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A Flattish S&P Is the New Melt-Up. The Vix Agrees.: Taking Stock

A Flattish S&P Is the New Melt-Up. The Vix Agrees.: Taking Stock

(Bloomberg) -- There’s a lot of red this morning, and it seems appropriate.

The moves, however, are muted in the aggregate, as we’re only down 9 handles -- par for the course this week in terms of the volatility in the major averages. An abrupt end to the North Korea summit that was called "productive", though sans the formally signed agreement that had been planned, the worst China PMI figures in three years, a host of poor tech earnings and a teetering health mega merger are all serving to weigh.

The North Korean failure likely won’t mean much for equity indices, as its only real impact will likely be to harden the respective stances between China and the U.S. China has long wanted its "pitbull" to make nice with the U.S. (and the U.S. has long wanted China to rein them in), and this failure will likely make a China deal slightly more difficult to achieve.

Despite the PMI figures, Goldman Sachs earlier this week wrote that they were seeing "tentative" signs of a China turnaround while global growth is "moving past the bottom." U.S. Q4 GDP is due later this morning.

And in cautious M&A developments, Bristol’s largest holder objected to the mega Celgene deal, though the Street’s take thus far is that a deal is still likely to get done. That optimism spread through the merger-arb world after the confusion surrounding Wabco and ZF Friedrichshafen (did they talk, are they talking, did they not talk) was resolved with the U.S. based auto parts maker confirming preliminary talks. Shares in WBC are up more than 7 percent, and we’ll be watching industry peers like Cummins, Paccar and Allison Transmission for sympathy moves.

A Flattish S&P Is the New Melt-Up. The Vix Agrees.: Taking Stock

Jumper Cables

It’s starting to feel like some sort of jump start is needed for the S&P to gather some direction, after three straight days closing with an approximate 1/10th of a percent move. Payrolls data next week can’t come soon enough. There were all the ingredients Wednesday, with plenty of catalysts outside of the salacious Cohen testimony (which included comments on Trump’s SAT scores, net worth inflation (and deflation, faux art sales, to claims the President “knew of and directed” negotiations for a Trump tower in Moscow). Though the President’s ex-lawyer provided plenty to be distracted by, two of the largest catalysts for worldwide markets, trade and Brexit, saw an advancement of the narrative.

U.S. Trade Rep. Lighthizer took a hard line on China (which briefly sent the SPX lower), cementing the idea that much more was required for a deal, and the European Union was said to have agreed to insist on a delay of the U.K.’s departure date by up to two years, versus a more abrupt timeline. The latter development cascaded through fixed income markets, boosting yields on Gilts, Bunds and the 10 year treasury, which in turn helped financials in the U.S. (one of the few outperformers in the session). Financials also got a lift from regional bank Regions Financial’s investor day, where 3-year targets topped expectations for Rotce and its adjusted efficiency ratio.

A Flattish S&P Is the New Melt-Up. The Vix Agrees.: Taking Stock

Go Ahead, Sell Already

Building on yesterday’s Taking Stock, winners again did seem to take a bit of a breather, with just 4% of the S&P hitting new year highs after a day that was middling at best. We saw some pressure on health insurers (like UNH, ANTM, CVS (which owns Aetna)) after Democrats unveiled a "Medicare for All" plan that was essentially dead on arrival (but would effectively remove the insurer middlemen -- or at least pressure their margins), but to get any real momentum, a substantive downtick for the S&P is needed.

JPMorgan strategist Jason Hunter in a note earlier in the week wrote that the "most surprising" element of this year’s rally has been the lack of real consolidation. He highlights just four “tactical” pullbacks of 2-3 percent, which just won’t cut it if we are to move much higher. Janney agrees, writing, the “rally will persist once we get passed a little profit-taking,” in the analysts references to overbought conditions. I would note that the last time this percentage of S&P 500 constituents were above their respective relative strength indexes (RSI) of 70, we did in fact get that dip the analysts appear to be wishing for, though I doubt they wish for the same magnitude, as indicated in the below graphic.

A Flattish S&P Is the New Melt-Up. The Vix Agrees.: Taking Stock

A Semi-Selloff

Semiconductors, among this year’s better performers gave back some of their index-beating gains Wednesday. There wasn’t any one thing that led to weakness, but there may have been some euphoria wearing off from the Mobile World Congress after what Goldman Sachs analysts wrote was "general optimism" on 5G and foldable phones that would likely do nothing for 2019 unit forecasts (but may provide a lift in 2020). Morgan Stanley also provided some takeaways from their TMT conference, writing that commentary in semis indicated business was stabilizing, though at "depressed levels." Texas Instruments, a bellwether, had commented that the current environment was "soft," analyst Joseph Moore wrote, and that the company was not really trying to call a bottom, expressing caution that a correction could last up to 4 quarters.

