Who loves a parade? Heck, who doesn't? After back-to-back trading sessions that were not that attractive looking in the least, equity markets caught a wave of buy programs that allowed for some greenery on Thursday. Can we trust it? Was it real? There are reasons to believe. There are reasons, good reasons, to hold judgement.
Still, as a trader/investor who has always tried to use all of the tools in my toolbox (almost sounds like the Fed), I do not enjoy relying solely upon technical analysis to make nearly all pricing decisions. Readers know that historically, I have used technicals to determine where the bus stops are, but fundamental analysis to determine which way the bus would move, on top of underlying macroeconomic data that told me that we indeed even had a bus to hitch a ride on.
I feel, though for almost two months now this approach has certainly worked, that this has also simplified the sport we play. Not that traders are put at a disadvantage. Not like starting each at bat with an 0-2 count. More like starting each at bat with one ball and one strike. Less room for error.
Oh, but the parade marched by on Thursday. Equity markets bottomed just about a half hour after the opening bell and moved steadily in a northerly direction for the next six hours. The Dow Jones Industrial Average led the way for a change, while sector leadership placed industries more reliant upon economic growth near the top.
It's not as if the recent leadership performed poorly, just in a more pedestrian fashion. Trading volumes decreased from the pace seen through the Tuesday afternoon selloff that only ended on Thursday morning, but do still appear elevated from late April / early May trends.
Oddly, though winners narrowly beat losers across NYSE listed securities and losers actually outnumbered winners for Nasdaq listed names. That said, advancing volume decisively routed declining volume in aggregate for U.S. stocks regardless of where domiciled. Is there now a move into value over growth? We need to see more such behavior in order to be convinced. I think we also need to see a different catalyst at that.
What Was That?
So, can banks lead? Should banks lead? My view? In a world of economic contraction... in a world where negative interest rates seem to be an everyday topic of discussion among economists... in a world staring at what could be an uncertain but possibly deep period of default-producing insolvency, of course not. In a world where eight of the largest U.S. banks have suspended share repurchase programs, and many investors look at the still existing dividends as temporary, of course not. Actual financial conditions now make the Fed's annual stress tests seem like a Sunday afternoon at the park.
What happened on Thursday was headline-driven speculation over possible consolidation across a less profitable industry. All the talk was over what Goldman Sachs (GS) might do to diversify their business into a model less dependent upon trading operations. The talk is also one of decentralizing the financial industry away from New York City, or from urban centers, as working remotely for many of these types of workers has shown that concentrating staff in highly dense population is not just expensive, but in this world, perhaps less safe.
Names like Wells Fargo (WFC) and PNC Financial (PNC) came up in news stories early in the day. Other stories broke later that threw cold water on the idea. Can we really know? No. What we do know is where the sudden interest in the financials came from, and our underlying instinct that sometimes where you see smoke, you do find fire.
For me, I find this more tradeable than investable, but I have already written that as long as I must rely on technicals far more than fundamentals or macro, my timelines must remain shorter than usual. This is just personal discipline.
What does recovery look like? China was the first country forced to shut down their economy as the city of Wuhan was the unfortunate early epicenter of the current global pandemic. China was also among the first economies to try to reopen in a "new normal" kind of way. China's National Bureau of Statistics released its monthly batch of macroeconomic data for April overnight.
How's it going? According to this government agency provided data, iffy would be the word. Sure, equity index futures markets did see a mild boost as Industrial Production increased to year-over-year growth of 3.9%, and that did beat consensus. That positive reaction has worn thin as the hours have passed. There were plenty of surprises in the other direction as well.
The Chinese Unemployment Rate, in percentage terms, actually grew from March, while Retail Sales missed what economists were looking for by quite a lot. In fact, while fixed asset investment, which is China's second-largest driver of GDP, did see a slowing in the pace of contraction from March, there still was more contraction than most had projected.
In other words, there is early recovery in China, and conditions do appear to be improving in spots, but it looks slower than many had hoped. The consumer, which is where China was trying to focus more ahead of this pandemic, remains behind factory output.
