and Congressional Democrats. Most sectors in the S&P 500 index were higher, led by Healthcare. Real-estate bucked the trend. The Nasdaq hit a fresh new record high, led by gains in Microsoft and the Semis. The VIX volatility index hit a fresh 5-month low at 22, before rebounding into the close to settle near 24.40. Apple shares continued to rally climbing nearly 3% on Monday after notching up a 14% gain last week.

Manufacturing in the US accelerated the most in 16-months, which is a forward-looking index. This helped buoy US yields which in turn help the US dollar rebound. The dollar rebounded putting pressure on precious metals, but oil and natural gas rallied helping to buoy the energy space. Natural gas prices surged 16% on Monday on a warm weather forecast. Microsoft confirmed that it would work out a deal to purchase Chinese company TikTok from Byedance. President Trump said that he would want part of the sale to come to the American People. This enraged some businesses in China.

ISM Manufacturing Accelerates by the Fast Pace in 16-months

U.S. manufacturing expanded in July at the fastest pace since March 2019. The Institute for Supply Management reported that its manufacturing index rose to 54.2 last month from 52.6. Expectations were for a reading of 53.6. The ISM’s measure of production increased in July to 62.1, the highest level since August 2018, and a gauge of orders climbed to 61.5, which was the strongest since September of that year. Customer inventories fell to 41.6 in July, the lowest this year and showing that stockpiles were shrinking at a faster pace. Factory inventories also declined after barely growing a month earlier.

E-mini S&P 500 Index (ES) Futures Technical Analysis – Benchmark Index Supported by Microsoft Surge

September E-mini S&P 500 Index futures are trading higher at the mid-session on Monday. The strength is being driven by Microsoft’s pursuit of TikTok’s U.S. operations and a clutch of upbeat quarterly earnings reports. Gains are likely being limited by Congress’ inability to agree on a fiscal coronavirus stimulus deal.

At 16:04 GMT, September E-mini S&P 500 Index futures are trading 3288.50, up 25.00 or +0.83%.

Microsoft jumped 3.7% as it said it would push ahead with talks to acquire the U.S. operations of Chinese-owned TikTok after President Donald Trump reversed course on a planned ban of the short-video app. Additionally, tech and healthcare led gains among the 11 S&P 500 sectors.

A rally in tech-related stocks and historic stimulus have lifted the S&P 500 to within 4% of its peak, but faltering macroeconomic data and a gridlock on more government stimulus have made investors cautious again.

Daily September E-mini S&P 500 Index

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. The uptrend was reaffirmed earlier in the session when buyers took out the last main top at 3284.50. A trade through 3195.00 will change the main trend to down.

After trading inside a compressed range for two weeks, the index appears ready to break out to the upside. Today’s early price action suggests there is a bid, but we’d like to see if buyers will come in on a pullback into the former main tops at 3284.50 and 3269.00.

Defending 3284.and 3269 will indicate that buyers are coming in with conviction and defending the breakout. This will also indicate that the buying was being fueled by new money coming into the market rather than buy stops.

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

S&P 500 Price Forecast – Stock Indices Continue to Climb

The S&P 500 initially pulled back just a bit during the trading session on Monday but then shot higher. We are above the 3300 level early in the session, and it does suggest that we are probably going to go looking towards the gap above, and then eventually the 3400 level. That is the all-time high, and I think it is only a matter of time before we get there due to the fact that the Federal Reserve continues to add liquidity to the markets, and therefore people are buying “things” to get away from the US dollar itself.

S&P 500 Video 04.08.20

Have been in an uptrend anyway, so regardless as to what we are doing in the short term, buying is the one thing that you should be looking at, as selling is very dangerous to do. I think there is significant support at the 3200 level which has been sustained, so that is something to keep in mind going forward. The 3400 level could be a bit difficult to get above, but once we do that should open up a move towards the 3500 level.

Even if we break down below the 3200 level the 50 day EMA is sitting at the 3130 level, and therefore I think it is only a matter of time before the buyers return on any pullback. Remember, stock markets have nothing to do with the economy, and everything to do with liquidity. As long as the Federal Reserve continues to throw money at the market, they will continue to buy things. This is a market that has been one way for a while and I just do not see it changing.

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

What To Expect After Walt Disney Earnings

Walt Disney Co. (DIS) reports fiscal Q3 2020 earnings after Tuesday’s closing bell in the United States, with analysts expecting a loss of $0.64 per-share on $12.48 billion in revenue. The stock tread water after missing Q2 profit estimates by a wide margin in May, with shareholders hanging tough as soon as the company reported outstanding subscription growth in the Disney+ streaming service. It’s now trading 15% higher but still below levels broken in the first quarter.

Walt Disney Reopens Florida Theme Park

The Disney World Resort in Orlando, Florida reopened in July, right at ground zero in the U.S.A.’s COVID-19 summer spike. Anecdotal evidence suggests that out-of-state visitors are avoiding the park like the plague but the entertainment giant has offered few specifics. As a result, Wall Street analysts will be listening closely to Tuesday’s conference call, trying to gauge the success or failure of the questionable initiative.

Theme parks are just one of many divisions impacted by the pandemic, with the majority of film production still shut down, forcing Walt Disney to delay the filming of new Star Wars, Marvel, and Pixar movies. The ESPN sports division is struggling as well, with MLB games delayed due to team outbreaks that threaten to derail an abbreviated 60-game season. And, of course, no one expects Disney cruise ships to sail again before the second quarter of 2021.

Wall Street And Technical Outlook

Wall Street Consensus remains highly guarded, with a ‘Hold’ rating based upon 7 ‘Buy’ and 12 ‘Hold’ recommendations. Two analysts believe that shareholders should consider moving to the sidelines at this time. Price targets currently range from a low of $85 to a street-high $146 while the stock is trading $4 below the median $120 target. It’s possible another blowout quarter in Disney+ subscriptions could lift sentiment enough to reach the median target.

Walt Disney is holding up relatively well, given multiple headwinds, oscillating just below the 200-day moving average at 120. Buying pressure eased in June after an oversold impulse, with holding patterns pointing to a wait-and-see attitude by shareholders. A destructive second pandemic wave this fall and winter could shake that faith, generating an exodus that brings the first quarter low back into play.

S&P 500 Bulls Pulled a Rabbit Out Of Their Hats

Just as I called for, the bulls are winning in the battle to break above the early June highs lastingly. And it’s not through technology, communications or the defensives – the other sectors keep more or less standing ground.

So, can I wave off the selling pressure right after the opening bell? In today’s analysis, I will look at this shot across the bow, and examine the extent to which the bulls should be concerned, or not.

I reaction to Q2 tech earnings indeed overpowered the dismal quarterly GDP figures and struggling job market. Right or wrong, the stock market takes a rear view mirror look at this historic GDP plunge, treating it as a mere mini-depression. It chooses to ignore the fact that more than 54 million Americans have filed new claims for unemployment benefits, and that a total of 118 million working age Americans aren’t working (the labor participation rate in June stood at 61.5% only).

With the new stimulus around the corner, it’s betting that the unprecedented plunge in personal consumption (concentrated in services, not goods) and likewise steep dive in consumer sentiment, would be over. Right now, such bets are still paying off.

