A World of Hurt Awaits If Traders Start to Panic: Taking Stock

(Bloomberg) -- Stocks are back to their declining ways, after Friday’s breather, as tensions are bubbling up between the U.S. and Saudi Arabia over the disappearance of a prominent journalist while Trump threatens another round of tariffs on China -- note the WSJ had an ominous story over the weekend about a "new cold-war era" between the two sides.

One potential bright spot is the early action in Bank of America, which is the biggest earnings report of the day. Shares quickly erased their losses in pre-market trading after the statement hit, with the firm pointing to solid loan growth and credit quality that remained strong.

Sectors to Watch Today:

  • Inflamed trade war fears could upend any follow-through bounce that globally inclined names like Caterpillar, Boeing, 3M, and the semis saw in the prior trading session (SOX recoiled 2% on Friday)
  • Bank stocks as earnings season rolls on after a mixed bag from Friday coincided with a clear break of the KBW Bank Index from its seven months of consolidation (see chart below); PNC got much of the attention thanks to its softer loan growth figures, which Nomura Instinet called "a negative barometer for regional banks"
  • Energy stocks on ramifications from the elevated tensions in Saudi Arabia; the head of the Arabiya news network said that U.S. sanctions could wreak havoc on the global economy by taking oil prices above $200 per barrel
  • Retailers on the fallout from the Sears Holdings bankruptcy; Goldman sees the greatest potential upside over time for Lowe’s, Best Buy, Home Depot, and Kohl’s
  • Aerospace & defense stocks after Harris Corp. and L3 agree to merge (combo $33.5 billion market cap), which follows several other deals in the space, like Esterline/TransDigm, KLX Inc./Boeing, and Rockwell Collins/United Tech
  • Video games group as we await sell-through data on Activision’s new Call of Duty and any sort of confirmation of whether this game might end up being a Fortnite killer
A World of Hurt Awaits If Traders Start to Panic: Taking Stock

No Panic Selling Yet

We’re entering the first heavy week of earnings with an unpleasant aftertaste of 1) a mini-meltdown in stocks, 2) a spooky breakout in rates, 3) the return of volatility in general, 4) a safe haven bid in gold, 5) a vexing pattern of negative preannouncements and margin disappointments, 6) a no-end-in-sight feeling on the U.S.-China trade war, and 7) a geopolitical flare-up in Saudi Arabia where the tense situation over a missing journalist appears to be deteriorating by the day (the iShares MSCI Saudi Arabia ETF KSA is the one to watch).

I say "mini-meltdown" for the tape because this dip is significantly smaller than the one we saw in February in percentage terms, at least so far. The benchmark indices are still higher year-to-date (S&P 500 +3.5%, Nasdaq +8.6%) and impressively held their 200-day moving averages on Friday after a precarious-looking break the day before.

Plus no institutional trader that we surveyed saw any sort of panic-selling on their respective desk. That may be the key to keeping this bull market alive.

Net net, we gave up three months of gains in a flash, but things are a smidge calmer than where we stood last week and we can finally get down to real fundamentals with some megacap earnings about to be released (assuming that’s a good thing, of course).

Two Precarious Groups

One area that bears watching includes anything remotely considered "momentum," as the recent selloff in this group mimicked the one from February (almost to a tee, if you go by the iShares momentum ETF MTUM). Square looks to me like the measure of sentiment for this group in the near term given its >20% breakdown last week, even if some of the pounding came on the heels of a major executive departure. Odds are probably good that if Dorsey’s baby continues to meet hordes of sellers, some of the other high-profile tech-slash-consumer names will meet a similar fate.

A World of Hurt Awaits If Traders Start to Panic: Taking Stock

Another area to keep tabs on is the small caps, as the chart on the Russell doesn’t look to be anywhere close to as healthy as the one on the SPX or the Nasdaq -- for one, the RTY has been on a downtrend since the beginning of September, or a full month before the downturn in the broader market. Secondly, the 200-day moving average on the index didn’t offer any support like it did for the other two (see chart below).

