Resilience Is Key, Despite Some Turning Sour: Taking Stock

(Bloomberg) -- You wouldn’t know it by the talking heads who are so intently focused on the six-day ~623 point slide by the Dow (GE finally getting the boot might be a silver lining here), but the market as a whole has continued to show signs of resilience in the face of mounting trade noise.

Take the S&P 500, which has opened lower in each of the past three sessions on U.S-China trade fears only to bounce sharply at ~10:30am each day. The DJIA may be down many hundreds of points just this week (trade proxies Caterpillar and Boeing have really been weighing), but the SPX is only off 0.6% and still trading well within its 2,750-2,800 range. Or better yet, look at the tech-heavy Nasdaq, which has only seen half of the S&P’s decline in that time span and even finished in the green on Monday.

And the resilience is showing through this morning yet again, with the U.S. futures taking their cue from global markets (E-minis up ~6 handles after Europe’s Stoxx 600 erased all of yesterday’s losses and the bleeding in China stocks takes a breather), and also having little to sell off on as nothing incrementally shocking came out from the trade clashes. News on the corporate front wasn’t great, with a bevy of disappointing results hitting some big stocks (ORCL and SBUX both slipping more than 3%, FDX -0.8%, LZB -6.6%), but the market seems to have zero interest in playing off of that.

Wall Streeters Turning Sour?

Despite the market holding up, there have been some strategists who have taken the opportunity to sound some alarms (something we’ve haven’t seen too much of this year, even after the stomach-churning meltdown in early February). For instance, Morgan Stanley’s Michael Wilson said earlier this week that potential downside has increased with yields topping out and as the S&P 500 has brushed off the rising threats of protectionism.

And last night, Stifel’s Barry Bannister warned on near-term risk to the S&P 500, with a target of 2,635 (or almost 5% lower than Tuesday’s close) for the third quarter on dollar strength, trade issues, and market adjusting to a tighter Fed, before ending the year at 2,800. Additionally, Citi economist Cesar Rojas said equity markets are underestimating the risk of tensions escalating into a full-blown trade war.

Watch These Sectors

FAANGs - Tuesday’s Taking Stock talked about expectations for FAANGs to show strength given relative immunity to the trade war debate, and that worked like a charm throughout yesterday’s session as Netflix topped $400 for the first time and closed up almost 4%, Amazon rose 0.6% and Facebook & Alphabet finished marginally lower; only Apple acted weak, though that’s likely given its much heavier exposure to China versus any other name in the complex

Semiconductors - Like Apple, the chip stocks are taking on some pressure from all of the China trade talk (SOX down >2% over past two sessions), but Micron earnings tonight (implied move ~9.4%) might end up being a major catalyst for the group; note that expectations are running high with analyst after analyst calling for strong results and forecast. Evercore ISI lifted its target to $100 the other day, which suggests an upside move of nearly 70%, and Nomura is out today pumping its $100 PT call as well.

Tech IPOs - I wouldn’t say that some of the recently-priced IPOs that have screamed higher over the past few weeks came down to Earth on Tuesday, but a sizable (and probably healthy) pullback was seen in names like HUYA -12%, SMAR -10%, BILI -9.9%, ZUO -9.7%, DBX -5.5%, IQ -3.1%. Ones that bucked the trend were AVLR +4.3%, PVTL +2.2%, and DOCU, which ended flattish but has potential for volatility given the start of its two-day annual Momentum conference, where the CEO will speak midday.

Industrials & Autos - The bulk of the trade war fear-selling is occurring is this group, with the aerospace and heavy machinery names taking it on the chin (BA -3.8%, DE -3.7%, CAT -3.6%) alongside a rash of weakness in the autos (TSLA -4.9%, GM -3.9%).

Banks - The group is coming off a rough week, which saw the hopes for a move above 3% on the 10-year yield fade fast, but the BKX is back to bumping towards its 200-day moving average on the downside (a level successfully tested three times since the beginning of April) as we approach the first round of the bank stress tests, expected to hit Thursday after the close.

Energy - The second-best performing sector in the S&P this week, after the utilities, is clearly in focus ahead of the OPEC meeting on Friday. Goldman points out that the volatility expectations for the group is unusually low versus the average implied move over the past three years on OPEC day.

Notes From the Sell Side

Here are your biggest calls so far..

Goldman sees GE’s removal from the DJIA as a near-term negative, though notes that the impact from ETF selling will likely be minimal (only ~$80m of GE shares are held by ETFs that follow the Dow) and adds that recent removals from the index outperformed in the twelve months following the announcement..

Analysts are slamming SBUX (three bulls have removed their buy ratings so far) after last night’s preannouncement.. Deutsche Bank has a big note out on the banks where they upgrade C to a buy and keep GS and WFC as their top picks..

Needham slashes its revenue estimates on underperform-rated SNAP after channel checks and due to reduced DAU growth projections.. Goldman is downgrading ALRM (becoming the only sell on the Street), citing competition from Amazon and Google, and also upgrading MIME to a buy with a Street-high price target of $53..

And speaking of price targets, here’s a heck of a boost: RBC upgraded I to an outperform and ratcheted up its PT to a Street-high $30 from $5 ahead of the FCC releasing its draft of the Notice of Proposed Rulemaking this week, which the analyst sees will ultimately lead to the adoption of the company’s C-band proposal..

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

  • Today -- OPEC International Seminar in Vienna day one
  • Today -- MSCI results on whether Argentina and Saudi Arabia get emerging-market status
  • Today -- IPO lockup expiry ICLK
  • 7:00am -- MBA Mortgage Applications
  • 7:00am -- WGO earnings
  • 8:00am -- ATU earnings
  • 8:00am -- World Cup: Portugal vs Morocco
  • 8:30am -- Current Account Balance
  • 8:30am -- Oaktree Capital’s Howard Marks on Bloomberg TV
  • 8:30am -- SMTC investor day
  • 8:30am -- HZN call on termination of Brink deal
  • 8:55am -- YUM at Oppenheimer Consumer Growth and e-Commerce Conference
  • 9:00am -- Wilbur Ross testifies at Senate Finance Committee eharing
  • 9:30am -- Draghi, Powell, Kuroda, Lowe speak at Sintra
  • 10:00am -- Existing Home Sales
  • 10:00am -- EQIX analyst day
  • 10:30am -- DoE oil inventories
  • 11:00am -- World Cup: Uruguay vs Saudi Arabia
  • 11:20am -- EOG at JPMorgan Energy Equity Conference
  • 12:00pm -- DOCU CEO speaks at Momentum conference
  • 2:00pm -- World Cup: Spain vs Iran
  • 4:00pm -- MU earnings
  • 4:05pm -- AOBC earnings
  • 4:15pm -- CACI to issue FY19 guidance
  • 4:30pm -- MU earnings call
  • 7:30pm -- Trump holds rally in Duluth, Minn. to discuss the economy & trade policies
  • Tonight -- IPOs to price: Essential Properties Realty (EPRT), Aptinyx (APTX), Avrobio (AVRO), i3 Verticals (IIIV), Xeris Pharma (XERS), ElectroCore (ECOR), Magenta Therapeutics (MGTA), Kezar Life Sciences (KZR)

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