S&P 500 in the Medium- and Short-Run

I’ll start today’s flagship Stock Trading Alert with the weekly chart perspective (charts courtesy of http://stockcharts.com ):

After preceding week’s hesitation, bullish price action revived the weekly chart again. On solid volume, prices closed above the early June highs. All by themselves, I don’t see the extended weekly indicators as a cause for concern – such rationale has to stem from the daily chart, so let’s check that one next.

Another breakout attempt above the early June highs is officially in, and its rising volume is encouraging. Or does the bearish candlestick bring more than its fair share of caution? Without a downside reversal in the nearest days, the candle merely tells a story of a successful reversal of Friday’s losses.

The credit markets still lean the bullish way.

The Credit Markets’ Point of View

High yield corporate bonds (HYG ETF) extended gains on Friday, having earlier repelled the bears. The lower volume isn’t an issue when examining the previous volume spike. Take a look at late June, and the relative volume differential in the session following the washout one. That’s why I see Friday’s decreasing volume vs. Thursday’s high one, as no cause for concern.

Both the leading credit market ratios (please see this and many more charts at my home site) – high yield corporate bonds to short-term Treasuries (HYG:SHY) and investment grade corporate bonds to longer-dated Treasuries (LQD:IEI) – are broadly supporting each other. And that bodes well for the stock upswing to go on.

The ratio of high yield corporate bonds to all corporate bonds (PHB:$DJCB) is in an uptrend again, and such return of the animal spirits in bonds is constructive for the stock market bulls.

The ratio of stocks to Treasuries ($SPX:$UST) paints a bit more cautious picture. Yet, its message is still of the stock bulls enjoying the benefit of the doubt.

The overlaid S&P 500 closing prices (black line) against the HYG:SHY ratio show that Friday’s close didn’t leave stocks in a dangerously extended position. Should the HYG:SHY tailwind last as I see it likely to, then stock prices have a floor nearby.

Smallcaps and Emerging Markets

The Russell 2000 (IWM ETF) is trading weak on a very short-term basis – it didn’t manage to even close unchanged while the S&P 500 moved up. Should they have performed better, that would point to a more broad-based advance within the S&P 500 – and indeed, the daily market breadth indicators in the 500-strong index have seen better days, politely put. But back to smallcaps.

Indeed, the IWM ETF is in a vulnerable position after having defended its 200-day moving average. Should its weakness take a more impactful turn, that would surely affect the S&P 500.

Emerging markets keep their healthy consolidation going, and are slowly again approaching their early July highs. This chart’s message certainly isn’t bearish for the S&P 500.

S&P 500 Sectors in Focus

Technology (XLK ETF) is all the rage again, making new 2020 highs. Pretty extended, but the much talked about correction, hasn’t come and isn’t really here. The key driver of Friday’s S&P 500 isn’t disappointing.

Crucially, semiconductors (XSD ETF) aren’t underperforming in any dramatic fashion. Dramatic – that’s an understatement, because one day’s weakness doesn’t cut that. Move on, no crack in the dam here.

Healthcare (XLV ETF) merely refused to decline profoundly on Friday, and isn’t really acting as a market leader over the past few session. Step aside though, and the chart is healthy, and I look for an upside surprise here quite soon. Perhaps some more vaccine news slash hype would help the lackluster financials (XLF ETF) performance too.

Summary

Summing up, Friday’s S&P 500 reversal is keeping the breakout attempt above the early June highs alive. Credit markets keep acting strong, and the rise in Treasuries just serves to power the TINA (there is no alternative) trade as it pushes investors farther out on the risk curve. Farther than they would be comfortable, but still helping the stock bull at the moment. One of the key watchouts is the daily market breadth, where both the advance-decline line and advance-decline volume remain in the bearish territory. Overall, the balance of risks remains skewed to the upside, though the bulls would benefit from a tight stop-loss locking recent gains.

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.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.

* * * * *

All essays, research and information found above represent analyses and opinions of Monica Kingsley 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, Monica Kingsley and her 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. Ms. Kingsley is not a Registered Securities Advisor. By reading Monica Kingsley’s reports you fully agree that she 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. Monica Kingsley, 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 Higher As Traders Push Equities To Multi-Month Highs

Euro Area Manufacturing Gets Back To Expansion Mode

S&P 500 futures are up in premarket trading in sympathy with European bourses which are gaining ground after the release of Euro Area Manufacturing PMI report.

The report showed that Euro Area Manufacturing PMI increased from 47.4 in June to 51.8 in July. Numbers above 50 show expansion. The return to growth is an encouraging development which may provide additional support to riskier assets.

Today, the U.S. will also release its Manufacturing PMI data. Analysts expect that U.S. Manufacturing PMI increased from 49.8 in June to 51.3 in July. A better-than-expected Manufacturing PMI report can provide more support to U.S. stocks and push them higher.

Republicans And Democrats Fail To Reach Consensus On New Coronavirus Aid Package

Republicans and Democrats continued their negotiations over the weekend but did not manage to reach consensus on the coronavirus aid deal.

Democrats want to preserve special unemployment benefits of $600 per week while Republicans are worried about costs and want to cut benefits to $200 per week.

As usual, there are other negotiating points, but the unemployment benefit topic remains the key source of discord.

Few analysts doubt that the U.S. needs to provide additional support to consumers to keep spending at healthy levels. The U.S. economy is dependent on consumer activity so a decline in spending could significantly hurt the recovery.

Microsoft May Buy TikTok’s U.S. operations

According to a recent Reuters report, U.S. President Donald Trump gave Microsoft 45 days to negotiate a deal to buy TikTok’s U.S. operations. Microsoft has already discussed the potential deal with Trump.

The U.S. has accused Chinese software companies of sharing data of U.S. citizens with the Chinese government, and TikTok is the first company in Washington’s crosshairs.

More Chinese companies will soon feel the same pressure as Secretary of State Mike Pompeo promised that Donald Trump would announce new measures to safeguard U.S. citizens’ data in the upcoming days.

China stated that it opposed actions against its software companies, and retaliation in some form is almost guaranteed.

For now, the U.S. stock market completely ignores another increase in U.S. – China tensions as it is focused on upbeat Manufacturing PMI data from Europe and expectations of good Manufacturing PMI data from the U.S.

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

Clorox Sales Up 22% in June Quarter Amid COVID-19 Panic-Buying; Target Price $256

Clorox, a $9 billion market cap consumer products company, reported that its sales surged 22% in the June quarter, including double-digit growth across all reportable segments as people spent more time cleaning and disinfecting their homes due to the COVID-19 pandemic, sending its shares up over 1% pre-market trading.

Clorox said it delivered earnings of $310 million, or $2.41 diluted EPS in the fourth quarter, which ended June 30, 2020, compared to $241 million, or $1.88 diluted EPS, the same quarter a year earlier, representing a 28% increase in diluted earnings per share. The company’s fourth-quarter gross margin increased 170 basis points to 46.8% from 45.1% in the year-ago quarter.

The board of directors of the Clorox Company also announced that, effective Sept. 14, 2020, Linda Rendle will be promoted to chief executive officer and elected to the company’s board of directors. Benno Dorer will continue serving as the board’s executive chair.

Clorox shares closed 2.27% higher at $236.51 on Friday, increased more than 50% since the beginning of 2020.

