Divergences Could Sink McDonald’s Uptrend

Dow component McDonald’s Corp. (MCD) posted an all-time high above 238 this week, adding to a modest uptick after the company beat Q1 2021 top and bottom line estimates, earning $1.92 per-share on 8.7% revenue growth to $5.12 billion. Global comparative sales rose a healthy 7.5%, underpinned by a 13.6% surge in the United States. Foreign venues reported positive but less impressive growth, highlighting continued restrictions as a result of the pandemic.

Winning the Chicken Wars

The fast food giant noted continued expansion of digital order and delivery segments, even though seating restrictions have been eased or removed in many states. It’s looking for pent-up demand to drive positive net 2021 growth, although it hasn’t been too hard to buy a Big Mac since April 2020. The company also noted victories in the chicken sandwich wars breaking out across the nation, noting their applicants “have exceeded projections especially after 4pm”.

Telsey Advisory Group analyst Bob Derrington raised his target to $260 on Tuesday, noting the company “reported strong 1Q results which included adjusted EPS of $1.92 compared to our $1.76 estimates. McDonald’s global system sales benefited from the strategic embrace of its 3-Ds (Drive-thru, Digital, Delivery), its streamlined menu, quicker drive-thru service and the successful launch of new products across its system. That included the February launch of its new Crispy Chicken sandwich within its U.S. market, which has enjoyed robust sales”.

Wall Street and Technical Outlook

Wall Street consensus now stands at an ‘Overweight’ rating based upon 25 ‘Buy’, 2 ‘Overweight’, and 9 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $225 to a Street-high $282 while the stock is set to open Thursday’s session about $25 below the median $260 target. Additional upside appears likely, given this relatively humble configuration.

McDonald’s topped out above 220 in August 2019 and plunged to a multiyear low during 2020’s pandemic decline. A strong recovery wave reached the prior high in September, yielding a failed breakout, followed by a rounded correction that completed a cup and handle pattern in March. The breakout into May has started slowly, with the stock trading just three or four points above new support, but this classic pattern may support much higher prices in coming months.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

What Is Backwardation?

Backwardation of commodities hit the steepest level in nearly 15 years this week, driven by a worldwide shortage of raw materials. Massive stimulus, low-interest rates, and the light at the end of the pandemic tunnel have driven this surge in demand, which is coinciding with the first commodity uptrend in a decade. Metals, agriculture, and the energy markets have all been moved by this historic impulse, which ironically predicts lower commodity prices in the coming months.

Understanding backwardation requires learning three key terms. First, the spot price denotes the current commodity price. Theoretically, anyone can walk into a commodity store and walk out with that commodity at the spot price, which changes over time due to the market forces of supply and demand.  Second, the futures contract denotes an agreement to buy or sell the commodity at a specified delivery date in the future, with contract maturity as short as a month or up to 10 years in the future.

Third, the futures curve illustrates the relationship between the spot price and futures prices. A futures curve is in backwardation when the slope is declining, predicting the commodity price will be lower ‘n-months’ into the future. Conversely, a futures curve is in contango when the slope is rising, predicting the commodity price will be higher ‘n-months’ into the future. This information is so actionable it can be used to gauge market sentiment, in addition to pricing.

What is Backwardation?

Simply stated, a commodity futures contract and spot market enter backwardation when shorter-term pricing is higher than longer-term pricing. As in 2021, this phenomenon can reflect intense short-term scarcity that forces suppliers of these commodities to raise prices at a rapid rate. This is significant because futures with longer maturities have to include inventory carrying and storage costs in addition to fundamentals and market-driven demand estimates.

Backwardation can be short-term (bottlenecks that will soon be eased) or long-term (supply and demand imbalances that persist for months or years). In the current phenomenon, futures traders expect that short-term scarcity will ease as production and supply ramp-up, putting a dampening effect on longer-dated contracts. However, backwardation can also end with futures ramping up to higher prices to match spot prices, generating a nearly perfect storm for rising inflation.

Decade-long cycles drive commodity prices and backwardation may set off warning signs that demand has overtaken supply on a semi-permanent basis, set to generate significant inflationary pressure. However, the curve’s downslope indicates that expectations remain within boundaries, at least in the short-term, reacting to balanced conditions. As a result, those tasked with rate analysis have to watch the futures curve, looking for signs of stress that can translate into higher prices.

Traders seek to profit from backwardation by selling short at the spot price and buying back at the futures contract price. In theory, the practice will eventually restore normal conditions, inducing the spot price to fall until it is lower than or equal to longer-dated securities. Expiration can help or hurt this process, as illustrated during the 24 hour period ahead of April 2020 expiration, when the expiring WTI crude oil contract fell below minus $40 due to a massive short-term exodus.

Contango vs. Backwardation

Contango, also known as forwardation, is the opposite of backwardation.  This market condition occurs when each successively longer-dated futures contract costs more than the next shorter-dated futures contract, generating an upward slope.  For example, when a futures contract rotates on a monthly bases, the price of the July contract will be higher than the price of the June contract, which will be higher than the May contract, and so on. Futures contracts can shift rapidly between contango and backwardation, or get stuck in one state that persists for years.

It is assumed that spot prices will rise to meet futures prices when contango is in effect. As a result, market players will sell short higher-priced futures contracts and attempt to buy back the exposure through spot prices, pocketing the difference. This technique has a self-perpetrating effect, i.e. generating even greater demand that drives the spot price higher until it matches or exceeds futures prices, ending the contango. The expiration date affects this process, capable of generating high volatility when market forces are in conflict.

