Market Seems To Be Seeking Direction As Quarter Winds Down

Key Takeaways:

  • Volatile trading could continue after choppy session Thursday
  • Costco earnings beat expectations, but stock loses ground
  • Washington stimulus hopes still ticking, but sides far apart

As the election nears, it feels like there’s been a change in market psychology, and a note of caution on stocks in general following the great summer run-up.

Though stocks fell in pre-market trading this morning, it doesn’t seem like there’s a real sense of direction. Things are just drifting around, waiting for something to happen. This week has featured lots of intraday volatility, and it’s hard to see that changing. It’s a jittery market to both the upside and downside, and investors should be on their toes.

Yesterday’s minor rally that lifted the battered Tech sector seems like a long time ago this morning, with stock index futures down across the board and volatility edging higher. The S&P 500 Index (SPX) is on pace for its fourth-straight week of declines, something that hasn’t happened in quite a while.

News today could include more rustling from Washington about a possible stimulus package, though nothing is likely to actually happen there right away. Stocks got a little boost from this talk Thursday, but there’s nothing solid for investors to hang their hat on. The two sides look like they’re still far apart.

See-Saw Action Continues to Dominate

Despite all the intraday volatility, the Cboe Volatility Index (VIX) remained below the psychological 30 mark yesterday. That could be a good indicator to watch Friday, with any move toward or above 30 likely indicating more tough sledding ahead for stocks in the new week. Remember to check futures action Sunday night for any response to weekend headlines.

Some of the see-saw moves could reflect that we’re getting close to the end of the quarter, a time when institutional investors tend to “square positions” by selling losing stocks and buying winning ones. This can make the next few sessions a little choppy. Investors dealing with this volatile environment might want to consider keeping trade sizes smaller than usual in case of big moves one way or the other.

A bit of the volatility this week likely reflected concern about election-related headlines. The market could be especially vulnerable to trading on this sort of noise the next few weeks before earnings season arrives and provides a competing focal point.

Speaking of earnings, Costco (COST) delivered last night, easily beating Street estimates on top- and bottom lines. Same-store sales rose an amazing 11% in the U.S. Despite that and a ton of upgrades this morning for COST, the stock fell slightly in pre-market trading. It’s hard to see why, except maybe it could be a buy the rumor, sell the fact situation since the stock recently posted all-time highs.

Durable goods orders for August, out this morning, looked disappointing with just a 0.4% rise. Analysts had expected around 1.5%, and the July gain was 11.7%. This could be read as another sign of the recovery losing steam as last spring’s stimulus measures run out.

Could Weekend Sing an M&A Tune?

Weekends are often when you hear merger and acquisition (M&A) news, as we saw a couple weeks ago. Keep an eye out for any possible M&A action in the coming days after a quiet week on that front. Getting some activity there could bring a bit of buying interest back into the market.

There was a little more buying interest at times on Thursday, and once again the SPX managed to close above correction territory (down 10% from highs) after being below that level intraday. This could be a sign of resilience, and also that buyers are defending the 100-day moving average that rests right around 3200. That remains a level to potentially watch Friday and into next week. If it can’t hold, then a test of the 200-day moving average down near 3100 would appear more likely.

Another thing to consider paying attention to today is U.S. crude prices, which clawed back above $40 a barrel Thursday. It might be slightly bullish for the market as a whole if crude can maintain this level, and certainly would be good to see for the battered Energy sector. As of an hour before the bell, crude was just below $40.

Looking for Direction from Tim Cook and Company

Both the SPX and the Nasdaq
100 (NDX) fell below long-term support at their 50-day moving averages earlier this month. To date in September, the SPX is down 7.3%, while the Nasdaq (COMP) is the worst-performing major index with 9.3% losses.

All the “FAANGs”—including Apple
(AAPL) and in addition Microsoft
(MSFT)—are down significantly, but AAPL showed some strength yesterday and was trading slightly higher before the bell today. This is a company with huge influence on the market, and arguably a solid performance by AAPL could be needed to lift the tide for the other Tech boats.

When the dust finally settled yesterday, 10 of the 11 S&P 500 sectors posted gains, led by traditionally more cautious sectors like Utilities and Consumer Staples. That might go back to what we’ve been saying about investors adopting a more hesitant approach ahead of the election..

The dollar index, which had been rising as fears over the virus and lack of a fiscal stimulus grew, was roughly steady yesterday, but keep an eye on it today for possible indications of direction going into next week. Any strength in the dollar might be read as bearish for stocks, because it could be a signal of nervous investors embracing cash.

Gold is down dramatically from the all-time highs it recorded this summer, perhaps because inflation fears have started to diminish amid more coronavirus-related shutdowns and U.S. employment data that haven’t been too impressive lately (see more below).

Treasuries, meanwhile, haven’t given investors any direction signs this week, with the 10-year yield seeming content to huddle near 0.67% like campers around a fire. The yield stepped back slightly early Friday.

Tech Comeback? After the intense pressure on FAANG and other Tech stocks so far this month, we’re potentially coming to an area where people are starting to ask themselves whether things might be getting overdone for the sector. Companies like AAPL and MSFT aren’t going away, and we’ve seen the incredible need during the long shutdown for the products they and other Tech firms provide.

Tech companies have made strides this year in things that are going to last, like cloud services. People are using these products and they’re not going to drop them when they go back for work. Before Wednesday’s wipeout in the sector, it did look like some investors were starting to take a nibble, and there was a little more evidence of that on Thursday. Still, with AAPL down nearly 20% this month after rising 40% in August, it’s way too soon to say the hard times are necessarily over.

Banks Take A Punch, Stay in Ring: While a little sun started to shine on Tech as the week advanced, there wasn’t much reprieve for beaten-down banks. This sector continues to suffer under the twin barbells of extremely low interest rates and extremely high credit risk. The biggest banks have done a great job cutting costs and keeping their businesses liquid, so there’s a chance they could start getting some traction if a vaccine comes into widespread use. Also, despite having fallen double digits so far this month, the S&P 500 Financial sector has been mostly treading water since May and remains up about 30% from its March lows.

That recovery pales next to approximately 45% gains in the overall SPX since then, but it’s not like the Financial sector is tanking. Banks continue to hang in there like a boxer who just takes punch after punch after punch and won’t go down. Strong August new home sales announced Thursday might be a point in the banks’ favor, especially for big mortgage generators like Wells Fargo (WFC
) and Bank of America
(BAC). The next test comes in mid-October when both big banks and regionals start sharing their latest financials.

Data Tug-of-War: On the data side, it’s a bit quiet to end the week following a Thursday that pulled the market in both directions. Initial jobless claims stayed stubbornly high, but the August new home sales report was pretty amazing. New home sales rose above 1 million on an annual basis for the first time in nearly 14 years and were 43% above year-ago levels. Low mortgage rates and people fleeing cities for the suburbs might explain some of this strength, analysts said. However, there’s concern that this kind of huge housing boom could be a short-lived phenomenon that calms down a bit once the pandemic ends.

One thing that stood out about this particular report was a slight drop in average prices paid for a new home, but that could reflect that the biggest sales gains were in the southern part of the U.S., where prices tend to be lower. Looking ahead to next week, some of the key data include consumer confidence and the government’s final estimate for Q2 gross domestic product (GDP). We have to wait a month for the first Q3 GDP read, which should help tell us if the economy actually did start to turn around.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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