Clorox stock forecast

Nine analysts forecast the average price in 12 months at $202.89 with a high forecast of $256.00 and a low forecast of $164.00. The average price target represents a -14.22% decrease from the last price of $236.51. From those nine, three analysts rated ‘Buy’, four analysts rated ‘Hold’ and three rated ‘Sell’, according to Tipranks.

Morgan Stanley target price is $193 with a high of $259 under a bull scenario and $145 under the worst-case scenario. Deutsche Bank raised its target price to $223 from $174. Several other equity analysts have also updated their stock outlook. Clorox had its price target raised by investment analysts at JPMorgan Chase & Co. to $235 from $203. BofA Global Research raised price objective to $235 from $215.

We think it is good to buy at the current level with a target of $256 as 100-day Moving Average and 100-200-day MACD Oscillator signal a mild buying opportunity.

Analyst comment

“Structural Long-term Topline Challenges Relative to HPC Peers: While CLX’s near-term topline is likely to be robustly supported by a COVID-related demand boost for cleaning products (we project +17.5% for 2H20e, driven by the 25% of CLX’s business related to cleaning), we believe that longer-term, Clorox remains over-indexed to low-growth product categories, with high exposure to the US,” said Dara Mohsenian, equity analyst at Morgan Stanley.

“Valuation Too High: We view CLX valuation of 20.5x CY21e EV/EBITDA and 30x CY21e P/E as too high (in comparison to PG at 23x CY21e P/E) considering limited LT EPS growth and strategic potential relative to peers post a beneficial COVID impact,” he added.

Upside and Downside Risks

Topline and margin upside from improved pricing, longer-lasting COVID-related demand impact, better than expected volume, declining commodity costs, successful innovation driving recaptured shelf space, consolidation potential, and cost-cutting, Morgan Stanley highlighted as upside risks to Clorox.

Pricing doesn’t take hold, worsening volumes, higher than expected commodity inflation, heightened competition from private label, Morgan Stanley highlighted as downside risks.

Marathon Petroleum to Sell Speedway for $21 billion to 7-Eleven; Target Price $48

Marathon Petroleum, an American petroleum refining, marketing, and transportation company, announced that it has entered into an agreement with 7-Eleven, a wholly-owned indirect subsidiary of Seven & i Holdings, to sell its Speedway gas stations in the United States for $21 billion in cash.

The $21 billion valuation represents a significant value unlock. The 100% cash transaction immediately captures value for MPC shareholders relative to potential valuation risks of other alternatives, the company said.

“We estimate a 17% equity valuation uplift from the transaction with proceeds evenly going to buybacks and debt, though that allocation will not be decided until deal close. Rating and price target under review,” said Jason Gabelman, equity analyst at Cowen.

“We expect MPC to target net debt at <1x mid-cycle EBITDA post-sale. We estimate $2.2 billion mid-cycle refining EBITDA plus $2.2 billion distributions from the MLP. This could mean $7.5 billion of sale proceeds go to debt paydown with the remainder to share buybacks, though one could argue the stable distributions from the MLP mean a higher debt multiple. The equity value change until deal close will impact how many shares will ultimately be repurchased and could be a driver of value creation from this sale.”

The deal is expected to result in after-tax cash proceeds of approximately $16.5 billion. Marathon Petroleum expects to use the proceeds to both repay debt to protect its investment-grade credit profile and return capital to shareholders.

The deal is anticipated to close in the first quarter of next year, subject to customary closing conditions and regulatory approvals. 7-Eleven said the agreement will help bring the total number of stores in the world’s biggest economy and Canada to nearly 14,000.

“We think this is a positive outcome for Marathon Petroleum, with the company receiving a price that’s above expectations (which we peg at ~$17-18 billion pre-tax), crystallizing Speedway value immediately, and bringing in more cash for greater financial flexibility (vs. a spin),” said Benny Wong, equity analyst at Morgan Stanley.

Following this deal, Seven & i shares fell more than 8% to JPY 2937.5 on Monday, the biggest one-day drop since March. Marathon Petroleum shares rose 0.5% to $38.38 in after-hours trading.

Executive comment

“This transaction marks a milestone on the strategic priorities we outlined earlier this year,” Michael J. Hennigan, president and chief executive officer said a press release.

“Our announcement crystalizes the significant value of the Speedway business, creates certainty around value realization and delivers on our commitment to unlock the value of our assets.  At the same time, the establishment of a long-term strategic relationship with 7-Eleven creates opportunities to improve our commercial performance.”

Marathon Petroleum stock forecast

Eleven analysts forecast the average price in 12 months at $47.09 with a high forecast of $61.00 and a low forecast of $38.00. The average price target represents a 23.27% increase from the last price of $38.20. From those 11, nine analysts rated ‘Buy’, two analysts rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

Marathon Petroleum had its price target trimmed by Scotiabank to $48 from $51 The firm currently has a sector outperform rating on the oil and gas company’s stock. Mizuho lowered its price target to $52 from $54. Jefferies cuts target price to $48 from $50.

Several other equity analysts have also updated their stock outlook. Jefferies Financial Group increased their target price on shares of Marathon Petroleum to $48.00 from $50.00. Morgan Stanley target price is $48 with a high of $60 under a bull scenario and $28 under the worst-case scenario. We think it is good to hold for now as 100-day Moving Average signals a mild selling opportunity.

Analyst comment

“Marathon Petroleum offers multiple ways to win. We expect MPC to benefit from the overall decline in crude prices, although we caution refined product demand risk could weigh on valuation. That said, the stock offers idiosyncratic upside as the company is undergoing a strategic review to unlock discounted value, which includes spinning out Speedway,” Morgan Stanley’s Wong said.

“We see a SoTP upside to ~$50/shr. Our SoTP is as follows: we assign $24/shr to retail, $21/shr to midstream, and $24/shr to refining. Adjusted for assets/liabilities, net debt, and synergies, our SoTP suggests a ~$51/shr valuation (>47% upside),” he added.

Upside and Downside Risks

Oil prices stay depressed or decline further; Successful spin-off of Speedway retail fuel business; Potential separation of MPLX and conversion to a C-Corp; Material widening of sweet-sour differentials, Morgan Stanley highlighted as upside risks to Marathon Petroleum.

Demand risk and Sweet-sour differentials narrow materially are two major downside risks.

Positives to Outweigh Negatives, Constructive on Stocks and Other Risk Assets: Fidelity’s Timmer

The direction in which the stock market may head is not as clear as it was at the end of March as some things are working in favour of stocks going up and also against them; however, the positives continue to outweigh the negatives, said Fidelity’s Global Asset Allocation Division director of global macro, Jurrien Timmer, who remains constructive on stocks and other risk assets in general.

So far, the deadly virus has infected more than 18 million people in over 210 countries and killed nearly 700 thousand, wherein the United States is the worst hit. Despite that, stocks continue to act as if we have already beaten the COVID-19, the infectious disease caused by the most recently discovered coronavirus.

The S&P 500 index has gained 50% since hitting a three-year low on March 23 of 2191.86, largely spurred by the Federal Reserve’s massive stimulus and COVID-19 vaccine optimism. However, the year is already halfway through and now it rests with the stock market to prove that it was right about a sharp V-shaped rebound in economic growth.