Interpreting Backwardation and Contango

Traders engaged in backwardation and contango strategies can get trapped when the spot/futures relationship doesn’t follow expectations. As noted above, both imbalances can result from short-term influences or long-term paradigm shifts. In 2021, we’re coming out of a pandemic that disrupted supply chains and forced factories to shut down but we don’t know if supply can ramp up quickly enough to keep futures prices lower than spot prices. We also don’t know if we’re facing a short-term bottleneck or multiyear phenomenon.

Commodity traders keep close watch on other markets for clues about the persistence of backwardation and contango. The bond market is especially useful in this endeavor because it reflects the investment community’s consensus about interest rates along the yield curve. At the moment, this group of ‘traders’ is more bullish about interest rates than the futures crowd, who have chosen  by consensus to keep longer-term pricing at lower levels than spot pricing.

Finally, backwardation is considered to be a leading indicator, predicting that spot prices will be lower in the future. This prognosis works well if suppliers can boost production quickly and bring supply/demand back into balance, but bullish and bearish signals fail when macro events overtake short-term conditions.  Once again, cross-market verification is an absolute necessity to increase futures curve signal reliability and to reduce whipsaws.

Summary

Backwardation indicates the futures curve is falling, with spot markets and short-term futures contracts priced higher than longer-dated contracts. Conversely, contango indicates the futures curve is rising, with progressively higher prices between spot markets and longer-dated futures contracts.  Both market conditions are normal but can sometimes signal significant long-term shifts in market behavior.

Disney Slumps to Support Ahead of Earnings

Dow component Walt Disney Co. (DIS) reports Q2 2021 earnings next week, with analysts looking for a profit of just $0.27 per-share on $16.0 billion in revenue. If met, earnings-per-share (EPS) will mark a 55% reduction in profit compared to the same quarter in 2020, when the pandemic forced shutdowns in most divisions. The stock sold off nearly 2% in February after beating Q1 top and bottom line estimates but posted an all-time high less than one month later.

California Disneyland Reopens

California Disneyland reopened this week after a 14-month closure, raising hopes that Parks revenue will return to pre-pandemic levels. However, persistent infections in other parts of the world could delay that recovery by months or longer, forcing the entertainment giant to rely more heavily on film production and streaming service income. There’s no doubt that Disney+ will continue to perform like gangbusters but no one knows what to expect with box office receipts, given the uneven recovery and continued fears of closed spaces.

Truist analyst Matthew Thornton raised his price target to $205 in April, marking one of the few Wall Street calls so far in 2021. He noted “We continue to view DIS as very well positioned in global Media and Entertainment (and the shift to DTC) on account of its franchises/brands/assets (Marvel, Star Wars, Pixar, National Geographic, Disney/Disney+, ESPN/ ESPN+, Hulu/HLTV, Hotstar, others) and competencies (merchandising, advertising, M&A)”.

Wall Street and Technical Outlook

Wall Street consensus has deteriorated after outsized 2020 returns, with an ‘Overweight’ rating based upon 18 ‘Buy’, 1 ‘Overweight’, 7 ‘Hold’, and 1 ‘Underweight’ recommendation. Price targets currently range from a low of $147 to a Street-high $230 while the stock is set to open Wednesday’s session more than $30 below the median $218 target. This placement suggests that Main Street investors are worried that Disney won’t resume its growth trajectory until more countries emerge from the pandemic.

Walt Disney failed a breakout above the 2015 high at 120 during 2020’s pandemic decline, ahead of a vertical recovery wave that reached new highs in November. It posted an all-time high at 203.02 in March 2021, ending a 124-point price swing off the March 2020 low. The stock carved just a single basing pattern during the torrid advance, exposing price action to an extended correction that could easily last into the fourth quarter.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Cirrus Logic Could Sell Off to 60

iPhone supplier Cirrus Logic Inc. (CRUS) is posting marginal gains in Tuesday’s pre-market following a tier one analyst upgrade. The Austin-based integrated circuits manufacturer fell 15% last week after missing Q4 2021 top and bottom line estimates, posting earnings-per-share (EPS) of $0.66 on a 5.1% revenue increase to $293.54 million. The company also issued downside guidance, blaming supply constraints that have caught the semiconductor industry off-guard.

Hurt By Supply Constraints

The company should benefit from US – China discussions intended to reduce export control-driven bottlenecks that have impacted dozens of industries dependent on the silicon chip. However, natural forces of supply and demand should eventually ease the crisis, with manufacturers now ramping up production. Meanwhile, Apple Inc.’s (AAPL) blowout iPhone sales this year raise odds that Cirrus Logic will recover lost ground once balance is returned.

Needham analyst Rajvindra Gill upgraded Cirrus Logic to ‘Buy’ with a $100 target this morning, noting “We’ve been on the sidelines owing to the high valuation and the concentration of revenues in Apple (70 to 80%+). The stock has fallen ~26% from its mid-January peak (underperforming the SOX by 29% over that period) and its P/E multiple has compressed 40%. While recent results/guidance was disappointing … new opportunities are emerging. Net, we expect revenue growth to accelerate in FY22 and believe stock is compelling here.”

Wall Street and Technical Outlook

Wall Street consensus has grown cautious so far in 2021 due to high valuation, yielding an ‘Overweight’ rating based upon 7 ‘Buy’ and 4 ‘Hold’ recommendations. Price targets currently range from a low of $80 to a Street-high $115 while the stock is set to open Tuesday’s session about $7 below the low target. While the upgrade should ease highly bearish sentiment, short-term technical damage will take time to overcome.

Cirrus Logic failed a breakout above the 2017 high at 71.97 in the first quarter of 2020, descending into the mid-40s. It bounced back to resistance in January 2021 and broke out but failed that advance as well. Price action is now caught between support in the 70s and resistance just above 100 while downside momentum after last week’s selloff favors a breakdown that could deep support near 60 before attracting committed buying interest.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication.