A World of Hurt Awaits If Traders Start to Panic: Taking Stock

Your 63-Hour ICYMI

Here’s some stuff you might have missed since Friday’s close:

Trump called Mattis "sort of a Democrat" and hinted that the Defense Secretary might be planning to quit, and he might not be the only one ("There are some people that I’m not happy with," Trump said); Biden said Trump is "trashing American values"; Jared Kushner may have paid little or no federal income taxes in five of the last eight years; Barron’s cover story talks about why there are more scares ahead for the stock market; Bridgewater’s Bob Prince, in an FT interview, warns the Fed that the economy "is moving from hot to mediocre"; II’s list of "Rising Stars" of Wall Street research includes Guggenheim’s Curry Baker, Credit Suisse’s Judah Frommer, Deutsche Bank’s Tiffany Kanaga, Citi’s Praful Mehta, and Wolfe’s Jared Shojaian; Leon Cooperman reportedly slammed the SEC at his retirement party; hedge fund Marblegate Asset Management bought ~300 NYC taxi medallions over the past year for >$50 million; Barron’s took a closer look at the convertible arb strategy of Calamos’s Eli Pars; the NYT created an interactive map of "every building in America"; a Wisconsin brewery debuted a Candy Corn Cream Ale; it’s already splitsville for Ariana Grande and Pete Davidson; the royal family is getting bigger; the Knicks waived Joakim Noah just two years after signing a four-year $72-million contract; there were loads of college football upsets over the weekend (No. 2 Georgia, No. 6 West Virginia, No. 7 Washington, No. 8 Penn State, No. 16 Miami, No. 19 Colorado, No. 21 Auburn all lost); and the Rams are the only undefeated team left in the NFL after the Pats took down the Chiefs.

Notes From the Sell Side

Morgan Stanley is all over the autos sector this morning:

  • Cautious on the auto suppliers (follows Evercore ISI’s "There Will Be Blood" note from Friday), arguing that investors are unlikely to get involved in the space ahead of 2019 guidance in mid-January. The bank is positive on Aptiv (like Evercore ISI) and American Axle, cautious on Visteon, and downgrades Delphi to an equal-weight on limited visibility going forward.
  • Eyebrow-raising call from Adam Jonas, who lists five reasons why his team may be "seriously underestimating electric-vehicle momentum; he specifically noted that the high-spec version of Tesla’s Model 3 "took us by surprise. Hard to say how much this matters. But it matters."
  • Negative on Hertz and Avis after introducing a new on-airport rental car pricing monitor, nothing that both companies face secular and cyclical challenges "that we see as, over time, unsupportive for pricing increases"

Goldman says rapidly slowing consumer demand in China raises EPS risk for neutral-rated Apple: "Should very weak consumer demand persist and impact the higher end of the market, Apple’s potential to beat and raise in FQ4’18 earnings is likely reduced."

Cowen expects GE to take action to shore up its balance sheet (dividend cut, potential equity raise, etc.), though doesn’t expect a "full reset" until early 2019, which will extend the overhang on shares; they cut their price target to $12, which is among the lowest on the Street.

Credit Suisse downgrades the U.S. steel sector to a market weight on both supply and demand concerns; ratings on Nucor, Steel Dynamics and Cliffs all move to neutral.

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

  • 8:30am -- Empire Manufacturing, Retail Sales
  • 8:30am -- BAC earnings call
  • 8:30am -- FTS investor day in Toronto
  • 8:45am -- SCHW earnings
  • 10:00am -- Business Inventories
  • 1:00pm -- Apple’s Jony Ive, HPQ CEO Dion Weisler, Instagram co-founder Kevin Systrom, Sean Parker at Wired25 Summit
  • 2:10pm -- Galaxy Digital CEO Michael Novogratz on Bloomberg TV
  • 2:35pm -- Canada PM Trudeau keynote interview at Fortune Global Forum
  • 4:00pm -- JBHT earnings (roughly)
  • 4:30pm -- MSFT CEO Satya Nadella at Wired25 Summit
  • 5:00pm -- ADBE analyst meeting
  • 5:30pm -- RIO 3Q sales
  • 5:30pm -- JBHT earnings call
  • 7:00pm -- Google CEO Sundar Pichai, TWTR/SQ CEO Jack Dorsey, CRM co-CEO Marc Benioff, YouTube CEO Susan Wojcicki at Wired25 Summit
  • 8:15pm -- Monday Night Football: Niners at Packers (-8.5)
  • 9:30pm -- China CPI, PPI

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