Since nearly all the country’s economic activity has been suspended since late March amid rising concerns about the spread of the coronavirus disease, federal governments and central banks around the world has spent trillions of dollars trying to help restart the economy and provide some relief to the financial markets.

That stimulus has given the initial impetus to stock as liquidity increased in the debt markets and volatility subdued in several markets. However, the long-term impact of these massive stimuli on the economy and the financial markets is unknown. The S&P 500 ended 1% higher at 3271.12 on Friday, just 122.4 points below its all-time high of 3,393.52 registered on February 19.

The COVID-19 related collapse in earnings will be reversed slowly as the economy re-opens and the recovery matures into expansion in 2021, causing a full recovery in the market to the February highs by the end of this year. The S&P 500 stock index to hit 3,400 By the end of this year and 3,600 next year; earnings to also rebound in 2021, according to Mizuho Securities.

Empirically, big price gains, combined with a large retracement after a fall amid strength in market broadness – a trend that can be seen in the S&P 500 today, has always led to a start of a bull market.

“If there ever was a pivotal moment for making a call on which direction the next 10% or 25% move will be for the S&P 500, now is it, I believe. A few months ago, it seemed to me, it was a relatively simple call, at least based on the study of market history. The stock market typically rallies after the type of historic selling climax experienced in late March, and this time has not been any different so far. But after a 46% rally (which never produced a retest) I think it’s much more of a toss-up now,” said Fidelity’s Global Asset Allocation Division director of global macro, Jurrien Timmer.

On the positives, Fidelity’s Timmer said:

“On the plus side, the economy has bottomed and is recovering, with earnings growth following along. Earnings season is looking good so far, with 85% of companies beating estimates by an average of 15 percentage points. It’s still early days for earnings season with 181 companies reporting, and the differences between estimates and reported earnings are unusually large given how little guidance there has been on the earnings front. The policy response has been another plus, of course. The Fed is keeping its foot on the monetary gas pedal, and more fiscal relief may be on the way as well, as transfer payments threaten to dry up. The promise that the Fed and Treasury (and their global counterparts) can build a bridge across the COVID-19 abyss and on to the other side of this pandemic has been an important factor behind the market’s powerful rally,” Fidelity’s Timmer said.

“The tape (momentum and breadth) has been another plus for the US market. The sentiment picture is another positive. Finally, on the plus side, there appear to be a number of potential positive developments underway in terms of COVID-19 treatments and vaccines. This prospect, along with the Fed, have put a floor under the market, including the more economically sensitive ‘reopen’ sectors,” he added.

On the negatives, Fidelity’s Timmer said

“COVID-19 continues to burn its way through sections of the U.S. and the world, and this is causing some states to delay or reverse their reopening plans. As a result, some of the high-frequency economic indicators are suggesting that the economy is starting to stall out following the initially strong V-shaped recovery. The longer the recovery gets dragged out, the greater the risk that this V could turn into a U or L, and that the liquidity crisis that the Fed was able to mitigate will turn into a solvency crisis not unlike 2008,” Fidelity’s Timmer said.

“The risk is not that the economy will not recover, just that it won’t recover back to its full potential. If the economy recovers, but only to say 70% of what it was pre-COVID, then it will be a long slog back to normal. Right now, the stock market seems to be priced for something quicker. On top of this we have a pivotal election in a few months, bringing with it various potential policy outcomes, which could eventually affect corporate taxes and U.S.-China relations,” he added.

“A well-diversified portfolio of both growth stocks and deep value stocks (especially emerging market and non-US developed), gold and Treasury Inflation-Protected Securities (TIPS), and long-duration bonds. A portfolio similar to this, in my view, is pretty close to an all-weather portfolio,” he concluded.

Precious Metals Weekend Wrap-up August 1, 2020

Now that we have encouraging data, we should be able to make informed decisions concerning on how to move forward. Unfortunately, politicians are making this much worse than it needs to be. The damage they have done to the economy is immeasurable.

It’s reported that 55% of restaurants on Yelp have shut their doors for good. And some estimate that 33% of the hotels in the U.S. could go out of business. In my opinion, the economy is yet to feel the long-term consequences of this economic shutdown.

Gold reached new all-time highs on the back of a declining dollar. I expected a breakout above $2000, but not until 2021 or 2022. What happens next depends on the dollar. If the dollar stabilizes and turns higher, then gold should correct and begin to consolidate. If the dollar continues to crash, then gold could enter a runaway move higher.

The Fed announced no change in its interest rate policy on Wednesday and said it would do everything necessary to support the economy. Sometimes gold and the dollar reverse trends (top or bottom) just after a Fed decision. The dollar formed a bullish engulfing candle on Friday, supporting the potential for a reversal.

The gold cycle indicator remains pegged at 450, and gold is very overbought.

US DOLLAR

Gold is higher as a direct result of the crashing dollar. The dollar is incredibly oversold and due for a bottom, which would imply a top in gold. I’ve mentioned before how prices often reverse on or just after a crucial Fed meeting. The dollar formed a bullish engulfing candle on Friday, 2-days after Wednesday’s announcement. Closing above the 10-day EMA (currently 94.11) next week would sponsor a bottom.

GOLD WEEKLY

It’s rare for prices to slice through a significant resistance level without consolidating first. And for that reason, I’m suspicious of the recent breakout to new all-time highs. When momentum is strong, like now, prices will sometimes overshoot a major level. If this is a momentum overshoot, then gold should stay below $2050 and finally turn lower. A sustained advance above $2100 would signal a potential runaway move.

GOLD DAILY

Gold reached an intraday high of $2005.40 on Friday. Prices are very overbought, and the cycle indicator is maxed out at 450. The trend is well-overdue for a correction. A daily finish below $1971.40 would secure a swing high and signal a potential top.

SILVER

After breaking out above $20.00, silver exploded to our $26.00 target. Prices are overbought and due for a pullback. Closing below $22.50 would support a top. To extend this advance, prices would have to close above the $26.27 spike high.

PLATINUM

Platinum is the last precious metal to breakout to fresh highs. Prices would have to close above $1050 to signal a breakout. Whereas dropping below the cycle trendline would indicate a correction.

GDX

On Thursday, miners closed below Monday’s gap, issuing a potential exhaustion gap sell signal. Miners would have to close above $44.46 to reverse the short-term bearish signal. To confirm a multi-week correction – GDX would have to close below $36.87.

GDXJ

Juniors also closed below Monday’s gap, triggering a short-term sell signal – prices would have to close above $63.31 to reverse it. Otherwise, breaking below $50.00 would confirm the onset of a multi-week cycle correction.

SPY

Stocks consolidated throughout the week but managed to close above the short-term trendline on Friday. It looks like prices will attack the February 329 gap next week. Like gold, the trend is incredibly overbought and ready for a correction.

Have a safe and pleasant weekend.

AG Thorson is a registered CMT and expert in technical analysis. He believes we are in the final stages of a global debt super-cycle. For more information, please visit here.

The Week Ahead – COVID-19, Economic Data and US Politics in Focus

On the Macro

It’s a busier week ahead on the economic calendar, with 59 stats in focus in the week ending 7th August. In the week prior, just 57 stats had been in focus.

For the Dollar:

It’s another busy week ahead on the economic data front.