Costco Testing Key Resistance Level

Costco Wholesale Corp. (COST) is pressing against a key resistance level in Monday’s pre-market in reaction to bullish analyst commentary. The stock is still in the red for 2021 after posting a 28% return in 2020, underpinned by its commanding retail position during the COVID-19 pandemic. Taken together with 2019’s 36% return, the underperformance isn’t usual, given the market’s classic warning that “the big the move, the broader the base”.

Post-Pandemic Economic Surge

Big box store sentiment has deteriorated this year, with rival Walmart Inc. (WMT) also posting a negative year-to-date return. Despite investor reluctance, Costco is perfectly positioned to benefit from the post-pandemic economic surge in the United States and other parts of the world, given its massive footprint in North America, Asia, Australia, and Europe. It’s also trading close enough to the 2020 high to potentially support an advance toward the 500 level.

Telsey Advisory Group analyst Joseph Feldman raised his target to $375 on Monday, noting “Costco should remain a share gainer, with its solid sales, high membership renewal rates, and square footage growth of LSD. Costco should continue to generate solid EPS growth, driven by a MSD-DD comp, MSD-HSD membership fee income growth, healthy digital growth, and lapping COVID-19 related costs. We maintain our ‘Outperform’ rating, applying a P/E multiple of ~35x to our new FY22 EPS estimate of $11.15.”

Wall Street and Technical Outlook

Wall Street consensus also stands at an ‘Overweight’ rating, based upon 19 ‘Buy’, 4 ‘Overweight’, and 10 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $325 to a Street-high $415 while the stock is set to open Monday’s session more than $25 below the median $400 target. The Q3 2021 earnings report on May 27 could lift these targets.

Costco rallied above the February 2020 high at 325 in July and took off in a strong uptrend that posted an all-time high at 393.15 in November. It sold off more than 80 points into March and bounced strongly, grinding out a straight line recovery that stalled at the .786 Fibonacci retracement level at 375 about two weeks ago. A rally above this harmonic barrier should support a rapid advance into the 2021 peak near 400, setting off a potential breakout attempt.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

PayPal Rangebound Ahead of Wednesday Report

PayPal Holdings Inc. (PYPL) reports Q1 2021 earnings after Wednesday’s closing bell, with analysts looking for a profit of $1.01 per-share on $5.9 billion in revenue. If met, earnings-per-share (EPS) will mark a 53% increase in profit compared to the same quarter last year. The stock surged 7.4% in February after beating Q4 2020 top and bottom line estimates but topped out a few sessions later and has been rangebound since that time.

Fintech Leadership Grows

The company benefited from 2020’s acceleration into digital transactions, posting a phenomenal 116% annual return. It’s added another 12% so far in 2021, with a surging U.S. economy and bullish fintech sentiment adding to the list of tailwinds. It’s now a recognized market leader in digital wallets, highlighted by this week’s news that Coinbase Global Inc. (COIN) will allow customers to buy crypto using debit and credit cards linked to their PayPal accounts.

Rosenblatt Securities analyst Sean Horgan called PayPal one of his top digital payment picks last week, maintaining a ‘Buy’ rating while raising the firm’s price target from $320 to $350. He’s looking for 30% upside compared to mid-April price levels, with the Venmo mobile payment division set to exceed a $900 million 2021 revenue target due to the surge in spending generated by massive stimulus in the United States.

Wall Street and Technical Outlook

Wall Street bulls have been pounding the tables since the second quarter of 2020, yielding a current ‘Buy’ rating based upon 36 ‘Buy’, 5 ‘Overweight’, 6 ‘Hold’, and 1 ‘Sell’ recommendation. Price targets now range from a low of $241 to a Street-high $375 while the stock closed Friday’s U.S. session more than $50 below the median $313 target. This low placement raises odds for a high percentage rally if earnings exceed expectations this week.

PayPal broke out above the 2019 high at 121.48 in May 2020 and entered a powerful trend advance that stalled just above 200 in September. Bullish action cleared that barrier in December, yielding a vertical rally impulse that posted an all-time high at 309.14 in February. The subsequent downdraft found support at 223 in March while price action since that time has been stuck within those boundaries, which are likely to persist through the second quarter.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Apple Trading Higher After Blowout Quarter

Dow component Apple Inc. (AAPL) is trading higher by nearly 3% in Thursday’s pre-market after beating Q2 2021 top and bottom line estimates by wide margins, posting a profit of $1.40 per-share on $89.58 billion in revenue. The tech icon beats expectations across all product categories, led by iPhone sales of $47.9 billion, which fueled an overall 53.6% year-over-year   revenue increase. Guidance for double digit year-over-year Q3 growth and a 7% dividend increase capped off the highly bullish presentation.

Strong Sales Across the Board

Installed base upgrades to 5G iPhone 12 models added considerable revenue during the quarter while iPad posted the strongest March sales ever.  Even Mac got into the act, wrapping up the best three quarters in the company’s history. Sales grew by double digit percentages in all geographical regions, highlighting the impact of massive U.S. stimulus and a slow worldwide recovery from the COVID-19 pandemic.

Goldman Sachs analyst Rod Hall cried “Uncle” after the report, upgrading Apple from ‘Sell’ to ‘Neutral’, noting “We are upgrading our rating after Apple posted another large beat and implied a raise vs. our June revenue expectations. Our original view that the iPhone cycle would disappoint in the midst of COVID was clearly wrong. Not only has Apple done better than we expected on iPhone during the cycle but Mac and iPad have also materially outperformed our forecasts”.

