Daily Market Notes: 1-24-2020

Yesterday’s market was initially negatively affected by the spread of the coronavirus in China as that country put a lockdown on two cities and cancelled New Year celebrations and travel to places like Macau, which hurt the shares of gambling stocks once again. In addition, financial stocks were weak on a bad report from Dow component TRV and lower interest rates.

The Dow was lower by 219 points on the opening and the S&P lost 20. But how many times lately have we seen these sharp morning losses disappear as the day moves on and yesterday was no exception. Around 2pm things really got an upside kick when the World Health Organization said that the outbreak is not a global emergency for now.

This is all that a bullish overall market needed to hear, and so from that point until the close, things charged higher led by a recovery in BA and a sharp upside turnaround in the shares of TSLA, and what else is new with this one? So when all was said and done, the Dow finished the session with a small decline of 26 to 29,160 which was its third straight decline, heaven forbid. It was hindered by an earnings-related decline in TRV plus further weakness in DIS. The S&P managed to end higher with a 4 point gain up to 3326 while the hero of heroes, namely the Nasdaq, set another record high close with a 19 point advance up to 9402 led by a tremendous turnaround in NFLX after its earnings-related selloff on Wednesday, in addition to AAPL and TSLA.

Breadth numbers ended about even and the VIX, which had gotten as high as 14.15 on that morning selloff as mentioned above, still ended with a gain of .07 to 12.98 and this was despite another gain in the S&P and this is once again another example of how this persistent buying of VIX calls and SPX puts, prevents this item from going lower and gives the market room to advance until the VIX would be able to get down to its ultimate support level of between 10 and 11. Until that happens, we can still go higher believe it or not.

Bond yields were lower on the slowing worldwide potential economic scenario with the 2-year Note at 1.52% and the 10-year at 1.73% which tightens the yield curve to 21 basis points and was another reason for the weakness in financials. Gold was higher as a result up to $1,563 and crude oil was down to $55.59 a barrel also on the potential slowing environment.

Earnings reports for the fourth-quarter continue this week with the following lineup: yesterday – Dow components PG and TRV lower plus FCX, CMCSA, VFC, RJF but AAL, ABBV, CTXS, LUV, JBLU, MTB, UNP were higher; today – Dow components INTC and AXP higher and ISRG, SWKS and DFS lower.

Economic reports will have: yesterday – December L.E.I. fell by 0.3%, weekly jobless claims rose by 6K to 211K.

After a strongly higher start today based on very good INTC earnings which got the stock to a 19-year high and just the fact that people are conditioned to the market always going higher lately, the Dow was up by over 100 points out of the starting gate. But when a report that a second case of the coronavirus was reported in the U.S. (Chicago) and that the death toll in China has now risen to 26, things began to turn south and once again the financials are the weakest on a continued decline in bond yields on the slower worldwide economic growth scenario and a little flight to safety as well. And also once again, the travel-related stocks such as hotels, airlines and booking sites are taking a beating as well.

As this is being written, the Dow had reached a decline in excess of 230 points, which means that the downside reversal from this morning is now in the neighborhood of more than 330 points. Other indices are also selling off in greater proportion because the Dow is being supported by INTC and AXP on earnings and AAPL on further upgrades to higher price objectives ahead of its upcoming earnings. The financials are hurting the Dow and DIS is also selling off on the closing of its theme park in China due to the disease.

Breadth numbers are bad at a negative 1 to 2 downside ratio and the VIX is loving this with a move to over 15.

Bond yields as mentioned, are dropping again with the 2-year Note at 1.48% while the 10-year is 1.68%, which narrows the yield spread into only 20 points after it had been as wide as 34 a few weeks ago. Gold is higher on the lower interest rates at $1,573 an ounce and crude oil is also selling off sharply at $54.43 a barrel, also on the weaker situation resulting from the disruption in China.

Next week will be huge for earnings with all of the major technology leaders reporting and we will list the lineup in Monday’s notes and there will also be an F.O.M.C. meeting which will add to the excitement of what could be a real barnburner in either direction.

For the first quarter of 2018, earnings gains were 27% the best such showing in seven years, the second-quarter was 25%, the third-quarter saw a gain of 28% and the fourth-quarter was 13.1% and this was the fifth straight quarter of profit growth in excess of 10%. The final number for the first and second quarters of 2019 were fractionally lower with the third quarter down by around 2%. The fourth quarter is now projected to show a small loss of 0.7% while the first-quarter of 2020 is finally supposed to show a gain of 5.8%. This would be the first time that earnings for the S&P would have declined for four straight quarters in a row since the period ending in mid-2016.

This is now the longest bull market ever as the S&P escaped the ignominy of falling 20% last December by 0.1% on a closing basis. Since its beginning on March 9, 2009 the S&P has now gained 475%. The second best bull market was from 1949 to 1956 with a 454% advance while the 1990’s bull run increased by 391% and the 2002 – 2007 gains were 121%.

The S&P now trades at almost 20 times for 2019’s projected profits of $167 and at 18.7 times what are supposed to be $178 profits in 2020. These multiples have expanded on the recent higher move in equities this month and there is no guarantee that the earnings projections will be reached either for this year or next year.

Economic growth for 2017 was at 2.6% for the entire year and in 2018, G.D.P. was revised down to 2.5% for the year. For 2019, the first quarter of 2019 came in at 3.1%, the second quarter was 2% while the 3Q is officially at 2.1%. 

Donald M. Selkin

Chief Market Strategist

 

Disclosures

Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds, or other instruments in the companies noted in this report.