In the 1st half, the ISM’s July private sector PMIs, ADP nonfarm employment change figures, and June factory orders are in focus.

We would expect Wednesday’s ISM Non-Manufacturing PMI and ADP Nonfarm Employment Change to have the greatest impact.

The focus will then to Thursday’s initial jobless claims and Friday’s nonfarm payroll numbers and unemployment rate.

Following some disappointing weekly jobless claims figures and the rise in COVID-19 cases, the labor market figures will be key.

For the service sector, any contraction in July, following a jump in productivity in June, would also weigh on riskier assets.

The Dollar Spot Index ended the week down by 1.15% to 93.349.

For the EUR:

It’s also another busy week ahead on the economic data front.

On Monday and Wednesday, July’s manufacturing and services PMIs are due out of Italy and Spain.

Finalized PMIs are also due out of France, Germany, and the Eurozone.

With Spain seeing a spike in new COVID-19 cases, expect some attention to the PMIs. Ultimately, however, the Eurozone’s services and composite will likely have the greatest impact.

The focus will then shift German factory orders for June, due out on Thursday.

At the end of the week, Germany remains in focus, with June’s industrial production and trade figures due out.

Barring disappointing numbers, June retail sales figures for the Eurozone should have a muted impact on Thursday.

The EUR/USD ended the week up by 1.05% to $1.1778.

For the Pound:

It’s a relatively busy week ahead on the economic calendar. July’s finalized private sector PMIs are due out and will garner plenty of interest.

Expect any downward revision to the Services PMI on Wednesday to have the greatest impact.

On Thursday, the focus will then shift to the BoE. More action is expected and the Bank may consider an extension to the suspension of banks paying dividends and buybacks.

While the BoE is in action, we can also expect any further updates on Brexit to also influence in the week.

The GBP/USD ended the week up by 2.27% to $1.3085.

For the Loonie:

It’s a relatively busy week ahead on the economic calendar.

On Wednesday, June’s trade figures are due out ahead of July employment numbers on Friday.

Expect the employment figures to have the greatest impact, however.

Barring dire numbers, the Ivey PMI for July should have a muted impact on the Loonie on Friday.

Away from the stats, COVID-19 and geopolitics will continue to influence crude oil prices and risk sentiment.

The Loonie ended the week up by 0.02% to C$1.3412 against the U.S Dollar.

Out of Asia

For the Aussie Dollar:

It’s a relatively busy week ahead for the Aussie Dollar.

At the start of the week, the Manufacturing Index figures are due out ahead of a busy Tuesday.

We would expect manufacturing PMIs from China, the EU, and the U.S to have a greater impact, however, on Monday.

The focus will then shift June trade and retail sales figures due out on Tuesday. Expect the retail sales figures to have the greatest impact. The RBA continues to rely on consumer spending to support the economy. Weak numbers will be a test for the Aussie Dollar.

For the week, however, the main event is the RBA monetary policy decision on Tuesday.

Following the spike in new COVID-19 cases, will the RBA remain optimistic about the economic recovery?\

Any dovish chatter and the Aussie Dollar could eye sub-$0.70 levels. At the end of the week, the RBA’s statement on monetary policy will also draw interest.

The Aussie Dollar ended the week up by 0.53% to $0.7143.

For the Kiwi Dollar:

It’s another quiet week ahead on the economic calendar.

2nd quarter employment figures are due out on Wednesday. The markets will likely be forgiving to an extent, with COVID-19 expected to have an impact on employment.

With economic data on the lighter side, private sector PMIs from China, the EU, and the U.S will influence.

Expect geopolitics and COVID-19 news to also have an impact in the week. Any signs of a slowdown in new cases globally and expect support to kick in.

The Kiwi Dollar ended the week down by 0.18% to $0.6629.

For the Japanese Yen:

It is a busy week ahead on the economic calendar.

Finalized 2nd quarter GDP and July’s manufacturing PMI numbers are due out on Monday.

The focus will then shift to July’s service PMI on Wednesday and June household spending figures on Friday.

While the stats will influence sentiment towards BoJ monetary policy, the Yen will remain at the mercy of COVID-19 and geopolitics.

The Japanese Yen ended the week up by 0.29% to ¥105.83 against the U.S Dollar.

Out of China

It’s a relatively busy week ahead on the economic data front.

July’s private sector PMIs are due out on Monday and Wednesday. Expect the figures to influence risk appetite in the week.

On Friday, July trade figures will also garner plenty of attention. While exports remain the main area of focus, any sizeable fall in imports would test risk appetite on the day.

Away from the economic calendar, any chatter from Beijing will also need monitoring.

The Chinese Yuan ended the week up 0.62% to CNY6.9752 against the U.S Dollar.

Geo-Politics

UK Politics:

Brexit will remain in focus. Talks are set to continue through August and September ahead of an EU Summit in October.

60 days may sound like a lot but when considering the lack of progress over 4-years…

A light economic calendar and Brexit chatter have provided the Pound with support. We may even see the markets brush off the chances of a hard Brexit.

Getting on with it seems to be the key desire now rather than dragging it out any longer. Either way, we’re not expecting Johnson and the team to give too much away…

U.S Politics:

Last week, the Republicans showed signs of fragmentation. As Presidential Election stress builds, we could see more fractures as Trump attempts to distract voters.

The immediate issue at hand, however, is the COVID-19 stimulus package. Any failure to deliver will weigh on the Dollar. Labor market conditions have not improved and the 2nd wave has shown little sign of slowing. A lack of benefits for the unemployed will raise more issues than a fall in household spending. We have already seen social unrest…

The Coronavirus:

It was yet another bad week, with the number of new COVID-19 cases continuing to rise at a marked pace.

From the market’s perspective, the 3 key considerations have been:

  1. Progress is made with COVID-19 treatment drugs and vaccines.
  2. No spikes in new cases as a result of the easing of lockdown measures.
  3. Governments continue to progress towards fully opening economies and borders.

Last week, we saw a number of countries including Hong Kong and the UK reintroduce containment measures. Hopes of progress towards a vaccine had limited the damage last week. In the week ahead, however, the numbers will need to ease off to avoid spooking the markets.

At the time of writing, the total number of coronavirus cases stood at 17,981,937. Monday to Saturday, the total number of new cases increased by 1,782,490. Over the same period in the previous week, the total number had risen by 1,531,149.

Monday through Saturday, the U.S reported 447,236 new cases to take the total to 4,762,945. This was up marginally from the previous week’s 417,070

For Germany, Italy, and Spain, there were 22,814 new cases Monday through Saturday. This took the total to 793,804. In the previous week, there had been 17,083 cases over the same period. Spain accounted for 16,101 of the total new cases in the week.

E-mini S&P 500 Index (ES) Futures Technical Analysis – Chart Pattern Indicates Heightened Volatility

September E-mini S&P 500 Index futures finished higher after clawing back earlier losses in what proved to be a very volatile trading session. Stocks opened higher then fell to their lows of the session as concerns about the economic damage from the COVID-19 pandemic replaced early bullishness from stunning quarterly earnings reports by Apple, Amazon.com and Facebook. However, the market managed to recapture those losses into the futures market close despite a lower cash market close.

On Friday, September E-mini S&P 500 Index futures settled at 3269.50, up 20.75 or +0.63%.