Wall Street and Technical Outlook

Wall Street consensus currently stands at an ‘Overweight’ rating based upon 24 ‘Buy’, 4 ‘Overweight’, 10 ‘Hold’, 1 ‘Underweight’, and 1 ‘Sell’ recommendation. The blowout quarter should lift ratings and targets in coming sessions but it might not be enough to trigger a new trend advance. Price targets currently range from a low of $83 to a Street-high $185 while the stock is set to open Thursday’s session about $23 below the median $160 target.

Apple returned to February 2020 resistance in the low 80s in May and broke out, entering a strong uptrend that stalled at 138 on Sept 2, just two days after the 4-for-1 split. A swift decline to 103 got bought aggressively but a January breakout failed after just four sessions, reinforcing resistance between 138 and 145. Price action is now pushing against the lower edge of this zone but adverse cycles predict the trading range will be hard to break in the short term.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Spotify Under Pressure After Another Losing Quarter

Spotify Technology S.A. (SPOT) is trading lower by 8% on Wednesday despite reporting a better-than-expected Q1 2021 loss and meeting revenue estimates. The European streaming platform lost  €0.25 per share during the quarter, €0.18 better than estimates, while revenue grew 16.2% year-over-year to €2.15 billion, right on consensus. Revenue has shown no acceleration in the last five quarters, despite the pandemic and well-publicized content deals.

A Sea of Red Ink

And the company keeps losing money. According to an industry publication, the service lost the equivalent of $2.2 million every day in 2020 while spending over $1 billion on sales and marketing. Meanwhile, Monthly Average User (MAU) data for the latest quarter raises fresh doubts about the quest for profitability, with 24% year-over-year growth “modestly below our internal expectations” due to weakness in Latin America and Europe.

However, Spotify still has loyal fans on Wall Street. Jefferies analyst Andy Uerkwitz posted a Buy rating and $360 target last week, noting “Spotify is more platform than streaming service. The subtle differences are platforms have stickier customers, less likely to be disintermediated by new technologies, and longer tail of growth/margin expansion. We believe we are in the early innings of a creator economy where content creation/distribution/marketing has been democratized, in which Spotify will become the primary audio platform for creators.”

Wall Street and Technical Outlook

Wall Street consensus now stands at an ‘Overweight’ rating based upon 13 ‘Buy’, 13 ‘Hold’, and 2 ‘Underweight’ recommendations. Three analysts recommend that shareholders close positions and move to the sidelines. Price targets currently range from a low of $300 to a Street-high $450 while the stock is set to open the U.S. session nearly $75 below the median $345 target. It’s obvious from this disconnect that Main Street investors would rather own profitable companies.

Spotify came public on U.S. exchanges in the 160s in April 2018 and topped out near 200 in July. It mounted resistance in June 2020 and took off on a two-legged uptrend that posted an all-time high at $387.44 in February 2021. The stock fell more than 35% into the end of March and bounced at the 200-day moving average while price action into this week’s report continues to test that critical support level.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Uber Looking Good Ahead of Report

Uber Technologies Inc. (UBER) reports Q1 2021 earnings next week, with analysts looking for a loss of $0.37 per-share on $3.26 billion in revenue. If met, loss-per-share will be one-fifth of the loss posted in the same quarter in 2020, when lockdowns brought the ride share business to a grinding halt.  The stock fell nearly 4% in February after posting a large Q4 loss and missing revenue estimates and has drifted sideways in a triangle pattern since that time.

Post-Pandemic Ride Share

Optimism is growing that ride share will return to pre-pandemic levels in coming months, at least in the United States, complementing Uber’s rapidly growing footprint in delivery and other transportation services. Key acquisitions in grocery and alcohol delivery should add to revenue, helping the company achieve its first quarterly profit by the end of the year. Slow vaccine uptake in Europe remains the wild card, potentially hurting the bull case.

Needham analyst Bernie McTernan posted a ‘Buy’ rating and $77 target on Tuesday, noting “We see the potential for the move up the adoption curve in delivery during the pandemic to be sticky and look for Uber to benefit from its expansion into other verticals like grocery and alcohol, where recent acquisitions should help drive share quickly. With mobility returning to 2019 levels as the economy reopens, we like how the market appears focused on profitable US growth”.

Wall Street and Technical Outlook

Wall Street consensus has lifted to a ‘Buy’ rating in 2021, based upon 32 ‘Buy’, 2 ‘Overweight’, and 5 ‘Hold’ recommendations. One analyst still recommends that shareholders close positions and move to the sidelines. Price targets currently range from a low of $30 to a Street-high $82 while the stock is set to open Tuesday’s session more than $15 below the median $74 target. A smaller-than expected loss could provoke a buy-the-news reaction, given this humble placement.

Uber came public in the 40s in May 2019 and sold off to an all-time low in March 2020. A two-legged bounce reached 2019 resistance in November, yielding a breakout and rally to an all-time high at 64.05 in February 2021. Price action since that time has carved a symmetrical triangle on top of new support, with a rally above 61.50 setting off buy signals while a decline through 54.50 favors even lower prices. At this point, the smart money is betting on higher prices.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

The Sky’s The Limit For Microsoft

Dow component Microsoft Corp. (MSFT) reports Q3 2021 earnings after Tuesday’s closing bell, with analysts looking for a profit of $1.77 per-share on $40.83 billion in revenue. If met, earnings-per-share (EPS) will mark a 26% profit increase compared to the same quarter in 2020. The stock ran in place in January despite beating Q2 top and bottom line estimates by wide margins but took off in a strong uptrend earlier this month and is trading at an all-time high.

Keep Eye on Azure Growth

As usual, Microsoft investors will be focusing on quarterly sales in the Intelligent Cloud segment, with healthy growth in prior quarters driven by the Azure public cloud computing system. Azure has reported growth of 47%, 48%, and 50% in the last three quarters and any deceleration could have a negative impact on price action. The Productivity and Business Process Segment will also be watched closely, following 13% growth in Q2 and 11% in Q1.

