The morning appears to be an extension of Monday afternoon that saw weakness leak into the tape. This may not be a surprise given the kinds of catalysts ahead, with the potential to complicate the upward melt over the past weeks. Also, Nomura strategists indicated that many “fickle market participants” may have moved to profit taking given the trade extension deadline discussed yesterday had been mostly priced in, together with a sense the market was a bit overbought.
FOMC Chairman’s Senate testimony, due in just a couple hours (crucial for colour on the “Fed Pivot” responsible for the months long rally), Trump’s arrival in Vietnam ahead of his meeting with North Korea’s Kim Jong Un (the last time there was a meeting many foreign policy analysts were left scratching their heads), and the President’s ex-lawyer Cohen begins his testimony behind closed doors with the Senate Intelligence Committee (his public testimony begins Wednesday) which the WSJ reported may indicate Trump engaged in criminal conduct while in office.
Flipped a Switch
A lot of things went right Monday, between the mega merger Monday in health care (and GE) and a lessening of trade tensions. It was as straightforward a risk-on day as one could ask for, with the usual cyclicals rebounding while defensives lagged following the boundless optimism from the White House. But as forewarned, the S&P came up against some serious resistance once it tested its day’s lows, and gave way almost immediately.
Janney technical analysts ahead of the open Monday expected resistance “in the low 2800 range,” while Stifel’s institutional equity strategist Barry B. Bannister wrote that they saw the S&P 500 “soon fading” along with GDP and EPS after they spotted “trouble” in the U.S. economy and equity market. The skepticism is not too surprising given his 2750 target is among the lowest on the street.
Greatest Sell Side Call in History Isn’t Over
GE’s resurgence wasn’t enough for the S&P, as its near 20% gains in the pre-market slowly evaporated as the day wore on. Deutsche Bank called the initial positive reaction “surprising,” given the industrial conglomerate would now be left with less attractive components of its health care business that is lower growth and margin. Much of the Street chimed in throughout the day, but there’s one voice the Street is waiting for with bated breath — the very soul who nailed the troubles at GE, and even called the bottom (though notably didn’t call for clients to buy, either), JPMorgan’s Steve Tusa.
Retailpocalypse, Take Two
Small taste of retail is on the way with Macy’s results due shortly, and if the bulls want to avoid a worsening in the S&P futures, which are down about a quarter per cent as of writing, we’ll need to avoid a mini retailpocalpse that was nearly triggered in January. Macy’s gave up 16% with results in August, 7% with results in November, and 18% in a preannouncement last month. And had it not been for the strongest bounce in equity markets that we’ve seen in decades, the S&P 500 500 Multiline Retail Index (S5MRET) may have suffered more than the 5% it did in mid January, an index that includes Kohl’s Nordstrom, and Target.
Department stores suffered during the latest holiday season, Credit Suisse analysts write, and struggled to clear inventory in January. Macy’s itself in mid January commented that they would continue to take the necessary steps to ensure a clean inventory position. We’ll see if that comes to fruition in less than an hour from now. Peers will be in focus, especially after Home Depot failed to impress earlier this morning, though not a department store per se.
Hope Is Not a Strategy
That is, unless your in the real estate segment, known for the infamous “hope trade.” Today will be rife with housing-related data, from housing starts and permits to a variety of home price gauges for December that may show the extent to which falling treasury yields have translated to a stronger mortgage market and future demand. But those figures may not be enough for housing exposed stocks, now that the “Hope Trade” timeline has neared its conclusion — a period from late fall through to late winter/early spring where investors attempt to get ahead of the selling season. That fact, together with the segment’s recent performance (S15HOME +18% YTD vs. the S&P 500’s 12%) may give bulls pause.
Raymond James Monday added another homebuilder to its list of downgrades (KB Home this time, following recent cuts of DHI, PHM), citing recent valuations and the need to “step back” and evaluate the coming data. Though the analysts expect a strong season, odds may be stacked against outperformance.
Deutsche Bank analysts also discussed housing indicators, though flawed, that may indicate a strong season, if attendance at the IBS and KBIS shows were any guide. Citing attendance up 18% y/y for the combined shows (close to the all time record) that feature Kitchen and Bath industries and homebuilding, it is the “common view” that this bodes well for the segment. Analysts caution however that the figures tilt toward remodelling and new construction, while potentially being a lagging indicator.
That remodelling tendency was echoed at Credit Suisse following the IBS, where analysts discussed channel checks that indicated consumers continued their projects in conjunction with improved new home traffic through early February. They did cite however a “more cautious tone” from the homebuilders.
Armstrong World Industries beat expectations Monday, as the floors and ceiling manufacturer raised forecasts. Foundation Materials reported post market and beat on EBITDA, the top and bottom line, while its 2019 earnings forecast midpoint slightly missed. Home Depot results missed on comp. sales EPS while approving a 32% boost in the dividend and a $15 billion (U.S.) buyback program. Masco and Whirlpool, some of the most exposed suppliers to Home Depot, according to data compiled by Bloomberg, may respond as the mass retailer’s results provide slightly fresher detail as to the health of the segment in January. Homebuilder Tri Pointe group earlier reported a beat on the top and bottom line. Lowe’s results are due Wednesday.
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