Costco Reports Tomorrow As Investors Examine Ralph Lauren, Toll Brothers Today

JJ Kinahan
·10 min read

It seems fitting that as the U.S. prepares to launch astronauts into orbit today for the first time in almost a decade, the stock market has been rocketing higher for weeks.

SpaceX is planning to launch two astronauts this afternoon just after the closing bell, weather permitting. SpaceX is privately held, but if the U.S. is back in outer space to stay, that could be good news for companies with a space presence like Lockheed Martin Corporation (NYSE: LMT), Boeing Co (NYSE: BA), and Northrop Grumman Corporation (NYSE: NOC), Barron’s pointed out yesterday.

Back on the ground, it looks like the countdown is on for a launch from where things left off Tuesday on Wall Street. Major indices and some of the airline and travel stocks are up in pre-market trading. The question is whether the S&P 500 Index (SPX) can register its first 3000 close in nearly three months after just missing that yesterday.

Optimism continues to be the word of the day despite some worries about the U.S./China trading relationship and obviously concerns about any potential rebound in virus cases. There’s a sense among some market participants that the worst is behind us as people get back to work.

At the end of the day, it’s important for investors not to get ooled into a sense of complacency. If a trade war gets going, for instance, this isn’t a super-strong U.S. economy that can necessarily withstand that kind of body blow the way i mostly did last year. We were a healthier economy at that time. China’s economy is more fragile now, too.

Investors look ahead to the Fed’s Beige Book later today. Earnings to consider watching Wednesday include Ralph Lauren Corp (NYSE: RL) and Toll Brothers Inc (NYSE: TOL).

Some big retailers including Costco Wholesale Corporation (NASDAQ: COST) report on Thursday. One thing to consider listening for on calls of companies like COST is whether executives think crisis-related stock-up demand pulled some sales forward, which could potentially detract from results later this year.

Chase for 3000 Stalls...

The first test of 3000 in almost three months came up a little short yesterday. So today we’ll see if the S&P 500 Index (SPX) can get back above that level, where it hung out for most of Tuesday before some late-session selling.

Nine of 11 sectors rose yesterday, but Information Technology was a laggard. That sector has been on such a run that a little pause for breath doesn’t seem all that worrisome, though it did keep the Nasdaq (COMP) from joining in the gains posted by other major indices.

The sagging finish yesterday couldn’t really dent what was a pretty amazing start to the new week. A little profit-taking at the end of the session probably won’t alarm anyone too much, though the late retreat might also have reflected concerns about China. It would have been technically positive to hold onto those gains above 3000, a level that  lines up pretty closely with key resistance at the 200-day moving average for the SPX (see more below).

...But Not for Long

People didn’t have too long to regret the late slip below 3000. The SPX looks like it’s going to start today well above that. The question is whether those gains can hold. Closing above 3000 today and for a few more days would likely help cement those bullish feelings.

After the close, investors got two new pieces of what might be welcome news. First came reports that Senate Majority Leader Mitch McConnell had said a new fiscal stimulus would “probably” have to be done. That’s been a contentious issue for a few weeks, so maybe there’s some progress getting to an agreement.

Politics aside, it’s hard to argue that more money from Washington for businesses and employees would be bad for the stock market. One concern heading into June is whether stimulus will continue after the impact from the $3 trillion legislation passed in March starts to wind down.

The other welcome news was more symbolic as Cboe Global Markets (CBOE) announced a partial reopening of its trading floor June 8.

On the less sunny side of the street, a report from Bloomberg News that said the Trump administration is weighing sanctions on Chinese firms and officials over the situation in Hong Kong, and that might have helped push stocks off their highs in the final hour of trading yesterday.

Still “Cycling” Along

Cyclical stocks in sectors like Industry and Energy led the charge last week, a pattern that continued Tuesday. Even the flagging Financial sector joined the act, storming ahead as bond yields inched higher and investor optimism soared.

View more earnings on RL

As research firm Briefing.com pointed out, optimism around reopening appears to be steepening the yield curve, with longer-dated yields rising more quickly than shorter ones on Tuesday. That’s often a positive sign for the economy and for Financial stocks in particular. A slight decline in the U.S. dollar—which nervous investors clung tightly to back in March—also might signal growing hopes for better times ahead.

Airline and other travel stocks helped lead the scoring Tuesday, with some of the major airlines including Delta Air Lines, Inc (NYSE: DAL) and United Airlines Holdings, Inc (NYSE: UAL) soaring double-digits by midday Tuesday.

