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Caution Flag: Rally Hits Pause Button Amid Rising Caseload, Pre-Weekend Positioning

The major indices appear to be taking a breather today after a fierce three-day rally that brought major indices up 20% from three-year lows. It might be healthy to see a little pause today, but data next week could be another hill to climb.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Washington eyes stimulus
5 min read
Photo by Getty Images

Key Takeaways

  • Major indices appear ready to pause after fierce rally as weekend looms

  • U.S. virus case numbers continue to surge, causing concern in the markets

  • Next week brings hefty load of March data after historic rise in jobless claims

(Friday Market Open) Over the last month, we’ve seen steep sell-offs and meteoric rallies, including the one we just had with major indices up 20% in the last three days. But even in the good weeks, there’s one thing standing between a positive finish and the weekend: Friday.

When you have three up-days like we just saw, it’s asking a lot to continue the momentum. Especially when investors have seemed shy going long into the weekend throughout this crisis. Fridays have been a challenge all year.

It’s possible things got overdone to the upside, and now the market will take a breather. This actually could be a healthy development. Also, note that things didn’t go limit-down overnight, which is a good sign that maybe the market is starting to trade in a narrower range as people work to find out what stocks are actually worth. 

News that the U.S. now has more virus cases than any other country and that U.K. Prime Minister Boris Johnson tested positive probably added to the setback in overnight futures trading. Also, yesterday’s dramatic rise in jobless claims remains in focus. We can’t overlook the fact that this crisis has had a devastating impact on peoples’ day-to-day lives. Many Americans are hurting right now, and so are many businesses. These aren’t easy times for anyone.

Pre-Weekend Positioning Could Threaten Streak

Before Thursday, it had been nearly two months since the last rally of three days or more—a four-session streak that occurred between Feb. 3 and Feb. 6 for the S&P 500 Index (SPX).

Anyone hoping to see another 4-for-4 faces the fact that today is Friday. If you’ve closely watched the last two months or so, the very word “Friday” might sound a bit ominous. Fridays have been some of the worst days since this crisis began, so you might want to consider looking out for any potential late-session volatility. 

It will be interesting to see where things close, although it’s still too early to say there’s any scientific technical support level. From a psychological perspective, it would be nice to see the SPX hold 2550 into the close, and especially to see it manage 2600. But those are more psychological support than technical support.

Volatility Stays Sky-High, Reinforcing Concerns

Friday’s session concludes what’s so far been the best week for major indices since 2008. That follows last week, which was one of the worst in decades. You don’t have to be a seasoned trader to know that worst-ever-weeks followed by best-ever-weeks aren’t normal, even if things do feel a lot better now than a week ago.

Though the moves have been up the last few days instead of down, these huge swings and continued high volatility—the Cboe Volatility Index (VIX) remained above 60 yesterday—suggest the market is far from out of the woods. Some analysts also warn there’s no guarantee the major indices won’t eventually re-test the three-year lows posted Monday, back before this wild rally began. What the market arguably needs to do is establish a trading range, and it’s still nowhere near doing that.

However, there are some green shoots. For one thing, as an analyst pointed out in the media yesterday, the SPX fell on Monday to lows below the bottoms of last week, and then rose Wednesday and Thursday above last week’s highs. That’s technically constructive, but might reflect end-of-month position squaring by some of the big funds. It’s probably not coincidental that this sharp rally took place with just a few trading days left in March. Even in normal times, you sometimes see more volatility at the end of a month and also at the end of a quarter.

The real test arguably comes in April, when investors wrestle with what’s expected to be a drip-drip-drip of increasingly soft data like the jobless claims explosion seen Thursday. Between that and earnings season—which could feature many companies suspending their outlooks and reporting disappointing Q1 results—the headwinds will be there. The main data to watch as April begins, however, is the virus case count, which no amount of federal and monetary stimulus and support can do anything about.

Speaking of stimulus, no one knows if the bill expected to pass today will be enough. We threw money at the crisis, and whether it can get the country through this is pure speculation. If you’re an investor, it goes back to asking yourself if the companies you’re invested in have big balance sheets that can help them weather the storm.

Data Next Week Could Pose Psychological Test

There’s a smattering of March data today in the final consumer sentiment report for the month, but it’s next week when we start to get a hefty dose of monthly data from March. Unfortunately, most of it is probably going to look like a “Dear John” letter to the market. We’re talking consumer confidence and March payrolls, due Tuesday and Friday, respectively. There’s also the ISM manufacturing index on Wednesday, which was a little soft even late last year long before anyone had heard of the virus.

We’ll offer some previews Monday and later next week on how analysts see some of these numbers shaping up. The new week could give investors an initial chance to watch how major indices respond to data that reflect this historic economic slowdown. Remember, stocks tend to be forward looking, and all the data are from the past. That could help explain why stocks rallied even after that historically bad weekly unemployment claims data yesterday.

Why Banks Charged

If you look back at Thursday’s action on Wall Street, it might seem a bit odd that credit card companies and regional banks were among the leaders, even at a time when we’re all stuck at home and the only spending many are doing is online. However, there appears to be building hope of pent-up demand exploding when this situation subsides a bit and people can go out again. That might be why credit card firms like Discover (DFS) and mid-sized banks like Capital One (COF), Fifth Third (FITB), and Synchrony Financial (SYF) performed well Thursday. All climbed double-digits Thursday.