The S&P Technology Sector, a major component of the overall index, was boosted by a strong performance in shares of all three tech heavyweights.

Apple Inc shared surged to reach a record high in the wake of blowout quarterly earnings results and a four-for one stock split announcement.

Amazon.com Inc jumped after posting the biggest profit in its 26-year history, while Facebook Inc gained after it reported better-than-expected revenue.

Google-parent Alphabet Inc, on the other hand, fell as quarterly sales dipped for the first time in its 16 years as a public company.

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. The uptrend was reaffirmed on Thursday, but the rally fizzled earlier today after an attempted breakout over 3269.00 failed to attract enough buyers to extend the move. Late in the session, however, the index managed to reaffirm the uptrend.

The main trend will change to down on a trade through 3195.00, but were not likely to see an acceleration to the downside unless the selling is strong enough to talk out the next main bottom at 3191.50.

The short-term range is 3284.50 – 3191.50. Its 50% level at 3238.00 appears to be controlling the near-term direction of the index. Traders straddled this price level four times this week as they tried to establish direction.

The short-term range is 3105.25 to 3284.50. Its retracement zone at 3194.75 to 3173.75 is support. It has been propping up the index since July 15.

The main range is 2923.75 to 3284.50. Its retracement zone at 3104.00 to 3061.50 is another potential support zone.

Short-Term Outlook

Based on this week’s price action, it looks like we are likely to experience a volatile trade next week because of the tight trading range. Traders don’t like to see the same prices every day. They want movement and action.

A volatile breakout to the upside could start on a sustained move over 3238.00. Other potential trigger points for an acceleration to the upside are 3273.75 and 3284.50.

On the downside, crossing to the weak side of the short-term Fibonacci level at 3173.75 is likely to draw in the short-sellers. Also contributing to a potential acceleration to the downside will be sell stops placed under 3173.75.

If traders hit this level with selling conviction then don’t be surprised by an acceleration to the downside with the first target a support cluster at 3105.25 to 3104.00.

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

The Weekly Wrap – Economic Data, the FED, and Trump Sank the Dollar

The Stats

It was a busy week on the economic calendar, in the week ending 31st July.

A total of 56 stats were monitored, following the 41 stats from the week prior.

Of the 56 stats, 31 came in ahead forecasts, with 24 economic indicators coming up short of forecasts. Just 1 stat was in line with forecasts in the week.

Looking at the numbers, 19 of the stats reflected an upward trend from previous figures. Of the remaining 37, 35 stats reflected a deterioration from previous.

For the Greenback, it was a 6th consecutive week in the red. In the week ending 31st July, the Dollar Spot Index fell by 1.15% to 93.349. In the week prior, the Dollar had fallen by 1.57%.

The continued slide through the month of July left the Dollar Spot Index down by 4.15% for the month.

Dire economic data, the continued spread of COVID-19, and a dovish FED delivered the loss. Adding to the Dollar angst in the week was Trump’s Presidential Election delay tweet on Thursday…

According to a Reuters report, U.S Dollar net shorts surged to the highest in 9-years, delivering the largest monthly loss Since Sept-2010.

Looking at the latest coronavirus numbers

At the time of writing, the total number of coronavirus cases stood at 17,731,750 for Friday, rising from last Friday’s 15,930,779 total cases. Week-on-week (Saturday thru Friday), the total number of cases was up by 1,801,071 on a global basis. This was higher than the previous week’s increase of 1,741,556 in new cases.

In the U.S, the total rose by 454,463 to 4,702,774. In the week prior, the total number of new cases had risen by 478,299.

Across Germany, Italy, and Spain combined, the total number of new cases increased by 22,753 to bring total infections to 793,804. In the previous week, the total number of new cases had risen by 17,404. Spain alone reported 16,101 new cases in the week.

Out of the U.S

It was a busy week on the economic data front.

Key stats included July consumer confidence, the weekly jobless claims, and 2nd quarter GDP figures.

The stats were skewed to the negative. Consumer confidence deteriorated in July, as a result of the 2nd wave of the pandemic. Initial jobless claims increased for a 2nd consecutive week, with the U.S economy contracting by 32.9% in the 2nd quarter.

At the end of the week, July consumer sentiment figures were also revised down.

There were some positives, however. Durable and core durable goods continued to rise in June.

Chicago’s PMI returned to expansion in July, with personal spending rising for a 2nd consecutive month in June. These were good enough to give the Dollar much-needed support at the end of the week.

In the equity markets, the NASDAQ and S&P500 rose by 3.69% and by 1.73% respectively. The Dow bucked the trend, however, falling by 0.16%.

Out of the UK

It was a particularly quiet week on the economic calendar, with no material stats to provide the Pound with direction.

A lack of economic data contributed to the upside in the Pound that benefitted from Dollar weakness. News of the government reintroducing lockdown measures in the North weighed at the end of the week, however.

In the week, the Pound rallied by 2.27% to $1.3085 in the week, following on from a 1.80% gain from the previous week. The FTSE100 ended the week down by 3.69%, following on from a 2.65% loss from the previous week.

Out of the Eurozone

It was a busy week on the economic data front.

In a quiet 1st half of the week, Germany’s IFO Business Climate Index figures for July provided support on Monday.

The focus then shifted to 2nd quarter GDP numbers. France, Germany, and the Eurozone reported particularly dire 2nd quarter numbers.

The German economy contracted by 10.1%, the French economy by 13.8%, and the Eurozone economy by 12.1%.

It wasn’t enough to send the EUR into the red, however, as the U.S delivered darker numbers.

For the week, the EUR rose by 1.05% to $1.1778, following a 2.00% rally from the previous week. A 0.58% pullback on Friday limited the upside for the week.

For the European major indexes, it was another bearish week. The DAX30 slid by 4.09%, with the CAC40 and EuroStoxx600 falling by 3.49% and by 2.98% respectively.

For the Loonie

It was a quiet week on the economic calendar.

Economic data included May GDP and June RMPI numbers at the end of the week.

The stats were positive, with the Canadian economy expanding by 4.5% in May, following April’s 11.7% contraction. In June, the RMPI rose by a further 7.5%, following a 16.4% jump in May.

While the other majors lost ground against the Greenback on Friday, the stats delivered support at the end of the week.

The Loonie rose by 0.02% to end the week at C$1.3412 against the Greenback. In the week prior, the Loonie had rallied by 1.22% to C$1.3415.

Elsewhere

It was a mixed week for the Aussie Dollar and the Kiwi Dollar.

In the week ending 31st July, the Aussie Dollar rose by 0.53% to $0.7143, while the Kiwi Dollar fell by 0.18% to $0.6629. A 1.04% slide on Friday, left the Kiwi in the red for the week.

For the Aussie Dollar

It was a relatively quiet week for the Aussie Dollar.

Inflation and private sector credit figures delivered mixed results in the week.

In the 2nd quarter, consumer prices slid by 1.9%, with prices down by 0.30% year-on-year.

Final delivery numbers were not much better, with the Producer Price Index falling by 1.20% in the 2nd quarter. Year-on-year, the index fell by 0.40%.

The numbers were better than forecasts, which propped up the Aussie Dollar.

Private sector credit disappointed, however, falling by 0.3% in June.