Retail, another beaten-down sector, also saw buyers looking ready to shop. Macy’s Inc (NYSE: M) rose nearly 20% at one point before seeing some of those gains melt by end of day. It still gained 10%. Others including Nordstrom, Inc (NYSE: JWN), Kohl’s Corporation (NSYE: KSS) and Nike Inc (NKE) all had nice starts to the short week.

Not Out of the Woods

You could argue it makes sense that people are buying cyclicals on the vaccine optimism. However, it’s important not to get carried away, especially when the scientific community warns that a vaccine is months out at best and there hasn’t been much progress finding treatments for the symptoms of the virus.

What makes some market watchers nervous is that by mid-June when most states are fully open, the economic data will start coming in on how much people are taking advantage of new opportunities to go out and shop or eat. It’s unclear if the reality will be able to keep up with the great expectations that we’re seeing right now. That means investors could be in for disappointment.

At the risk of sounding like a broken record, remember what you heard here last year when stocks were galloping higher and higher: There’s no reason to go “all in.” Some investors let “FOMO,” or fear of missing out,” guide them too much. Any time you put more money into the market, there should be a solid reason for doing so and it should fit into the context of your long-term investment plans.

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CHART OF THE DAY: PLAYING CATCHUP: The Financial (IXM—candlestick) and Industrial (IXI—purple line) sectors are both cyclical parts of the market that got hammered harder than the broader S&P 500 Index (SPX—blue line) by Covid-19. Over the last month, both sectors are starting to recover a bit and even catch up to the SPX. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade.For illustrative purposes only. Past performance does not guarantee future results.  

Data Dive: Few if anyone expects any really rosy numbers these days, so you have to take what you get. In the case of Tuesday’s numbers, investors got something a little better than expected even if things still look pretty soft on the economic front. Consumer confidence, an important metric when it comes to figuring out how eager people might be to go out and spend (when they can go out) did indicate some improvement from a month earlier. The headline figure was 86.6 for May, up from 85.7 the last time out. It was still below analysts’ expectations, but might indicate a little more consumer optimism as the economy starts reopening.

New home sales for April, a backward-looking number, actually came in much higher than Wall Street had expected at a 623,000 annual clip. That could indicate that low mortgage rates are having an impact, and also that people are still making big bets on the economy in these tough times with major purchases. Toll Brothers, one of the largest home-building companies, reports after the close today and could provide more insight into new home buying trends.

Crowded Showrooms? If you canceled a trip recently, you’re probably in good company. So it wasn’t too surprising to see Hertz Global Holdings Inc (NYSE: HTZ) file for bankruptcy last Friday. Other car rental companies, including Avis Budget Group Inc (NASDAQ: CAR), are also struggling, and that’s not good news for the major automobile makers, either. During normal times, CNN reported, rental companies account for around 10% of new car purchases. That’s not happening now. In fact, cash-hungry rental companies are likely to sell a large portion of the 1.5 million cars they own over the weeks and months to come, according to analysts interviewed by CNN. This means car makers have to compete with more supply coming onto the market even as they try to keep their own new cars from gathering dust at dealers.

The upside of all this could be for any consumer out there trying to buy a vehicle. The average new car price had been skyrocketing for years and rose to nearly $39,000 by the end of last year, according to Kelley Blue Book. However, demand for new cars was flagging even before the crisis, and the average price actually fell sequentially in April. Having new supplies augmented by the rental industry would seem to indicate the potential for more price drops in the future, and a rough road getting even rougher for the major automakers. Low-interest rates could conceivably help bring some traffic back to the dealerships, but remember, unemployment is in the double-digits. Next week brings May auto sales from many of the big car companies, offering the latest perspective on how things are moving along.

Dog Catches Car. Now What? The big news this week for chart watchers is that the SPX and Dow Jones Industrial Average ($DJI) both spent time Tuesday above the psychological 3000 and 25000 levels, respectively. Some technicians also pointed out the significance of the SPX rising above its 200-day moving average intraday for the first time since March 5. While some would say eclipsing the 200-day could put new wind in the market’s sails, it looks to others like it could be more of a destination than the start of a new journey. Basically, the SPX had to claw its way back about 800 points to get back to the 200-day, which coincidentally stood right at 3000 heading into the week. That means it’s hard to say how much more momentum might remain, and whether there are enough fresh catalysts to bring fresh money from the sidelines.

Also, getting “back to 200,” so to speak, didn’t help the market much during the 2008-2009 downturn, as one analyst pointed out to CNBC. The SPX bounced around that level for about two months then after getting there for the first time. Another analyst said the next resistance zone above 3000 might stand near 3080, which is where the SPX traded in mid-March when the NBA suspended its season. Jump ball!

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

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