Melt Up

Dear reader,

Stocks are hot as the world economy re-opens. 

While the re-opening of businesses will come slowly, in stages, the stock market has wasted no time taking back lost ground for the year. 

Technology shares drove the week’s action as the Nasdaq roared 6% for higher to mark a 1% gain for the year.  The S&P 500 is down 10% for the year.

Fear of missing out on a new bull market, FOMO, became a theme this week. Last week it was short covering. Who wants to fight the Fed?

Some traders feel the Federal Reserve has put a floor on the market. There’s lots of money out there, and it doesn’t appear to be fleeing the market. 

The Bears are sticking to the notion that bear markets always have rallies that get everyone feeling good, like we’re in a new bull market. To this cause, the path of least resistance remains down as markets don’t do well with uncertainty, and there’s plenty of that at hand. 

China and Japan offer hints of what the US might expect post-quarantine. The Chinese have showed reluctance to resume normal life as restaurants and travel have not resumed to pre-virus levels. In Japan, an uptick in cases after quarantine has triggered a second round of lockdowns.  

Companies benefiting from social distancing have pulled indexes higher, including market flagships Amazon (AMZN), Netflix (NFLX), Microsoft (MSFT), Google (GOOG) and Apple (AAPL),  

Other hot spots include biotechnology, healthcare, high quality dividend payers and foreign stocks whose economies opened. Stocks may also be seen as a hedge against potential inflation with unprecedented money printing by the government. 

Meanwhile, major carnage in finance, retail, energy, industrials and travel related stocks threatens to become leadership to the downside if the bear returns.

There have been a number of positive first quarter earnings reports, especially from tech names. But first quarter numbers do not represent the full impact of the economic shutdown which started in its last two weeks. 

In the coming weeks second quarter earnings will be the focus, and are feared to be the worst of the year. Many feel a bounce back will occur in the third quarter.

About a third of the companies in the S&P 500 that report earnings have refused to give guidance given the unprecedented environment. Goldman Sachs expects S&P 500 earning to be off by a third for the full year. 

The S&P 500 fell 35% from its February hight to its March low, which matches exactly that an average bear market. The big question is whether or not the stock market losing a third of its value this year is an accurate reflection of future earnings.

The hope is that we’ve hit bottom. The market looks like its anticipating a V-shaped economic turnaround, which is hard to imagine happening given the horrendous economic data. 

So far, the market doesn’t care that economic data is at its worst since the Great Depression of the 1930’s. April’s unemployment report showed more than 20 million jobs lost. That’s the size of the state of New York. 

The good news is the unemployment report is a lagging indicator. More than a fifth of the 23 million jobless are classified as temporary rather than permanent.

US relations with China will likely play on market sentiment in the coming weeks. Threats of, and actual punishment to China for its behavior during the early days of the virus outbreak will be a headwind indexes, while talk of resuming trade talks may boost them. 

Trump wants a strong stock market heading into the November election. 

Technically Speaking

  • The S&P 500’s 3.5% climb for the week gives it a solid close above its 50-day moving average. But it wasn’t enough to take out last week’s high.
  • The 50-day averages are key. Any firm close below will assert the Bear’s cause. 
  • Bulls take the volume edge for the week, with two accumulation days to zero distribution days on the S&P 500 and Nasdaq.

Breakouts are happening. Upside momentum on the major indexes coupled with a boost in business for the newly strong stay-at-home market is rewarding companies with strong fundamentals.  

Recent Breakouts from eBay (EBAY), from a multi-month base, Etsy (ETSY) and Peloton (PTON) are just a few of many we’ve seen. 

Continued strength from Biotech is evident with the iShares Nasdaq Biotechnology Index ETF (IBB) approaching its 2015 high. 

Gilead Sciences (GILD) slipped 3% for the week as it flirts with a failed breakout. The company’s Covid-19 drug remdesivir is now shipping to hospitals. 

Many of bases are in the process of being formed, though few meet the strict criteria of our fundamental standards. 

The Trade Desk Inc. (TTD) is a top candidate as it technically broke out Thursday, though is still within acceptable range of its buy-point. 

The company’s cloud-based technology gives its customers the ability run digital ads via video, audio on multiple platforms. Fundamental year over year highlights include 33% quarterly revenue growth, 137 earnings growth and 22% return on equity. 

Many, many other opportunities are lining up. Many of which will hinge on broader market strength.

Also, Corona beer sales strong, according to its parent company Constellation Brands (STZ). Unfortunately, it does not meet our strict fundamental criteria for buys. 

Be lucky,