Pandemic Two Step

Dear Readers:

The Growth Stock Report resumes after a long hiatus. It’s a new market. Time to reset. It’s great to be back!

US Major indexes hold gains after taking back about half their losses from lows made last month. The glass is half empty, bears hold the cards.

Expect retest of March lows until the market gets a better read on the timing and recovering of the world economy. Is it going to happen this year? Is it safe now?

Disease control and economic turmoil puts financial markets into uncharted waters. 

Seven states are planning to end their stay-at-home orders. Alabama, Arizona, Florida, Georgia, Illinois, Michigan and Texas are set for this week. The governor of California is scheduled to address the issue for his state on that day. Eastern states, New York, New Jersey, Connecticut, Massachusetts, Pennsylvania, Rhode Island and Washington DC are looking at mid-May openings.

Political leaders fear a second wave of Covid-19 could be worse that the first, calling for a second quarentine, which would have an even more devastating affect on the economy. In 1918, the Spanish flu in winter was far worse than what it caused in deaths in the spring. Many epidemics have come in waves.

China and its post quarantine economy may prove to be a bellwether for the rest of the world. So far, it appears people are staying home more there, with restaurants and travel less popular.

Any medical remedy for the vaccine will be a game-changer. More on biotech stocks below.

Earnings season is in full swing. Watch for forward earnings guidance from tech giants Amazon, Facebook, Google and Apple scheduled to announce this week.

Uncertainty over the market environment has caused companies to remove earnings guidance. ChipotleUnilever, AT&T, and Domino’s Pizza were in this group last week. Warren Buffett has previously been an advocate for abandoning the practice altogether for their tendency to put too much emphasis on short-term profits.

Look out for companies lowering dividends. Dividend opportunities attract bids as the yield spread between S&P dividends and Treasuries are at 50 year high.

Technically speaking: 

  • The S&P 500 put in a bearish two-step symmetrical pattern and closed just under its 50-day moving average. There’s a Bull/Bear fight at this level, lots of chop back and forth.
  • Defensiveness is en vogue.
  • The Biotech and Gold Miner sectors have broken out of multi-year bases. More on this below.
  • Relative Strength: Healthcare,
  • Relative Weakness: Financials, Energy, Industrials, Real Estate
  • Technology is poised to lead after closing firmly above its 50-day MA – but it’s may be more of a look than a reality.
  • A high volume turn on the S&P’s 50-day would be an invitation to load the boat short. 
  • Volume ratio on the NYSE last week gives the bears a modest edge, while the Nasdaq weighed to the Bulls advantage.

We shouldn’t assume there’s bullish commitment from funds at this juncture. Buy-volume may largely be from algorithm traders and quantitive easing. Governments are printing money.

Upside trailblazers Netflix (NFLX) Amazon (AMZN) assume bullish leadership with new highs. Companies catering to the stay at home market do well in this environment. Their continued success could pull many others higher.

Software stocks have been a bright spot for the tech sector. Subscription based business models continue to bode well for the group. Companies offering stay-at-home solutions, such as Zoom (ZM), Citrix (CTXS) and Equinix (EQIX) are benefiting nicely in this environment.

VanEck Vectors Video Gaming and eSports ETF (ESPO) broke out of a base to a new high. Kids, and probably a significant number of their parents, are finding online gaming an outlet as almost all other forms of entertainment involving coming into contact with others has disappeared.

Biotechs are breaking out. The iShares Nasdaq Biotechnology ETF (IBB) is pushing new highs in a five-year base. Driving it, are Hopeful remedy makers for Covid-19, Gilead (GILD) and Novavax (NVAX) are leading the charge. Gilead stumbled on questionable early test results for its vaccine, though it’s still intact. 

Biotechs have out performed the market in recessions. Promising gene therapy has long enticed investors. Reportedly China is buying into the sector here, perhaps to take ownership of a potential remedy for the disease. 

Gold is holding highs not seen since in more than six years. The precious metal was trending higher before the pandemic hit. Any weakness in the dollar from the unprecedented printing of money will fuel it higher – as will a host of the usual fears including global economic depression and government breakdowns. 

The Gold Miners ETF (GDX) broke out to a 52-week high last week as it cleared a four week base.  

Until next week,