Cautious Rotation

Though we closed out last week’s trading with a directionless and rather uneventful session on Friday, for the week, the Dow Industrials gained a healthy 2.3%, and in the process regained its 200 DMA. Additionally, last week was the first week in months that the Dow Industrials outpaced both the S&P 500 and Nasdaq Composite to the upside.

For the week the S&P 500 rose a more modest 1.3% and the Nasdaq rose 1.0%. Given the extreme outperformance to the upside that the Nasdaq has posted since the onset of the COVID-19 pandemic, it is not at all surprising to see at least a degree of rotation last week into stocks that represent a relative value for investors.

That rotation aside, the fact that Dow component Pfizer released encouraging news on the COVID-19 vaccine front fueled a 7% gain on the week for Pfizer, and as a result, some added momentum for the Dow’s trade higher. The Dow’s move higher also received sponsorship from Coca-Cola, Johnson & Johnson, and Intel last week.

With earnings season now fully underway, Q2 financial earnings were top of mind last week for investors. JPM beat with the help of better-than-expected trading revenue. Citi beat by 6.38% and Wells disappointed by missing to the downside, significantly. First Republic Bank beat delivering $1.40 versus expectations of $1.20. Goldman beat handsomely, U.S. Bancorp and Bank of New York Mellon all beat as well. In short, though results proved to be better-than-expected for a majority of the financials reporting last week, the miss by Wells and the lack of constructive forward-looking guidance by every financial firm reporting effectively set the tone for the sector. For the time being, that tone can best be referred to as “cautious.”

This week’s economic calendar highlights:

Wednesday we receive the existing home sales data for June. May’s results, 3.910 M, were stronger-than-expected, even adjusted for seasonality. June’s Econoday consensus is 4.795 M. It is worth noting that the existing home sales data on a month-over-month basis in May was -9.7%. On a year-over-year basis existing home sales were down 26.6%. Also on Wednesday, we receive the weekly EIA Petroleum Status Report for the previous week. Last week’s reading reflected a draw in all three verticals. Crude oil inventories shrank 7.5 M barrels. Gasoline inventories dropped by 3.1 M barrel, and distillate inventories slipped by 0.5 M barrels.

Thursday morning we receive the weekly Jobless Claims report. It is worth noting that the current 4-week moving average in Jobless Claims stands at 1,350 K. Econoday consensus for this week’s report is exactly that, 1,350 K, effectively reflecting expectations for little improvement in this week’s reading. With a second wave of the COVID-19 pandemic taking shape in recent weeks, I think it Is safe to say that any significant improvement in this reading in the near-term will be unlikely.

Friday we receive both the PMI (Purchasing Managers’ Index), Composite Flash reading for July, and New Home Sales figures for June. In the case of the July PMI reading, Econoday consensus is 50.3 – a significant improvement from June’s composite reading of 46.8. Manufacturing is expected to be 51.5, and the services vertical is expected to come in at 50.0. New Home Sales – Level – SAAR for June are expected to reflect a gain of 700 K. Again, a reading that reflects improvement over the previous month’s reading of 676 K.

This week’s earnings calendar highlights:

The earnings calendar only gets busier this week with many large-cap names reporting including Amazon (AMZN), Tesla (TSLA), Microsoft (MSFT), Intel (INTC), IBM, and Coca-Cola (KO).

AMZN EPS forecast consensus estimate: $1.70
TSLA EPS forecast consensus estimate: $2.35
MSFT EPS forecast consensus estimate: $1.39
INTC EPS forecast consensus estimate: $1.11
IBM EPS forecast consensus: estimate $2.14
KO EPS forecast consensus estimate: $0.40

Though Q2 results and economic data remain the main priorities for investors, during times of extreme uncertainty, guidance oftentimes can emerge as the principal driver of equity market direction. Though we are certainly living in extremely uncertain times, I suspect that the guidance that accompanies this earnings season’s results will continue to not instill confidence – if we receive any at all.

Flickr photo: Thomas Hawk

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