Console and video game sales could be a wild card after NPD Group reported that consumer spending rose 18% year-over-year to a March record of $5.6 billion. Quarterly spending rose 30% above Q1 2020, even though sales exploded during lockdowns in February and March. Total XBox sales could also move the market because Sony PlayStation and Nintendo Switch have been outselling the US brand, according to industry reports. However, persistent inventory shortages make it hard to gauge Xbox’s true sales momentum.

Wall Street and Technical Outlook

Wall Street coverage has been pristine for years, with a current ‘Buy’ rating based upon 32 ‘Buy’, 2 ‘Overweight’, and 2 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions even though Mister Softee has doubled in price since March 2020. Price targets currently range from a low of $242 to a Street-high $330 while the stock is set to open Monday’s session about $22 below the median $283 target. This low placement isn’t an obstacle, given stellar price action in recent weeks.

Microsoft topped out at 191 in February 2020 and sold off nearly 60 points into March. It returned to resistance in May and broke out in June, entering a strong trend advance that paused with other big tech stocks in September. Bullish price action has carved two sets of higher highs since that time, even though the majority of the big tech universe is still struggling with 2020 resistance. This market leadership is likely to continue through 2021 and beyond.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication.

Bears in Charge Ahead of AMD Report

Advanced Micro Devices Inc. (AMD) reports Q1 2021 earnings after Tuesday’s closing bell, with analysts expecting a profit of $0.44 per-share on $3.20 billion in revenue. If met, earnings-per-share (EPS) will mark a 240% profit increase compared to the same quarter in 2020. The stock sold off 6.5% in January after beating Q4 2020 estimates and has continued to underperform into the second quarter.

Posting Year-To-Date Loss

AMD and NVIDIA Corp. (NVDA) posted impressive 2020 returns in reaction to multiple missteps at Dow component Intel Corp. (INTC). INTC sentiment has improved substantially in 2021 but that didn’t stop NVDA from posting an all-time high just two weeks ago. Sadly, AMD has failed to match the performance of either rival, slumping to an 8% year-to-date loss while entering the third month of dead price action at the 200-day moving average.

Raymond James analyst Chris Caso outlined the bull case last week, noting “the stock’s pullback has been driven by improved sentiment that Intel will solve their manufacturing challenges, which will reverse AMD’s successes. We’re taking the other side of that view. Now that Intel has committed to internal manufacturing, we think it’s unlikely that Intel ever regains a transistor advantage vs. AMD, and the current roadmaps ensure an advantage for AMD/TSMC through at least 2024”.

Wall Street and Technical Outlook

Wall Street consensus matches this analyst’s view, with an ‘Overweight’ rating based upon 17 ‘Buy’, 4 ‘Overweight’, and 12 ‘Hold’ recommendations. However, three analysts now recommend that shareholders close positions and move to the sidelines. Price targets range from a low of $70 to a Street-high $120 while the stock closed Friday’s session more than $20 below the median $105 target. This low placement reflects skepticism about the chipmaker’s ability to compete with larger rivals.

AMD completed a breakout above the 2000 high in the 40s in July 2020 and entered a trend advance that lost steam in the 90s in September. It posted an all-time high at 99.23 in January 2021 and eased into an intermediate correction that reached the 200-day moving average in February. Price action has gone comatose while a monthly Stochastic sell cycle still hasn’t hit the oversold level. In turn, this tells us that bears remain in firm control of the ticker tape.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication.

Mixed Outlook Ahead of Intel Report

Dow component Intel Corp. (INTC) reports Q1 2021 earnings after Thursday’s closing bell, with analysts looking for a profit of $1.14 per-share on $17.97 billion in revenue. If met, earnings-per-share (EPS) will mark a 21% profit decline compared to the same quarter last year.  The stock gave back a 6.5% advance after beating Q4 2020 top and bottom line estimates in January but performed well into early April, posting a 15 month high.

Investing in Local Fabrication

Investors have forgiven the chip giant after 2020 missteps forced loyal customers to cut deals with competitors Advanced Micro Devices Inc. (AMD) and NVIDIA Inc. (NVDA). NVIDIA, in particular, is rolling out highly-competitive products at a lightning pace, ready to build even greater market share in coming years. Intel has shifted gears to meet the challenge, investing billions to become a major foundry supplier. That effort could pay off, given worldwide chip shortages this year.

Needham analyst Pat Gelsinger posted upbeat comments about the initiative in March, noting “With most of the world’s leading edge foundry capacity now concentrated in Asia, Intel also launched Intel Foundry Services (IFS) to address the industry’s capacity constraints and need for more geographically balanced manufacturing capacity, with manufacturing locations in the U.S. and Europe. Intel also announced it will be spending $20 billion to build two new fabs in Arizona, which will support its current products as well as its foundry customers.”

Wall Street and Technical Outlook

Wall Street sentiment remains mixed despite share gains, with a consensus ‘Hold’ rating based upon 15 ‘Buy’, 1 ‘Overweight’, 15 ‘Hold’, and 2 ‘Underweight’ recommendations. More importantly, 8 analysts still recommend that shareholders close positions and move to the sidelines. Price targets currently range from a low of $40 to a Street-high $90 while the stock is set to open Thursday’s session about $6 below the median $70 target. This low placement could support rapid upside in reaction to a strong report.

Intel topped out in the upper 50s in 2018 and eased into a complex pattern, ahead of a 2020 rally and failed breakout during the pandemic decline. Steep declines have posted four lows in the mid-40s in the last three years, draining bullish sentiment and shareholder patience. The stock rallied within a point of 2020’s multiyear high this month but accumulation-distribution has failed to recover, setting off a bearish divergence that raises odds for another steep downturn.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication.

