There's No Good Reason Why We Aren't Up 20 Handles: Taking Stock

(Bloomberg) -- The optimism oozing from another round of massive tech earnings beats (QQQs are looking at a two-day rally of nearly 4%), the Korea summit that produced a deal from both sides, and the 10-year falling further below the 3% mark is doing nothing to lift futures.

What gives? You could point to a few things, like some mixed economic data out of Europe (some weaker country GDP prints), weak earnings reactions from a few non-tech names like Royal Bank of Scotland, Starbucks and U.S. Steel (and Sony reported a miss), or it’s possibly just a pullback from yesterday’s rally, coupled with jitters of being long into another weekend filled with uncertainties.

The biggest earnings left for the week are in the energy space, with Exxon, Chevron and Phillips 66. But aside from these, all eyes now shift to the 8:30am economic releases, where traders may be watching for a hotter-than-expected inflation data point in the Employment Cost Index print (estimate 0.7%) alongside the GDP figures.

Tech Bounces Back, for Now

The roar over tech earnings was all anyone was talking about immediately after the close. Like the day before with Facebook, the post-earnings trading action for the biggest tech names skewed more positive (AMZN +7.1% and poised to open at a record, INTC +5.7%, MSFT +3.5%, BIDU +4.3%, EXPE +11%) than negative -- a few names did tick lower (MXIM, FLEX, WDC), but these are much smaller names that don’t carry the weight of the mega-caps mentioned above.

It’s hard to say that tech’s leadership has returned with a vengeance just yet, but there is no question that the stunning reaction to the group’s earnings over the past few days are a complete 180-degree from what transpired with GOOGL, and has quasi-settled the pit-in-stomach feeling that many traders had amid Tuesday’s brutal selloff.

But the subdued reaction in the futures is a bit concerning, and we’re all still waiting to see which China trade scenario plays out. If the trip planned by Mnuchin and Lighthizer turns out all for naught and the whole thing goes south (more tariffs imposed, more sanctions re ZTE/Huawei, higher odds of China retaliation, etc.), then it’s almost certain that Apple and the semis will roll over and potentially take the rest of the space with them.

Plus next Tuesday brings us Apple earnings, for which nervous tics leading up to the print are encouraged, given the waft of negative noise from the sell side. Take Goldman’s preview from last night, which is loaded with scorching comments like:

  • "Recent supply chain indications suggest numbers in June may be even worse than our 40m unit forecast"
  • "Unit weakness overall not only leaves open the question of price elasticity but, more broadly, also calls into question whether consumers are becoming more fatigued with smartphone replacement"
  • And the kicker: "Buybacks may not be enough to offset weakness."

Most Hated Sectors

On the other hand, it’s becoming more obvious what the truly hated sectors are for this particular earnings season. Number one is consumer staples, with almost every major report resulting in pain for the longs (MO, HSY & SPB yesterday following PM, PG, KO and an ugly short seller attack on K to boot).

Number two is industrials, as everyone is well aware of CAT’s conference call remark heard ’round the world, but look at the recent spillage in $100b+ market cap name MMM (plunging almost 9% in three days since earnings), truck maker PCAR and the defense majors (PCAR, LMT, RTN, NOC all down 6%-8% in the same time frame). Similar multiple standard deviation moves were seen yesterday after reports from ITW -6.7%, PH -3.4%, and a slew of transports (KNX -6.7%, UNP -2.9%, AAL -6.4%, and SAVE -5.9%).

Notes From the Sell Side

Some of the biggest calls so far include the gushing over AMZN’s quarter, with Stifel raising its price target to a Street-high $2,020 (also upgrading FB to a buy) and Morgan Stanley lifting its bull case to a whopping $2,600... some of the other big tech names that reported last night are also getting love, as Bernstein and Summit Insights upgraded INTC while JPMorgan raised their rating on MSFT.

Baird is out "cautiously optimistic" ahead of Tesla’s report next week, telling the shorts to cover as the company will likely exceed overly negative expectations... BofAML is double upgrading CFR to a buy on balance sheet flexibility and a strong Texas economy.. and Morgan Stanley’s autos analyst Adam Jonas has a note out all about SpaceX, the company that Jim Chanos yesterday said he ultimately expects Elon Musk to leave Tesla for; Jonas estimates SpaceX’s business is worth ~$50 billion and is serious about attempting a mission to Mars.

Tick-by Tick Guide to Today’s Actionable Events

  • Today -- SIGA FDA briefing documents for tecovirimat NDA
  • Today -- MNK last day before Pdufa for Amitiza sNDA
  • 7:00am -- DOV, IPG, PSX earnings
  • 7:30am -- D, CCJ earnings
  • 8:00am -- CHTR, TEN, XOM earnings
  • 8:30am -- Employment Cost Index, Core PCE, and GDP
  • 8:30am -- CVX earnings; X earnings call
  • 9:30am -- XOM, COG earnings call
  • 10:00am -- University of Michigan Sentiment
  • 11:00am -- CL, LYB, CVX earnings call

©2018 Bloomberg L.P.