While the Aussie Dollar found support against the Greenback, the latest COVID-19 outbreak pinned back the Aussie.

For the Kiwi Dollar

It was another relatively quiet week on the economic data front.

While stats included building consent and business confidence figures, the focus was on the business confidence figures.

A marginal improvement in business confidence did little to support the Kiwi, however.

In July, the ANZ Business Confidence Index rose from -34.4 to -31.8.

According to the latest ANZ Report,

  • A net 9% of firms expect weaker economic activity in their own business, rising from -26% in June.
  • The retail sector drove the recovery, while the agriculture sector was the most negative.
  • 31% of firms say they intend to lay off staff, and 24% say they have less staff than a year ago.

For the Japanese Yen

It was a relatively quiet week on the economic calendar.

Retail sales continued to fall in June. Following a 12.5% slump in May, retail sales fell by 1.20%.

Industrial production delivered hope, however, rising by 2.7% in June, according to prelim figures. In May, production had tumbled by 8.9%.

A weakening U.S Dollar stemming from particularly dire economic data and a dovish FED supported the Yen.

The Japanese Yen rose by 0.29% to end the week at ¥105.83 against the Greenback. A 1.05% slide on Friday, cut the gains from earlier in the week. In the week prior, the Yen had risen by 0.82%.

Out of China

It was a quiet week on the economic data front.

July’s NBS private sector PMI figures delivered mixed results on Friday.

While the Non-Manufacturing PMI slipped from 54.4 to 54.2, the Manufacturing PMI rose from 50.9 to 51.1.

With Beijing and Washington silent, following the previous week’s diplomatic spat, the Yuan recovered to sub-CNY7 levels.

In the week ending 24th July, the Chinese Yuan rose by 0.62% to CNY6.9752 against the Dollar. In the week prior, the Yuan had fallen by 0.37%.

The CSI300 rallied by 4.20%, while the Hang Seng falling 0.45%, as a 2nd wave of the pandemic hit HK.

US Stock Market Overview – Stocks Close Higher to Close out the Month on an Up Note

US stocks moved higher on Friday as the Nasdaq roared higher. Better than expected earnings from Apple, Amazon and Facebook helped buoy the Nasdaq. Apple shares soared more than 10% as iPhone 11 sales surged. Facebook was up more than 7%, as both the top and bottom-line beat expectations. All sectors in the S&P 500 index were lower, led down by losses in cyclicals. The technology was the best performing sector. Personal spending rose more than expected, and inflation ticked up slightly. Crude oil prices edged higher following news that the oil rig count declined by one rig.

Personal Spending Rose

Consumer spending, rose 5.6% last month after a record 8.5% jump in May as more businesses reopened. Expectations had been for consumer spending to rise by 5.5% in June. When adjusted for inflation, consumer spending increased 5.2% last month after surging 8.4% in May. Personal income dropped 1.1% last month after decreasing 4.4% in May. Wages increased 2.2% after rebounding by 2.6% in May. The saving rate fell to a still-high 19% from 24.2% in May.

Inflation edged higher in June

Monthly inflation ticked up in June, driven by food and energy goods and services prices, though the trend remained muted. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components rose 0.2%, matching May’s gain. On a year over year basis, the core PCE price index increased 0.9% after rising 1.0% in May.

Stimulus Bill Hits a Road Block

Negotiators on the next coronavirus relief bill hit a roadblock Friday and have not been able to reach a middle ground. Underscoring the gulf between Democrats and Republicans as they try to boost an economy. The current $600 per week enhanced federal unemployment benefit lapses on 7/31. After last-ditch efforts to pass an extension failed Thursday, the Senate left for the weekend.

S&P 500 Weekly Price Forecast – Continue to Grind Through Earnings Season

The S&P 500 has rallied a bit during the week but gave back some of the gains as we continue to see noise right around the 3280 level. That being said, we are in the midst of earnings season so it could be a major problem. Nonetheless, this major problem is probably short-term at best and I think that we will more than likely see plenty of buyers on any type of pullback. Earnings season causes a lot of noise, but at the end of the day the only thing that truly matters is that the Federal Reserve is still pumping the markets full of liquidity.

S&P 500 Video 03.08.20

The markets continue to see a lot of noise going forward, but I think given enough time it is likely that we will see buyers at lower levels, closer to the 3100 level. On the other hand, if we break above the 3300 level, it is likely that we will continue to go towards the gap above, perhaps even the 3400 level above which is a large, round, psychologically significant figure. That was the all-time high, so if we blow through there then we will of course continue to go much higher but I think we may be taking a little bit of a breather as we listen to the earnings season reports, perhaps giving people a bit of a pause at this point as to putting more money to work. With this, I have no interest whatsoever in trying to short this market, regardless of what is going on in the “real world.”

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

S&P 500 Price Forecast – Stock Markets Continue Channeling Higher

The S&P 500 has pulled back a bit during the trading session on Friday, reaching down towards the 3220 handle. However, there are buyers down there waiting to get involved and therefore think we continue to grind higher. 20 day EMA underneath is massive support, and at this point in time it is likely that the market will continue to find buyers in that general vicinity, perhaps even extended down to the 50 day EMA after that. That being said, the market is likely to continue finding value hunters coming into this market, so I think that eventually liquidity wins, and we go much higher.

S&P 500 Video 03.08.20

The 3300 level above is a target, and once we break above there is likely we will try to fill that small gap that is closer to the 3050 handle. Above there, then the market is likely to go looking towards the 3400 level which was the all-time high. I do think we eventually get there, and perhaps even further to the upside. Regardless, I have no interest in shorting this market as long as the Federal Reserve continues to be ultra-loose with its monetary policy and continue to flood the market with greenbacks. Because of this, the market is going to continue to offer opportunities every time we dip, so be cautious about trying to short this market, as it is in an obvious uptrend and there is no reason to try to fight overall.

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

The S&P 500 Upleg Is Getting Underway

The battle to break above the early June highs is on, and the bulls are likely to win it more lastingly this time around, thanks to tech earnings. The runup to their aftermarket announcement has been promising, and more gains were added once the numbers came in. Can I turn from merely cautiously optimistic to broadly optimistic now?

That’s the question I’ll answer in today’s analysis by examining especially the credit markets and sectoral performance.

S&P 500 in the Short-Run

I’ll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):

Yesterday’s intraday downswing was soundly rejected, and prices closed again near to the early June highs. The chop around the horizontal blue line just got a more bullish flavor. The anticipation of positive tech earnings turned into reality, and has the potential to carry the S&P 500 rally further.

Yes, that’s true just as my yesterday’s comment on the frightening advance Q2 GDP and poor unemployment data, when I wrote that these concerns:

(…) are likely to be brushed aside during the regular session’s trading – I see the focus as being rather on the upcoming stimulus details and tech earnings.

So far so good – let’s check the credit market performance next.

The Credit Markets’ Point of View

A very high volume day in high yield corporate bonds (HYG ETF) yesterday, with prices closing near their daily highs. That’s a show of strength, and a supporting rationale to drive stock prices higher next.

Investment grade corporate bonds (LQD ETF) though didn’t take part in yesterday’s HYG hooray (please see this and many more charts at my home site). At the same time though, they’re not flashing signs that would make me doubt the HYG move higher.