Las Vegas Sands at Cusp of Industry Revival

Las Vegas Sands Corp. (LVS) reports Q1 2021 earnings after Wednesday’s closing bell, offering a glimpse into the gaming industry’s ongoing recovery from the COVID-19 pandemic. Analysts are looking for the old school operator to lose $0.22 per-share on $1.37 billion in revenue, worse than the $0.02 loss reported in the same quarter last year. The stock ran in place after missing Q4 2020 top and bottom line estimates in January and is now trading close to a 14-month high.

Leaving Las Vegas

The Nevada Gaming Board reported that statewide ‘gaming win’ fell 25.9% year-over-year in February, with a 41.5% loss on the Las Vegas Strip. The March report at the end of this month should offer greater transparency into current conditions because it should compare favorably to March 2020, when the industry came to a grinding halt. Even so, challenges remain, with Nevada casinos allowing just 50% of capacity until final restrictions are lifted in June.

This should be Las Vegas Sands’ last full quarter with Nevada exposure, despite the company’s name, because it sold The Venetian and Sands Expo and Convention Center in March to focus on Asian operations. Macao is now waking up from the dead at a rapid pace, with the local Gaming Inspection and Coordination Bureau reporting that March generated the highest monthly revenue since January 2020. Even so, first quarter receipts were still down 22.5% year-over-year.

Wall Street and Technical Outlook

The property sale has provoked a mixed reaction on Wall Street, with consensus dropping to an ‘Overweight’ rating based upon 8 ‘Buy’, 1 ‘Overweight’, and 7 ‘Hold’ recommendations. Price targets currently range from a low of $53.50 to a Street-high $86.50 while the stock opened Wednesday’s session $10 below the median $69.50 target. This weak placement suggests that Main Street has reservations about the transaction as well.

Las Vegas Sands topped out in the 80s in 2014 and entered a decline that hit a 10-year low in the 30s in March 2020. The stock recouped about 80% of the pandemic decline into March 2021 but hasn’t ended the string of lower highs in place for the last three years, indicating the downtrend is fully intact. However, accumulation readings are telling a more bullish tale, lifting to the highest highs since 2011.  Given the conflict, mixed action into the third quarter looks the path of least resistance.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication.

Snap Expected To Report a Losing Quarter

Snap Inc. (SNAP) reports Q1 2021 earnings after Thursday’s closing bell, with analysts looking for a loss of $0.05 per-share on $739.6 million in revenue. If met, earnings-per-share (EPS) will be 38% higher than the same quarter in 2020, when the company also lost money. The stock rose more than 9% in February after beating Q4 2020 top and bottom line estimates and posted an all-time high at 73.59 just three weeks later.

Struggling with Monetization

The messaging app provider fell 25 points into the end of March, bouncing at support in the upper 40s, and is now trading in the upper half of a four-month trading range. However, longer-term relative strength cycles predict the current correction is likely to persist into the third quarter, lowering odds for an immediate breakout.  In the meantime, Snap needs to do a better job keeping users engaged in upgraded features that increase revenue through targeted advertising.

Credit Suisse analyst Stephen Ju reiterated the firm’s ‘Outperform’ rating and $80 price target this morning, noting “if we are to take the management forecast for 50% sustained growth for the next several years at face value, our sensitivity analysis suggests SNAP shares can double over the next 3 years. More near term, we increase our revenue forecast for 1Q21 to +60.3% (from +58%) year-over-year based on positive channel checks”.

Wall Street and Technical Outlook

Wall Street consensus matches Credit Suisse’s upbeat view, with an ‘Overweight’ rating based upon 26 ‘Buy’, 2 ‘Overweight, 10 ‘Hold’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $40 to a Street-high $91 while the stock is set to open Tuesday’s session about $16 below the median $76 target. Investors hope this humble placement supports rapid upside after a strong quarterly report, especially if the company posts an unexpected profit.

Snap hit an all-time low in single digits in 2019 and entered an uptrend that mounted 2017 resistance near 30 in October 2020. The stock posted a 306% annual return before topping out in February 2021 and eased into a correction that is generating garden variety selling pressure. This price action should eventually support a trip to new highs but downside could easily reach long-term support in the mid-40s before attracting the buyers needed for another trend advance.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication.

Harley-Davidson Firing on All Cylinders

Harley-Davidson Inc. (HOG) is trading at a two-year high in Monday’s pre-market after beating Q1 2021 top and bottom line earnings estimates. The company posted a profit of $1.68 per-share during the quarter, $0.78 better than estimates, while revenue rose 29.4% year-over-year to $1.42 billion, beating consensus by more than $150 million. HOG now expects motorcycle segment growth between 30% and 35%, compared to previous guidance of 20% to 25%.

EU Escalates Trade War

The American icon also advised it would “vigorously defend its position” after a European Union decision to subject the entire HOG product line to a 56% import tariff, starting in June.  Continued trade tensions following Donald Trump’s defeat in 2020 underpinned the ruling, which may signal the end of all European operations. Even so, the company is firing on all cylinders so far in 2021, benefiting from a sales renaissance as a result of the pandemic.

Robert W. Baird analyst Craig Kennison recently summed up growing bullishness, noting “We are upgrading Harley-Davidson shares to Outperform for the first time since 2016. We like the strategic direction led by a proven leader and expect investors to get behind the change narrative embedded in the 2021 to 2025 plan. We see the potential for retail to turn positive in 2021 for the first time since 2014 — and note that lean dealer inventory should fuel a healthy replenishment cycle.”

