What a Difference...
.... a week makes. It was just last Friday that the S&P 500 would pierce its own 50-day simple moving average (from the upside) and ultimately survive a test of that line that would stretch into Monday morning. Meanwhile, the Nasdaq Composite would survive a test of its 21-day exponential moving average, an index more heavily focused upon by short- to mid-term investors as more weight is placed upon recent momentum.
What happened to all of that pressure that had seemed to have been placed upon the equity market trend, to be specific, our uptrend? Several factors converged simultaneously to force equities broadly higher.
First off, the short squeeze game is over for now. Stocks that had become wildly volatile, such as GameStop (GME) , AMC Entertainment (AMC) and Koss Corp. (KOSS) , all saw share prices come in just about as dramatically as they had rallied. Try explaining to someone who doesn't even understand the concept of "short-selling" that once a short position has been covered, that's it. Ballgame over. You want to play that game, you need to find new victims. Short interest in these names is down significantly and there is no longer a need for those funds that had felt the squeeze to make sales elsewhere. Bills paid. Hopefully. Exposure rebalanced. Hopefully. Let's move this along.
Use the Force, Luke
Beyond the receding impact of a mass short squeeze, there are three rather hopeful themes (or forces) also supporting recent market activity. First and foremost, is the vibe that a fiscal relief package will soon pass through the legislative process and already terribly imbalanced budgets will reach new heights, probably in something close to the size that the president has requested. This has resulted in the expansion of U.S. Treasury yield spreads in anticipation of either consumer-level inflation chasing economic growth or economic growth chasing consumer-level inflation. For now. We'll discuss Austrian economics and collapse inspired by a loss of confidence in fiat in real time at a later date.
We have covered this impact (steepening of the curve) in this column fairly extensively. I wish not to bore you to tears, but suffice it to say that U.S. 10-Year Note yields held at 1.15% on Thursday, meaning that the two most important Treasury yield spreads, the 3-month/10-year and the two-year/10-year, also held their ground at 111 and 104 basis points, respectively.
One note of caution: Bond traders have (just a little) purchased the long end of the curve overnight, ahead of the Bureau of Labor Statistics (BLS) payrolls print this (Friday) morning to be released at 08:30 ET. This has flattened the curve just a smidge, but that may change 10 times over prior to the reading of this piece. Treat all market data mentioned here as subject if you are a late riser or if I am not your early read.
Now, we consider labor markets. Everyone saw the ADP print for January private sector job creation on Wednesday morning. Not only a return to growth, but a sizable beat of consensus at that. On Thursday morning, the Department of Labor confirmed a fourth consecutive week of significantly contracting initial jobless claims, coupled with a continuance in downward trend for continuing claims. In just a few short days, anticipation for this morning's BLS jobs surveys has gone from an aggregate feeling of dread to something perhaps more hopeful. Then, there are the other curves that we watch.
Every morning, I pray for the repose of all souls lost to this pandemic. I see faces. I hear names. Every morning I pray for the full recovery of all those currently stricken with this virus, currently stricken with the seemingly eternal post-viral syndrome, and for all those who suffer through it all caring for those stricken. Then I feed the dog. Then I check the data. The data, my friend, have been moving in the right direction. New infections are down, as are related hospitalizations and deaths. Perhaps the holiday surge has started to ebb. Let's hope the combination of ignorant people and a championship football game does not screw up this trend.
That said, we have news. Last (Thursday) night, Johnson & Johnson (JNJ) filed an application for an Emergency Use Authorization for its Covid-19 vaccine candidate. The data for this vaccine has been perceived as less than fantastic, as in a 66% efficacy rate at preventing severe disease. Messenger RNA technology, experimental at the outset of this pandemic, has spoiled us with efficacy rates in the mid-90%s. A 50% efficacy rate is considered a success in this specific field of science... or at least it used to be. In addition, the JNJ vaccine remains more than 50% effective against currently known viral mutations and is a "one and done" vaccine, unlike the double dose required by the two messenger mRNA vaccines already in circulation. What's more, it does not need to be stored in anything close to a deep freeze. JNJ's vaccine, if authorized, can pad U.S. vaccine supplies by up to 100 million doses over the first half of 2021, and for this vaccine, that is 100 million individuals. Don't want to take a vaccine that's only more likely than not to protect you when you can't get something 95% effective anytime soon due to scarcity? No problem. I'll take your spot in line in a heartbeat.