The overlaid S&P 500 closing prices (black line) compared with the HYG:SHY ratio show how relatively timid yesterday’s race to erase opening losses in stocks was. After the late-July soft patch in the 500-strong index, stocks are getting an increasingly stronger HYG:SHY tailwind these days. Is the resolution to the early July chop being repeated with a fledgling upswing? I think so.

S&P 500 Sectors in Focus

The renewed upleg in technology (XLK ETF) bodes well for the S&P 500, and even more so given that estimates were broadly beaten.

Healthcare (XLV ETF) recovered from the initial selling pressure, but its consolidation may have a little further to go regardless of the volume contraction that points to a bigger upcoming move. The drying selling points to an upside resolution more than anything else.

Financials (XLF ETF) also recovered from their intraday downswing, closing about unchanged. The volume though points at accumulation, which is likely to be followed by a move higher.

Consumer discretionaries (XLY ETF) keep trading in a tight range, and their intraday reversal on higher volume is similarly likely to result in another attempt to break above yesterday’s close.

Industrials (XLI ETF) didn’t dazzle yesterday, but the consolidation around their 200-day moving average is still likely to resolve with another upside move.

The first of the defensive sectors, utilities (XLU ETF) are still basing around their 200-day moving average, also with a bullish bias. The rotation into this value play is very much on.

The second one of the defensives, consumer staples (XLP ETF) keep the fire they’ve been on since late June, alive and well. While a consolidation of recent strong gains wouldn’t be unexpected, the underlying bullish trend implications are undeniable.

On one hand, there’s the theme of inflation in the pipeline, and steeply plunging greenback. But the reality of yesterday’s advance Q2 GDP took some cream off the ETF’s prices. As the dip was heavily bought, upcoming move higher appears inevitable.

Summary

Summing up, yesterday’s S&P 500 rebound off the early session’s lows got plenty of follow through next, and is likely to carry over into today’s session too. Tech earnings surprised on the upside, and so did the semiconductors (hello AMD). The rotation into formerly lagging sectors is helped by the tech regaining breath. Smallcaps performed in line with the S&P 500 yesterday, and emerging markets again took the baton. While the S&P 500 daily market breadth looks concerning (the advance-decline line moved to bearish territory) and so does the $VIX upper knot to a degree, the S&P 500 upswing is more than likely to run on, proving both factors as of fleeting and inconsequential nature.

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.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.

* * * * *

All essays, research and information found above represent analyses and opinions of Monica Kingsley 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, Monica Kingsley and her 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. Ms. Kingsley is not a Registered Securities Advisor. By reading Monica Kingsley’s reports you fully agree that she 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. Monica Kingsley, 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 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.

Amazon.com Posts Record Q2 Profit Amid COVID-19 Pandemic; Buy with Target Price of $3500

Amazon.com, the world’s largest online retailer, reported that its profit hit an all-time high in the second quarter as online sales surged amid the COVID-19 pandemic, sending its shares up 5% to $3,204.60 in after-hours trade on Thursday.

The multinational technology company based in Seattle said its net sales rose 40% to $88.9 billion in the second quarter, compared with $63.4 billion a year earlier. The company’s online store sales surged nearly 48% to $45.89 billion its second quarter ended June 30, 2020.

Net income surged to $5.2 billion in the second quarter, or $10.30 per diluted share, from $2.6 billion, or $5.22 per diluted share, in second-quarter 2019. Operating income increased to $5.8 billion in the quarter-end on June 30, from $3.1 billion in the same period last year.

“We are reiterating our BUY rating for Amazon.com, while increasing our price target to$3,800 from $2,625. Our new price target is based on our updated discounted cash flow model, including our long-term adj. EBITDA margin forecast 22.0% (unchanged) versus 15.4% in 2019,” said Tom Forte, senior research analyst at D.A. Davidson.

“COVID-19 has been like injecting Amazon with a growth hormone and is driving sales expansion in ways that even the rollout of one-day Prime shipping was not able to. The company indicated it expects $2 billion of incremental spending to combat COVID-19 in 3Q 2020, down from more than $4 billion in 2Q 2020. As we expected and consistent with the CIO survey led by our colleague, Andrew Nowinski, its cloud computing sales growth decelerated in the quarter to 29.0% from 32.8%,” he added.

Amazon’s shares rose over 70% so far in 2020, registering its biggest quarterly rise of more than 40% in the June quarter.

On the third quarter 2020 guidance, Amazon.com forecast its net sales between $87.0 billion and $93.0 billion, or to grow between 24% and 33% compared with third-quarter 2019 and operating income is anticipated between $2.0 billion and $5.0 billion.

“First, U.S. retail inflecting as Amazon.com drives surging e-commerce, Second, this is global too as bottom-up work leads us to raise int’l retail, Third, expect ad revs upside, Fourth, Amazon.com adding record high-margin dollar growth, creating a path to $95 billion of ’22 EBITDA even with investment. Top pick; Bull case to $4,200,” said Brian Nowak, equity analyst at Morgan Stanley.

Executive comment

“As expected, we spent over $4 billion on incremental COVID-19-related costs in the quarter to help keep employees safe and deliver products to customers in this time of high demand—purchasing personal protective equipment, increasing cleaning of our facilities, following new safety process paths, adding new backup family care benefits, and paying a special thank you bonus of over $500 million to front-line employees and delivery partners,” Jeff Bezos, Amazon founder and CEO said in a press release.

“We’ve created over 175,000 new jobs since March and are in the process of bringing 125,000 of these employees into regular, full-time positions. And third-party sales again grew faster this quarter than Amazon’s first-party sales. Lastly, even in this unpredictable time, we injected significant money into the economy this quarter, investing over $9 billion in capital projects, including fulfilment, transportation, and AWS,” he added.

Amazon.com stock forecast

Thirty-eight analysts forecast the average price in 12 months at $3,242.66 with a high forecast of $3,800.00 and a low forecast of $2,162.00. The average price target represents a 6.25% increase from the last price of $3,051.88. From those 38, 36 analysts rated ‘Buy’, two analysts rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

Just after the earnings result, Keybanc upped its target price to $3,500 from $3,285; Canaccord Genuity raised its target price to $3800 from $3300 and BMO raised target price to $3500 from $2850. 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.

Earlier this month, Suntrust Robinson raised the target price to $3,400 from $2,700, Deutsche Bank raised the target price to $3333 from $2750 and Wedbush raised the target price to $3,050 from $2,750.

We think it is good to buy at the current level and target at least $3,500 in the short-term and $4,000 in a best-case scenario as 100-day Moving Average signals a strong buying opportunity.

Analyst comment

“We went to a Buy from Neutral Rating in June at about 2600 and about 30% upside at the time. The stock has quickly hit our target with strong results. The max PE we use is 65X for conviction. Even though Amazon and other stocks have traded much higher than that, that’s our max. So keeping PE constant and factoring in the EPS upside (even though there’s a ton of upside coming) we’re moving to Neutral now that valuation wise our risk/reward is more even rather than upside,” said Chaim Siegel from Elazar Advisors.

“Retail trends accelerated. AWS revenues slowed but two-quarters of margin acceleration helps our EPS model. We have a big EPS upside if you scroll through our model. Still, at fair value, we’re moving to Neutral Rating.”