Is this what the future looks like for the west? Across nations that maybe had not focused on domestic production for a number of years? I think the answer has to be that we do not know. As western-style governments are less centralized, so have been shutdowns, and reopenings. I do see that lack of rapid recovery, officially for Chinese employment and for the Chinese consumer, as something that cannot be ignored. Neither here nor there? Maybe both here and there.
There is so much talk around the sports world over if, when, and how Major League Baseball can return to action. As a fan, I look forward to seeing big leaguers on my television screen. I am but a fan, with only the perspective of one seeking entertainment. There is, however, in my world, a reopening now scheduled that is far more important in terms of sentiment, but perhaps even more so, in terms of cogent price discovery. (I am highly biased.) I speak of the return of human floor traders to the physical trading floor of the New York Stock Exchange.
NYSE President Stacey Cunningham wrote in the Wall Street Journal on Thursday that the exchange's trading floor, after closing on March 23 and moving to a fully electronic model, will reopen that floor in a limited way on Tuesday (day after Memorial Day), May 26. Not all floor traders will return at once. It looks as if designated market makers (whom some of you still refer to as "specialists") may not come back immediately as that job is one done more capably from remote locations than are some of the other trader positions that are better done in execution at the physical point of sale.
Individuals entering the exchange will be required to wear masks, and closely follow social distancing guidelines. Traders will have to sign a waiver showing that they do understand the risk involved, will have to submit to temperature checks. They will also not be permitted to make use of New York City mass transit in their daily commutes. That's interesting. Understandable, but interesting.
I will never forget the first time that I ever set foot on that trading floor. For me, it was like walking out to center field in Yankee Stadium. It only took seconds to know that I belonged there, and wanted to be there. It is with great humility that I wish the greatest success and utmost safety upon those who do return to work at the New York Stock Exchange in this wave, and as the effort expands, and to the exchange itself as well in this attempt to get back to business in a more normalized way.
News broke on Thursday that Taiwan Semiconductor (TSM) had confirmed plans to build a $12 billion chip factory that will create more than 1,600 jobs in the U.S. state of Arizona. Taiwan Semi is a major supplier to both Apple (AAPL) and Qualcomm (QCOM) . In separate news, it looks like the Trump administration is currently in talks with Intel (INTC) about building new domestic foundries that might not only manufacture chips for the firm itself but perhaps as a provider for others.
You may have noticed that semiconductors as an industry not only led the tech sector on Thursday, but also easily outperformed broader markets. Interestingly, while the group did well as a whole, it was the equipment providers themselves, such as KLA Corp. (KLAC) , Lam Research (LRCX) , and Applied Materials (AMAT) that really moved sharply to the upside. In fact, Applied Materials continued to move higher after the closing bell despite reporting in line fiscal Q2 earnings on disappointing sales, and without providing guidance. I think the words "underlying demand for our semiconductor equipment and services remains robust" may have had something to do with it.
This group is where traders will look to early in Friday morning trade for signs of positive carry through into the weekend. This sentiment took a serious negative turn early on Friday morning as Reuters reported that the U.S. Commerce Department is said to be amending an export rule to "strategically target Huawei's acquisition of semiconductors that are a direct product of certain U.S. software and technology." Not only will this ripple across the semiconductor industry, this also may impact Taiwan Semiconductor who provides for Huawei. This story will develop throughout the morning.
Economics (All Times Eastern)
08:30 - Empire State Manufacturing Index (May): Expecting -65, Last -78.2.
08:30 - Retail Sales (Apr): Expecting -11.3% m/m, Last -8.4% m/m.
08:30 - Core Retail Sales (Apr): Expecting -8.4% m/m, Last -4.5% m/m.
09:15 - Industrial Production (Apr): Expecting -11.4% m/m, Last -5.4% m/m.
09:15 - Capacity Utilization (Apr): Expecting 64.3%, Last 72.7%.
10:00 - JOLTs Job Openings (March): Last 6.882M.
10:00 - Business Inventories (Mar): Expecting -0.5% m/m, Last -0.4% m/m.
10:00 - U of M Consumer Sentiment (May-adv): Expecting 67.4, Last 71.8.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 292.
16:00 - Net Long-Term Flows (Mar): Last $49.4B.
The Fed (All Times Eastern)
No Public appearances scheduled.