Another more esoteric thing that could be helping regional banks was some language in the stimulus bill that temporarily loosens up a few regulations put into place after the financial crisis of 2008. The legislation pushes back some requirements and frees up capital that banks can use for other things. Big banks weren’t left out of the rally, with battered shares of Bank of America (BAC) and JP Morgan (JPM) among the ones posting nice gains.

At the same time, some of the stocks that initially helped lead things higher earlier this week began to fade a little by Thursday. Amazon (AMZN), Facebook (FB), Apple (AAPL) and Alphabet (GOOG), for instance, all trailed the broader market’s gains.

This could be a sign that investors are starting to turn away from some of the more relatively high-priced and defensive stocks (which the biggest companies are to some extent due to their huge balance sheets), and toward some of the cyclical ones that really got smacked around earlier this month. Cruise lines and airlines, for instance. We’re far from normal, but more action like this could indicate that bulls are starting to re-appear.

Crude Crushed as Caution Continued Thursday

On a less positive note, U.S. crude inventories rose by 1.6 million barrels in the most recent week. That was the ninth-weekly increase in a row, and points up how demand, which usually starts climbing this time of year, just isn’t there. The front-month crude contract fell more than 7% on Thursday, back below $23 a barrel. It’s at nearly two-decade lows, and losses might have been exacerbated by the stimulus bill not including the oil industry, research firm Briefing.com said.

It was kind of interesting to see equities rally Thursday despite commodities getting hurt (copper was down 1% at times, for instance). Does this mean there’s been a break in the link that seemed so evident last week when equities and crude fed off each other? Only time will tell, because one day isn’t a trend. 

There continues to be caution, which you can see with gold rising and 10-year yields declining yesterday despite the equity rally. All these stimulus measures by the Fed and Congress also might be taking a toll on the dollar index, which fell back below 100 Thursday after recently climbing into triple-figures for the first time in nearly three years. Investors appear to be breathing a sigh of relief that so much is being done to prop up economies. With that in mind, they may not be feeling the need to cling so much to cash.

CHART OF THE DAY: CASH OUT—FOR MOMENT: The dollar index ($DXY—candlestick) made a major break this week after running up to nearly three-year highs earlier this month, as this three-month chart shows. It appears people ran to cash as they stared at what appeared to be an abyss, but then began embracing risk a bit more as the Fed and Congress acted quickly. However, caution continues to dog the 10-year Treasury yield (TXN—purple line). Data Sources: ICE, Cboe Global Markets.  Image source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

The “Dreaded ‘B’ Word” Buybacks got a bad reputation recently, as even President Trump and former Vice President Biden seem to agree that companies receiving federal help during the crisis should forgo them. Whatever one thinks about the politics, this mentality potentially poses another headwind for the market. Why? Because like them or not, buybacks can sometimes lift stock prices and improve earnings numbers.

The last time the market got slugged, back in Q4 of 2018, companies bought back an estimated $240 billion of their own shares, according to The New York Times. Buybacks tend to help the stock market by increasing demand for a stock, sometimes propping up share prices. Also, when a company buys back shares, the same profits are spread over the smaller number of shares, improving earnings-per-share results. 

You could argue this is an artificial kind of way to strengthen the metrics, and that stock prices and earnings might be more “genuine” without companies stepping in. From a historic perspective, buybacks haven’t even always been with us. It wasn’t until 1982 that the Securities and Exchange Commission (SEC) adopted a rule that allowed share repurchases, provided companies followed certain rules. Since then, buybacks have replaced or supplanted dividends for many companies. So if companies can’t use buybacks in this environment, it might not be too surprising to see them raise dividends instead, provided they have the liquidity. It’s something to consider watching.

Getting Technical: No one knows if this late-month rally has any legs, especially if the virus-related freeze on economic activity goes on much longer. However, one level in the SPX that looms pretty large up above could be 2700, and not just because it’s a psychological round number. It’s also the level that represents a 20% drop from the all-time peak of mid-February, meaning if the market punches above it, it’s technically escaped bear territory. The 2700 level also represents about a 62% retracement of the rally from December 2018 through February 2020, an important technical mark for chart-watchers. Stay tuned. 

99-Cent Sale: While everyone is encouraged to stay inside except for vital needs like buying groceries and medicine, one thing we can live vicariously from our living rooms is something many thought they’d only be able to tell their grandkids about: Gas for under a dollar. It’s become reality again in Wisconsin and Oklahoma, according to gas price tracker GasBuddy.com. The lowest prices at individual stations in those two states Thursday were 99 cents a gallon, while Oklahoma had the lowest statewide average price at $1.65, AAA reported. Average for the country is $2.07, a four-year low and down from more than $2.50 at the start of 2020. The last time the country as a whole saw an average gas price below $1, incidentally, was in early 1999, according to the U.S. Energy Information Administration (EIA). 

While low gas costs may not help the average person much, considering we’re all cooped up at home, it is potentially good news for the transport sector, which everyone’s relying on to keep those groceries and pharmaceuticals on the shelves. Earlier this week, one regional association representing truckers applauded Pennsylvania for re-opening some of its highway rest stops, which long-haul drivers depend on for gas, food, and, simply...rest. The rest stops had been shut down to prevent spread of the virus.

Good Trading,

JJ

@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • Major indices appear ready to pause after fierce rally as weekend looms

  • U.S. virus case numbers continue to surge, causing concern in the markets

  • Next week brings hefty load of March data after historic rise in jobless claims

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