This May Be the Day That the Breakout Is Confirmed: Taking Stock

(Bloomberg) -- Stock futures have been higher for most of the morning, though there has been a slight fade ever since Italian Premier Giuseppe Conte began his maiden speech to Parliament -- Italy’s stock market briefly turned negative in quick fashion (the first of two confidence votes will take place later today) -- not to mention the negative economic data that continues to bear down in the Eurozone, with Markit Services PMI and retail sales missing consensus.

In contrast with Europe, we received a positive economic indicator in the U.S in the form of monthly truck machinery data. Class 8 preliminary orders for May came in at 35,600, or up 110% y/y in May; Jefferies’ Stephen Volkmann, a bull in the space, said the numbers were a surprise given normal seasonality and increasingly tougher comps, adding that the market is still underestimating the strength of the truck cycle.

Within this space, it’s worth mentioning that truck maker Navistar is ticking higher after boosting its revenue forecast. Separately, Macquarie is upgrading Paccar to an outperform after a proprietary used truck value analysis. So suffice to say, we should see a decent day for these truck machinery names in addition to Cummins.

Cementing the Case for a Breakout

The S&P 500 closed Monday above the top end of its recent 2,700-2,740 range, albeit on the lightest volumes in a week, and finished at the highest level in two-and-a-half months. This can be attributed to a) a further recovery in the European stock market, b) strength in the tech and consumer sectors, c) more pounding the table from the sell-side, with JPMorgan notably upgrading U.S. equities, and d) a broader tape that seems to care little about trade woes and seems to want to do nothing but go higher. A follow-through rally today just might cement the bull case that this market has finally broken out.

And if that’s how things turn out by the closing bell, where to next? Eyeballing a daily chart gives us a new range of 2,750-2,800 (we peaked at ~2,800 twice already this year), but several experts are already calling for a short-term rip even above those levels, like Morgan Stanley chief U.S. strategist Michael Wilson, who sees a short-term target of 2,800-2,825, while Evercore ISI head of technical analysis Rich Ross predicts a "fast move" to an even higher range of 2,840-2,870, or just below the all-time intraday high of 2,872.87.

As has been the case for the longer-term rally in stocks, it’ll likely come down to tech to take us to those higher ranges. The sector has shown zero signs of slowdown, far outpacing all other S&P groups year-to-date (S5INFT +14% vs SPX +2.7%) while megacaps like Amazon, Apple, and Netflix have sprung to successive record highs in the past two sessions.

Even the action in Facebook was impressive. The stock notched a record on Friday (up ~30% from its candlestick hammer Cambridge Analytica lows), and could have been punished on the controversial data sharing article in the New York Times that received plenty of attention. But it didn’t, and an early bounce allowed the stock to only end the day down fractionally.

The index changes that crossed the wires last night should only be a boon for the space, with TWTR up almost 5% on S&P 500 inclusion and NFLX getting a lift on on gaining entrance to the S&P 100.

Today is all about the follow-through, just like the move in the broader tape, as well as any incremental commentary from the first day of BofAML’s TMT conference, where NVDA and SQ (both closed at records Monday) are on tap to present alongside TXN, AMAT, IBM, FEYE, WDAY, and a boatload of others.

Elsewhere, we need to keep an eye on how extended this rally in retail can get -- the XRT ETF rose 2.2% on Monday and is up almost 6% in the past month -- as something tells me that the "retailpocalypse," or lack thereof, will be talked about for weeks and months to come. Case in point, Evercore ISI’s double upgrade of Macy’s with the broader call that the "retailpocalypse is over" got a ton of attention from the Street.

Notes From the Sell Side

The biggest call appears to be on the cruise line stocks, where Morgan Stanley is whacking the space (CCL down almost 6%, RCL -1.4%, and NCLH indicated down) as channel checks "show solid booking volumes but at flat prices, and agents cite concerns about the Caribbean and general Q4 demand." Analyst Jamie Rollo slashes estimates on fuel and FX, and remains cautious on the sector due to oversupply risk.

In the energy world, Citi is upgrading OXY to a buy to reflect the widening Midland-Cushing oil price differential while Bernstein raises NE to a market perform after boosting its commodity price deck (oil >$70 per barrel in 2018 and 2019) on Monday.. Also BofAML downgrades FSLR to neutral on risk of an oversupplied Chinese solar market flooding the U.S., which would hit prices and margins for the company and other solar makers.

And there’s a ton of takes from Apple analysts on the Worldwide Developers Conference, but nothing appears to change the narrative for the company going forward. Longbow said this didn’t mirror 2017’s WWDC and include any hardware updates, indicating potential for another event this summer to address potential iPhone SE2 or HomePod, Mac, or iPad updates.

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

  • Today -- Digestive Disease Week (may impact IRWD, ARDX)
  • Today -- IPO lockup expiry for CURO, ODT, QTRX
  • 7:00am -- GIII earnings
  • 7:30am -- FRAN earnings
  • 8:00am -- BLK, MDT investor days
  • 8:00am -- Starbucks founder Howard Schultz to appear on CNBC
  • 9:00am -- DLTH earnings
  • 9:45am -- Markit PMI
  • 9:50am -- Muddy Waters’ Carson Block speaks on China at Bloomberg Invest Summit
  • 10:00am -- ISM Non-Manufacturing, JOLTs job openings
  • 10:30am -- BIIB at Jefferies healthcare conference
  • 11:00am -- WDAY at BofAML TMT conference
  • 11:45am -- NVDA at BofAML TMT conference
  • 12:30pm -- WIX investor day
  • 12:30pm -- TXN, ACIA at BofAML TMT conference
  • 1:30pm -- Italy’s new government faces first of two confidence votes
  • 4:05pm -- AMBA earnings
  • 4:10pm -- OLLI earnings
  • 4:15pm -- GWRE, LAYN, NCS earnings
  • 4:30pm -- API oil inventories
  • 4:35pm -- FEYE, BOX at BofAML TMT conference
  • 5:05pm -- Michael Novogratz speaks on crypto at Bloomberg Invest Summit
  • 5:20pm -- AMAT, SQ at BofAML TMT conference
  • 5:30pm -- TSLA shareholder meeting
  • 7:35pm -- IBM at BofAML TMT conference
  • 9:00pm -- COST monthly sales
  • Tonight -- Congressional primary elections in Ala., Calif., Iowa, Miss., Mont., N.J., N.M., and S.D.

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