If You Needed Excuses to Sell Tech, You Got Them: Taking Stock

(Bloomberg) -- Stock futures keep rising, though there wasn’t a ton to be optimistic about given the mixed bag of earnings reports -- not a great response by tech so far (more on this below) --- and curious stories and Trump tweets related to overseas tensions: Trump bashing the TPP, noting Pompeo’s meeting with Kim Jong Un went "very smoothly," and a story that Putin is seeking a deal after recent sanctions.

Note that Morgan Stanley just reported earnings with shares up already almost 3%, giving futures a slight push to session highs.

Technicals are coming into play on the upside, with many eyeing the S&P 500 close above the 100-day moving average of 2,701 and a potential move into the mid-Feb to mid-March range of 2,750-2,800.

Three things have stuck out since earnings kicked off on Friday:

• 1) some of the lightest volumes we’ve seen year-to-date
• 2) an awful trading tape for the banks where traders are selling into any strength
• 3) the opposite scenario in tech, where NFLX’s blowout report fueled a rally in the whole space yesterday

For context, the BKX is down almost 3% since JPM and Citi reported on Friday (GS was the worst performer in the Dow yesterday) versus the NYFANG index +3.4%, the broader S&P 500 tech index +2.4% and the S&P 500 +1.6%.

Three Reasons Why Tech May Underperform Today

The contrast is stark between financials and tech, especially considering that these two bull market winners have been trading in tandem for seemingly forever. But for whatever reason, traders have decided to take profits in one (the banks) and sit tight in the other (tech stocks) -- case in point, NFLX led the S&P 500 yesterday by a mile while 4 of the 6 worst performers in the index were banks, and Goldman was the biggest laggard in the Dow.

But after blue chip stock IBM, semiconductor name LRCX (both down ~5% pre-market), and Europe chip stock ASML (down as much as 1.9% in Europe) reported underwhelming numbers last night, tech investors finally have a real reason, besides the Facebook data scandal and Trump’s Amazon lashings, to pull the trigger on some profit taking -- not to mention that IBM and LRCX have more read-across to the rest of tech versus NFLX anyway -- so the question begs, will tech performance mimic the banks or can it possibly muster some resilience?

Some Street takes:

• IBM - Morgan Stanley said results weren’t as bad as first appeared, though "a high bar heading into the print sets up for near-term pullback"; Goldman also expects the stock to pull in after the recent strength, noting that the company’s margin trajectory (down on a y/y basis after disappointing 2017) will be a key point of investor debate
• LRCX - Several analysts are already out defending the name: Keybanc sees robust demand continuing through CY19 and calls the stock "one of the best names to own in semi-cap" while Goldman says to buy on any weakness given positive view on semi industry capex, the firm’s strong competitive position and valuation.
• ASML - See Street Wrap, where analysts honed in on the weaker-than-expected gross margin view

Other sectors in motion include the transports, where the rails should catch a bid on CSX earnings (rallying >5% last night) and the airlines might gain on UAL results (up almost 3%). Also the home goods and furniture space may feel some pressure after ETH (down >2%) released weak guidance, as might the water-related stocks like XYL and MWA after BMI missed (falling >5%).

Hertz Donut

Lastly, the car rental stocks sank precipitously yesterday (HTZ -7.1%, CAR -4.1%) on no clear-cut reasons, but that didn’t keep traders from speculating. Some said the moves could be related to changes in China related to the ownership of local auto ventures, while others said it might be because the startup Turo is making itself available to "independent car rental entrepeneurs."

Note that Icahn is the largest holder of HTZ with ~35% of shares outstanding, and CNBC said last night that he accumulated a "medium-sized" stake in VMW. Analysts don’t seem to have a clue on HTZ and CAR as no explanatory research notes have been published as of yet. We have calls out to both companies and are still waiting to hear back.

Notes From the Sell Side

Biggest calls so far include UBS initiating the steel sector with a cautious view, with both AK Steel and U.S. Steel rated at sell (both stocks are seeing downticks in early trading). Solar bellwether FSLR is rising after BofAML upgraded the shares to a buy on increasingly positive datapoints. Morgan Stanley double-upgraded EBAY with a Street-high PT of $58 (shares up >4%) and downgraded Zillow on added risk from its new business unit (shares down ~3%). JNPR should be weak after Goldman cut shares to sell while CBOE could be under pressure after JPMorgan reiterated its negative view on the stock.

And two interesting notes out on Tesla, with Keybanc keeping its near-term positive bias after recent checks while Morgan Stanley sees the next 3 months as "the most critical time in Tesla’s history since the Model S launch six years ago."

Tick-by Tick Guide to Today’s Actionable Events

• Today -- SE IPO lockup expiry
• 7:00am -- MS earnings
• 8:30am -- Fed’s Dudley speaks at Community Bank Conference
• 8:30am -- MS earnings call
• 10:00am -- Bank of Canada rate decision
• 10:30am -- UAL earnings call
• 10:30am -- DoE oil inventories
• 10:45am -- FAST investor meeting
• 2:00pm -- Fed’s Beige Book
• 3:15pm -- Fed’s Dudley speaks on economic outlook
• 4:01pm -- CP, PTC earnings
• 4:05pm -- AXP, KMI earnings
• 4:15pm -- Fed’s Quarles speaks in Washington
• 4:15pm -- URI, CCI, PIR earnings
• 5:00pm (roughly) -- CCK earnings
• 6:00pm -- STLD earnings
• Tonight -- IPOs to price include GrafTech (EAF), Vrio (VRIO), MorphoSys (MOR)

To contact the reporter on this story: Arie Shapira in New York at ashapira3@bloomberg.net.

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Joanna Ossinger

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