A few other sell-side calls came out, as RBC’s Mitch Steves speculated on whether we were indeed past the bottom in semis, and was generally upbeat on some names that included AMD, SNPS and semi cap names LRCX and AMAT, though cautioned one more quarter of “additional pain.” Mizuho also weighed in on the DRAM market in its reiteration of its buy rating for Micron (one of the worst performers in the SOX Wednesday), calling it "soft" with a chance for modest improvement versus NAND.

The tech sector broadly looks to be set up for another weak day Thursday after Box, HP Inc., Booking.com and Square all broadly missed expectations post market. My colleague Jeran Wittenstein called it an "ugly batch.” Cloud and productivity names Workday, Splunk, VMware (riding its 13th straight day of gains) and Zscaler are due to report after the market close.

75% Off

Of JC Penney -- shares that is -- from just one year ago today. Will it be next Sears? Or TJX Cos.? Earnings sent shares up 5% thus far, despite a comp sales miss, and it could go either way and in a hurry (options are pricing in a nearly 18% move). Off price retailer TJX Cos. torched Street estimates again Wednesday, a business model Bloomberg Intelligence analyst Poonam Goyal wrote “will continue to thrive in all environments.” JC Penney analysts did note that they are keenly awaiting elements of CEO Jill Soltau’s longer-term strategy, together with store closure details.

Other mall mainstays, Nordstrom (though admittedly higher end) and Gap Inc. are due after the close today, while L Brands also continued its bleed with poor results last night (its now lost more than 50% of its value in the last year).

Sectors in Focus Today

  • Consumer electronics names as FIT failed to follow in BBY’s positive footsteps with earnings; watch GPRO, SONO, NTGR, HEAR
  • Online travel agencies as BKNG whiffed, sending peer EXPE lower; watch TRIP, SABR
  • Car sales-exposed businesses (CARS, CARG) after Carvana reversed its losses to trade higher after results and a stronger forward outlook
  • Cloud players after Box lost a quarter of its market value in one earnings report (see DBX, NOW, SPLK and VMW -- the last two are due to report later today)
  • Women’s clothiers after LB continued its struggles; AEO may be a benefiary given its Aerie brand; ASNA, FRAN

Notes From the Sell Side

Cerner, a health care records and IT provider, was cut to underweight and assigned a new Street Low price target of $47 at Morgan Stanley earlier, after analyst Ricky Goldwasser calls the EHR market "saturated" and growth for the business will be challenged. Shares are indicated to open lower by 4% Thursday, as Goldwasser recounts the "stretched" valuation for the business that is facing down budget constraints at customer hospitals and a shift in spending away from data storage. Cerner must "sharpen" its ability to provide real-time analytics, Goldwasser wrote, while referencing his skepticism on the ability for the incumbent players to evolve with market changes.

HP Inc., after missing on 1Q net revenue in results post-market and reporting flat y/y printing net revenue, is down 15% pre-market and BofAML analysts are throwing in the towel on their prior buy rating. Analyst Wamsi Mohan double downgrades the rating to underperform, as the prior rationale for the rating was stability in the high margin print segment in which there is now lower confidence. He sees "too much volatility" in supplies growth, forecasts that appear too high, and a risk to incremental PC slowdown as a result of the macro environment. His price target of $19 (down from $30) is now the Street’s low.

Tick-by-Tick Guide to Today’s Actionable Events

  • Today: SVB Leerink Global Healthcare Conference in NYC
    • Morgan Stanley TMT Conference
  • 7:30am -- JCP earnings
  • 8:00am -- Fed’s Clarida speaks at economic policy conference
  • 8:30am -- 4Q GDP figures, personal consumption, core PCE; initial jobless claims
  • 8:30am -- JCP, CROX earnings call; WNC, CR, WAT, MSCI investor days
  • 8:50am -- Fed’s Bostic on the economy and housing
  • 9:00am -- QTWO investor day
  • 9:30am -- CVS, AMRN at SVB Leerink Global Healthcare Conference
  • 9:45am -- Feb. Chicago Purchasing manager; Bloomberg consumer comfort
  • 10:30am -- MCK at SVB Leerink Global Healthcare Conference
  • 11:00am -- Feb. Kansas City fed manufacturing
  • 11:00am -- JNJ at SVB Leerink Global Healthcare Conference in NYC; NUS Investor day; Fed’s Harker on the economic outlook
  • 11:25am -- NOW at Morgan Stanley TMT Conference
  • 11:55am -- TTWO at Morgan Stanley TMT Conference
  • 1:00pm -- Fed’s Kaplan does Q&A in San Antonio
  • 4:01pm -- WDAY, SPLK earnings
  • 4:05pm -- JWN, ADSK, ZS earnings
  • 4:15pm -- JCP, VMW earnings
  • 4:30pm -- MAR earnings, WDAY, SPLK, ZS earnings call
  • 4:45pm -- JWN earnings call
  • 5:00pm -- JCP, VMW, ADSK earnings call

To contact the reporter on this story: Brad Olesen in New York at bolesen3@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Steven Fromm

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