On top of the JNJ news, the Food and Drug Administration (FDA) reported on Thursday that the regulatory agency would be drawing up new rules around authorizations for adjustments made to vaccines already authorized to combat the spread of earlier varieties of the SARS-Cov-2 virus as manufacturers adjust to take the fight more directly to newer mutations. The FDA until now had insisted on full Phase 3 clinical testing prior to any authorization. On this, acting FDA Commissioner Janet Woodcock stated (and I lifted from The Financial Times), "We do not believe there will be the need to start at square one with any of these products - we recognize we are in a pandemic and we need to arm health care providers with the most appropriate tools to fight this pandemic on the frontlines."
In addition, on Friday morning, multiple regulatory agencies have started a "rolling review" process (across the U.S., U.K. and European Union) meant to expedite the eventual authorization of the vaccine candidate developed by Novavax NVAX. Vaccine glut, anyone? By mid-year? Oh, wouldn't that be nice. Equity markets seem to think so, too.
Broad rally on Thursday? No doubt about it. Record-high closes for both the Nasdaq Composite and S&P 500. Winners beating losers by nearly three to one both on Wall Street and up at Times Square. Advancing volume beating declining volume decisively at both locales as well. I really see only one "sort of" negative takeaway from Thursday's action. Aggregate trading volume moved sideways at both exchanges.
Most importantly, 10 of 11 S&P sectors SPDR ETFs moved higher, led by cyclicals and information technology together. That's a big deal. Yes, the one down sector (materials) is a cyclical, but that was the impact of rising dollar valuations on the day. This has to be "excepted" from other cyclical groups (financials, energy, industrials, discretionaries), all of which beat more defensive sectors for the session.
1) I like what I see coming from Ford Motor (F) . Ford easily beat fourth-quarter expectations for (adjusted) earnings per share, but experienced a mild miss for revenue generation. Adjusted EBIT crushed consensus. The chip shortage will be the headline as it is for all vehicle manufacturers, but Ford is making significant progress of profitability and is spending in the right places. Ford's operating cash flow, (adjusted) free cash flow, net cash position and total available liquidity all seem to be lined up as if ducks in a row. I come in this morning long Ford in significant size (currently up 29%). My price target has been the $12 level and I have written covered calls with that strike price that expire this evening against the entire position. Unless called away, I will roll these over with a higher strike a few months down the road.... wherever I can knock more than a buck off of net basis. BTW, Ford also is a holding of Jim Cramer's Action Alerts PLUS charitable trust.
2) You kids see the growth at Peloton Interactive (PTON) ? Gee whiz. Not doing virtual spin classes? You might be the only one. For Peloton's fiscal second quarter, connected fitness subscribers increased by 134% to 1.67 million. Digital subs increased 472% to 625,000. Adjusted EBITDA crushed the street. The biggest problem Peloton currently has is keeping up with demand, and that is being addressed through the still-to-be-closed $420 million acquisition of Precor.
I am a virtual spin class enthusiast myself. In fact, I have been told (who really knows?) that a lifetime of athletic activity may have saved my life when I went through my nasty fight with Covid. As a consumer, I just can't believe that anyone would pay Peloton prices. I use much cheaper (about 1/4 the expense) and still very good competitors. There is no doubt, however, that Peloton is the "cool kid" in this business and has captured the imagination of the upscale consumer. That's why I am long the stock. That's why I will likely add to this long (no, not on this dip, as all PTON has really done overnight was give back Thursday) should the shares approach the $139 area lows of late January. My target price remains $171.
January Employment Situation (08:30 ET)
Non-Farm Payrolls: Expecting 53K, Last -140K.
Unemployment Rate: Expecting 6.7%, Last 6.7%.
Underemployment Rate: Last 11.7%.
Participation Rate: Expecting 61.4%, Last 61.5%.
Average Hourly Earnings: Expecting 5.0% y/y, Last 5.1% y/y.
Average Weekly Hours: Expecting 34.7, Last 34.7.
Other Economics (All Times Eastern)
08:30 - Balance of Trade (Dec): Expecting $-66.4B, Last $-68.1B.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 295.
15:00 - Consumer Credit (Dec): Expecting $12.1B, Last $15.27B.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)