Mystery Rally Gets Complicated as Sectors Scramble: Taking Stock

(Bloomberg) -- Flat S&P futures this morning are really confirming what some market participants saw as an almost flukey Monday rally.

Though Monday brought plenty of solid developments, from commodities to incremental trade developments to M&A, to retail sales that confirmed the sky wasn’t falling, some were taken aback. BMO analysts Tuesday wrote that Monday’s rally “doesn’t make a lot of sense within the context of our short-term timing model, which is about as negative as it can possibly get.” Instead, they pointed to quadruple expiry Friday that could be causing “outsized ripples.” That came after a mini correction (not even sure if you could call it that) the prior week, which really never met the full definition (of at least a minor one) to provide the green light to resume the uptrend. That 5% figure off the top of the recent rally would mean we would have needed to reach closer to 2,670.

Mystery Rally Gets Complicated as Sectors Scramble: Taking Stock

Raking the Tea Leaves

But looking for clues on how today may shake out, and wading through the sector breakdowns as to the real tenets behind Monday and Tuesday’s rally, arguments could be made on both sides of the risk coin. On its face, health care and utilities saw some of the biggest gains (in line with cautious sentiment), but the real money ended up flowing to the usual (a la 2018) tech names, like Apple, which turned in its third straight day of gains, despite some sell side shops citing trends in iPhones turning south. Longbow said as much Tuesday, while Keybanc cited "muted" demand for the smartphones earlier in the week, citing carrier surveys.

Mystery Rally Gets Complicated as Sectors Scramble: Taking Stock

Results from Zagg, a smartphone accessory maker, didn’t do much to counter that argument, with results post-market in which the CEO in a statement cited soft demand for smartphones that created some headwinds in their results (shares are indicated flat to down pre-market).

Nevertheless, tech kept the S&P 500 supported throughout the day, countering stiff resistance from the Boeing jet crash fallout that continued to worsen, with many more worldwide agencies announcing their intent to suspend the aircraft’s operation. It’s doubtful, however, that independent of the tragedy the S&P would had have much of a go at the key 2,800 level we last saw in the early part of last week. BofAML analysts last week cited the need for a “buyable dip” in order to refresh the buying and push the S&P towards a breakout of its flattish range seen over the better part of a month.

Evercore strategists voiced caution on Friday, noting that one shouldn’t “buy the first down week off a Bearish Engulf,” and recommended tactical accounts reduce exposure into the strength. This morning looks like just that case playing out, as we’ve lost some of that bullish momentum from Monday steadily over the past couple sessions. Gundlach’s webcast soliloquy last night only piled on to take any leftover wind out of the bullish sails, forecasting the stock market will go negative again at some point this year.

Keeps it Interesting

A fascinating juxtaposition is before us with two approximately two-year-old IPOs in the cloud sector with heavy hedge fund ownership -- SWCH, CLDR. The former faces high short interest, which may have accounted for its strong performance Tuesday ahead of results (a ~12% pop, followed by massive post-market volatility with results before settling near flat). While the latter, due to report today and a more software-oriented cloud name, faces no such characteristic.

The data center-focused name also has had a history of missing Street estimates (though the latest results were solid, BMO’s Tim Long wrote), while Cloudera (17% held by the hedge fund types, according to data compiled by Bloomberg), notably, hasn’t yet technically disappointed the Street when its come to earnings and forecasts, exceeding consensus every time since its IPO.

That hasn’t stopped the investor irrationality, however, as, results later today are sure to provide some fireworks. Its fourth earnings report as a public company saw shares crumble by nearly 40%, while in the quarter before last, it spiked more than 24%. I’m only mentioning the name as some heavy hitters in the cloud and business software management game are just around the corner, in Oracle and Adobe.

Notes From the Sell Side

One of 2019’s standout plays received its first bear, as Loop Capital downgraded Roku to sell, making it the only firm tracked by Bloomberg with such a rating. Analyst Alan Gould cited the company’s year-to-date rally, an admittedly eye-popping gain of more than 130% (Netflix, in contrast, is up “just” 33% in 2019). “We recognize that stocks can go from expensive to more expensive, but we can no longer justify a Hold rating on Roku at this price,” Loop wrote, adding that the cautious view was “corroborated by increased insider selling and the company filing to sell stock.” While Gould noted Roku’s high levels of growth, he said it “faces substantial potential competition,” making it additionally difficult to justify the valuation. Macquarie also downgraded the stock today, but its rating just goes to Neutral. Shares are down 4% in pre-market.

Goldman Sachs turned positive on Carnival Corp, upgrading the cruise ship operator to buy a week before it is scheduled to report its first-quarter results (scheduled for March 21). Carnival’s valuation is "near trough absolute and relative levels to the S&P 500” and Royal Caribbean Cruises, analyst Stephen Grambling wrote, “even as management set a more conservative bar” for its fiscal 2019. He added that “Europe concerns appear overblown,” and that “if near-term trends are better than feared and beats ensue with ramping capacity growth, we expect an upward re-rating.” Shares are up nearly 2% before the bell.

Sectors in Focus Today

  • Marijuana stocks after Aurora Cannabis just announced that billionaire investor Nelson Peltz would be joining the firm as a strategic adviser. U.S.-listed shares are up more than 8% pre-market
  • Credit card names (DFS, COF) as American Express’ investor day will get underway later. Credit Suisse analysts have noted that despite management’s constructive view on growth, analysts are less confident it can exceed the midpoint of mgmt’s guidance ranges.
    • They point to customer costs rising faster than revenues and a lending slowdown as part of that thesis, but ultimately aren’t expecting a change to guidance today
  • Athletic wear and retailers (FL, NKE, UAA) after Adidas results indicated an expectation for sales growth to slow this year; shares fell the most since May
  • Titanium Dioxide and chemical makers VHI and KRO after their results led shares to deteriorate through Tuesday’s session with the former turning in its worst performance since the financial crisis. We’ll be watching for any relief rally
  • Plane suppliers and airlines (LUV, ALK, UAL) as the Boeing jet woes continue with further restrictions from Hong Kong

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

  • U.K. Parliament to vote on whether to remove a no-deal exit as option
  • QTT lockup expiry
  • 7:00am -- MBA Mortgage Applications
  • 8:30am -- Feb PPI
  • 8:30am -- Jan Durable Goods Orders
  • 9:00am -- AXP investor day
  • 10:00am -- Jan Construction Spending
  • 12:00pm -- CY analyst day
  • 4:05pm -- MDB earnings
  • 5:00pm -- MDB earnings call
  • RBC Capital Markets Financial Institutions Conference, New York (day 2 of 2): ARI, CFG, MTB, NTRS, PNC, ZION

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