Wall Street and Technical Outlook

Wall Street consensus has improved in lockstep with rising sales, now standing at an ‘Overweight’ rating based upon 7 ‘Buy’, 1 ‘Overweight’, 8 ‘Hold’, and 1 ‘Underweight’ recommendation. Price targets currently range from a low of $33 to a Street-high $55 while the stock is set to open Monday’s session more than $4 above the median $39.50 target. This placement shouldn’t act as a headwind because upgrades are likely to follow the bullish metrics.

The pre-market uptick marks the sixth attempt to mount resistance in the low 40s since a breakdown in the fourth quarter of 2018. A successful advance will complete a multiyear inverse head and shoulders breakout that could eventually test the 2017 high in the low 60s. However, mixed accumulation readings and shareholder anxiety in reaction to the tariffs are likely to dampen buying interest into the third quarter.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication.

IBM Spin-Off Attracting Little Excitement

International Business Machines Corp. (IBM) reports Q1 2021 earnings after Monday’s closing bell, with analysts expecting a profit of $1.62 per-share on $17.35 billion in revenue. If met, earnings-per-share (EPS) will mark a 12% profit decline compared to the same quarter in 2020, which included the Wuhan outbreak and worldwide lockdowns. The stock fell nearly 10% in January after missing Q4 revenue estimates and failing to provide a detailed fiscal year outlook.

IBM Q4 Spin-Off

The stock rallied to a 52-week high in March, fueled by the spin-off of the legacy Managed Infrastructure Services (MIS) business into a publicly-traded entity, in a transaction expected to close by year’s end. A flood of partnerships and acquisitions is populating the new high growth core operation, including purchases of cloud and fintech firms TruQua Enterprises, Instana, Expertus Technologies, Nordcloud, 7Summits, Taos Mountain, and myInvenio,

The spin-off will isolate slow-growing segments responsible for the tech giant’s downtrend so that core operations, dubbed NewCo, can concentrate on rapidly-growing cloud and artificial intelligence businesses. NewCo should attract a higher price-to-earnings ratio (P/E) than the predecessor, marking IBM’s most ambitious initiative in decades. However, shareholders will also get proportional shares of the legacy company, which could perform poorly in coming years.

Wall Street and Technical Outlook

Wall Street is taking a ‘wait and see’ attitude with the upcoming spin-off, posting a consensus ‘Hold’ rating based upon 5 ‘Buy’, 10 ‘Hold’, and 2 ‘Sell’ recommendations. Price targets currently range from a low of $115 to a Street-high $165 while the stock closed Friday’s session just $2 below the median $140 target. This placement sets the stage for higher prices in reaction to an upbeat report that focuses on the benefits of the upcoming reorganization.

The stock entered a multiyear downtrend after topping out in 2012 and may have bottomed out in March 2020. Lower highs posted during the decline have carved a well-defined trendline that now places major resistance at 150. A breakout will confirm the first uptrend in eight years but that isn’t likely in the short-term because accumulation readings have slumped to two-year lows despite the first quarter uptick, predicting rangebound action into the foreseeable future.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication.

UnitedHealth at All-Time High After Strong Quarter

Dow component UnitedHealth Group Inc. (UNH) is trading at an all-time high on Thursday after beating Q1 2021 top and bottom line estimates. America’s largest publicly-held health care provider benefited from its enormous Medicare/Medicaid administration footprint, posting a profit of $5.31 per-share, $0.94 better than expectations. Revenue rose a healthy 9.0% year-over-year to $70.2 billion, beating consensus by more than $1 billion. The stock currently pays a 1.33% annual dividend.

COVID Still Impacting Profits

The company also raised fiscal year 2021 earnings-per-share (EPS) guidance from $17.75 – 18.25 to $18.10 – 18.60. Those estimates include an approximately $1.80 per-share charge for the “potential net unfavorable impact to accommodate continuing COVID-19 effects, such as: testing and treatment costs; the residual impact of people having deferred care in 2020; and unemployment and other economy-driven factors”. UnitedHealth now serves 49.5 million customers, or more than 15% of the U.S. population.

The earnings report included a cautionary statement about the pandemic-driven profit deferral, noting that “COVID-19 treatment and testing during the quarter was higher than expected, paired with higher elective care deferral patterns. UnitedHealth Group is focused on encouraging and helping people to obtain the care they need, including vaccinations, and expects a continued rise in provision of care as the year progresses.”

Wall Street and Technical Outlook

Wall Street consensus hasn’t budged so far in 2021, maintaining an ‘Overweight’ rating based upon 28 ‘Buy’, 1 ‘Overweight’, and 6 Hold recommendations. Price targets currently range from a low of $360 to a Street-high $462 while the stock is set to open Thursday’s session more than $25 below the median $409 target.  This humble placement could support a rapid advance above 400 in coming sessions.

UnitedHealth failed a breakout above 2018 resistance in the 280s during 2020’s pandemic decline and bounced strongly, hitting new highs in June. Channeled price action stalled near 370 in November, giving way to a modest correction that found support at the 200-day moving average in February 2021. The stock bounced to range resistance in March and broke out once again, targeting an advance that that could reach 450 in the second half of the year.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Wells Fargo Posts Strong First Quarter Earnings

Wells Fargo and Co. (WFC) is ticking higher in Wednesday’s pre-market after beating Q1 2021 top and bottom line estimates by wide margins. America’s third largest bank posted a profit of $1.05 per-share, $0.40 better than expectations, while revenue rose  just 2.0% year-over-year to $18.06 billion, beating consensus by $600 million. Credit loss provisions decreased by $5.1 billion, underpinned by “continued improvements in the economic environment.”

Waiting on Fed Approvals

The bank is overhauling its risk management and governance as part of a Fed-guided plan to lift asset caps, which in turn will improve shareholder benefits and allow greater risk taking. It’s now expected that temporary restrictions on bank holding company dividends and share repurchases put into place at the start of the pandemic will end for most firms on June 30. Wells is scrambling to get required policies in place ahead of final approvals later this quarter.

