Stock gains accelerated Monday by midday, as cyclical sectors hurt badly by the coronavirus pandemic outperformed. But several signals tell strategists that the market is highly vulnerable.
All three major U.S. indices rose Thursday, with the S&P 500 up as much as 1.3%, better than the morning’s gain of less than 1%. Investors were feeling very risk-on, shedding the 10 year treasury bond, sending the yield up to 0.65% from 0.61%.
In the morning, big tech companies soon to report earnings and with secular growth drivers that can largely cut though the virus-induced recession, were outperforming.
By midday, they underperformed.
The leaders were stocks highly sensitive to the coronavirus-related trends of lower consumer discretionary spend and lower credit tolerance issuance, suggesting investors continue to view the reopening of economies across the globe as an appropriate development.
Here were some leaders in consumer discretionary:
TJX (TJX Companies) : +2.3%
Here were some market leaders in banking:
But since the market’s low, from which point to date the S&P 500 has risen 28%, not all of those stocks have been the best ones, and they’ve been range-bound since early April.
One of the notable outperforming groups has been big tech. Amazon, Apple, Microsoft, Netflix and Google, from their lows, are up 43%, 25%, 29%, 44% and 21%. And since April 9, these stocks have beaten the S&P 500 by many times the index's percentage point gain of 1.7%.
This has been accompanied by a massive rush into cash from institutional investors and treasuries, with the 10 year treasury yield falling from 0.77% since April 9.
Canaccord Genuity Chief Market Strategist Tony Dwyer offers a market view from this perspective: "While the SPX is up 1.68% from the April 9 close, the equal-weighted SPX is down 0.89 percent and the market-cap vs. equal-weight sector performances were very different as well,” Dwyer wrote in a note. He doesn’t advise buying stocks until there is a meaningful pullback, as he thinks the market is currently in a “frustration phase,” amidst a larger “bottoming process.”
Equal-weight means the average stock move on an index does’t take market cap weighting into account and is giving a clearer picture on the lack of breadth of the rally in recent weeks.
Investors are sprinkling some dollars into equities into earnings reports, as the dynamic that the market will look past an ugly 2020 campaign becomes widely accepted. And cash holdings up 30% since early February to almost $3 trillion doesn’t hurt risk appetite.
On the earnings front, the magnitude of the median earnings surprise is almost negative 5%, according to Morgan Stanley’s Chief U.S. Equity Strategist Mike Stanley’s note. That means S&P 500 companies are mostly missing earnings. Meanwhile, the median stock reaction three days post-earnings is roughly plus 1%.
But companies have said on their earnings that the rate of lockdown eases and positive shifts in consumer behavior remain highly uncertain. Investors are taking some risk, but cautiously, as more developments on the spread of the virus and easing of lockdowns remain a question mark.
The stimulus from the Federal Reserve and from Congress has supported market sentiment, but can only pad the recession, not end it.