Credit Suisse analyst Susan Roth Katzke summed up improved sentiment recently, noting, “We asked for targets and supporting disclosure to increase clarity on the path to improved returns; both were delivered with fourth quarter results. To be sure, the path forward has its obstacles and revenue growth remains a challenge, but the combination of evident progress, incremental investment, excess capital, and the inherent franchise opportunity reduce the downside risk and render the aspiration of a 15% ROTE achievable, in time”.

Wall Street and Technical Outlook

Wall Street consensus now stands at an ‘Overweight’ rating based upon 14 ‘Buy’, 3 ‘Overweight’, and 10 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions. Price targets currently range from a low of $34 to a Street-high $65 while the stock is set to open Wednesday’s session about $3 below the median $43 target. While modest upside is possible with this placement, prolific gains many have to wait for the Fed’s OK on dividends and buybacks.

Wells Fargo underperformed its rivals after 2016’s disclosure it created millions of fraudulent savings and checking accounts. The stock posted an all-time high in January 2018 and turned sharply lower through 2019 and into 2020 when the bottom dropped out following the Wuhan outbreak. The recovery wave since October has stalled at the .618 Fibonacci retracement of the selloff that began in December 2019, generating much weaker gains than bank indices and commercial rivals that are now trading at multiyear and all-time highs.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

NVIDIA at Cusp of Major Breakout

NVIDIA Inc. (NVDA) is testing February’s all-time high after raising Q1 2021 revenue estimates above consensus during Monday’s Analyst Day, predicting “good visibility” and “another strong year”. In addition to rising Data Center income, the company raised estimates for a new industrial-scale cryptocurrency mining product from $50 million to $150 million, highlighting intense demand for digital assets. It topped off the bullish guidance by insisting that demand will “exceed supply for much of this year”.

Cutting Edge Product Line

The graphics giant announced a flurry of new high tech computing products at the event, including BlueField-3, a next generation data processing unit that “delivers the equivalent data center services of up to 300 CPU cores”, and the NVIDIA DRIVE Atlan system-on-a-chip for autonomous vehicles. The company also revealed a host of partnerships and collaborations for Arm computing, AI-capable supercomputers, and AI-on-5G solutions.

Cowen analyst Matthew Ramsay raised his target to $675 on Tuesday, noting “NVIDIA’s Analyst Day discussed its expanding accelerated compute portfolio, as well as a broadening set of business models to extract value in gaming, autos and datacenter. The announcement of the Project Grace CPU was the surprise of the day given the ARM acquisition is still under review. An $8B auto funnel and Q1 pre-announcement were also positives.”

Wall Street and Technical Outlook

Wall Street consensus stands at an ‘Overweight’ rating after 2020’s outstanding 122% return, based upon 26 ‘Buy’, 5 ‘Overweight’, 5 ‘Hold’, 1 ‘Underweight’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $380 to a Street-high $800 while the stock is set to open Tuesday’s session about $55 below the median $662 target. New highs are likely between now and the May earnings release, given this modest placement.

NVIDIA broke out above 2018 resistance in the 290s in May 2020 and took off in a powerful trend advance that topped out near 600 in September. November and February 2021 breakout attempts failed while downturns have held rectangular support near 460. The stock traded within 80 cents of range resistance on Monday while accumulation readings have lifted to new highs, setting the stage for a breakout that could reach 800 in the next two to three months.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Tesla Well-Positioned for Relief Rally

Tesla Inc. (TSLA) is trading higher by more than 1% in Monday’s pre-market following a major analyst upgrade. The stock has struggled since topping out at 900 in January despite better-than-expected production and deliveries in the first quarter, underpinned by strong Model Y demand in China. Worldwide chip shortages and forced assembly line shutdowns have contributed to the downturn and could weigh on shares through the second quarter.

Post-Rally Exhaustion

In addition, the stock rallied more than 830% in 2020, setting off extreme overbought technical readings similar to 2013 and the first quarter of 2014 when it gained over 760%. Tesla posted no additional gains for the next three years, following the classic market adage that “the bigger the move, the broader the base”. Of course, it’s hard to forecast the beneficial impact to shares of the market bubble set into motion by U.S. and world stimulus since March 2020.

Canaccord Genuity analyst Jed Dorsheimer upgraded the stock to ‘Buy’ with a $1,071 target on Monday, noting “Tesla’s focus on first-principle engineering we believe will radically change the battery market, enabling the company to further the lead in BEVs and expand into the solar and home energy markets with its Powerwall products. Battery supply constraints will begin to alleviate in 2022, as the new 4680 cell design production comes online in Giga Nevada”.

Wall Street and Technical Outlook

Wall Street consensus has improved in the last three months, lifting to a ‘Hold’ rating based upon 13 ‘Buy’, 1 ‘Overweight’, 13 ‘Hold’, and 3 ‘Underweight’ recommendations. More importantly, six analysts still recommend shareholders close positions and move to the sidelines. Price targets currently range from a low of $67 to a Street-high $1,200 while the stock is set to open Monday’s session about $100 below the median $787 target.  This placement bodes well for a bounce off corrective lows but another breakout may not be in the cards.

Tesla rallied above June 2017 resistance at a split-adjusted 77.40 in March 2019 and tested that level successfully during the pandemic decline. It cleared February 2020 resistance in June and took off on an historic trend advance that carved a picture-perfect Elliott five-wave rally into January 2021’s all-time high at 900.40. Monthly relative strength readings have now crossed into active sell cycles, predicting the stock will remain rangebound through most or all of the year.

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

Disclosure: the author held no positions in aforementioned securities at the time of publication.