Mini Correction Is Here
Some investors predicted the correction we are experiencing just a couple days too early. It was clear a correction was coming because the number of new COVID-19 cases is plateauing instead of falling like in other countries. Plus, it was a buy the hope of states reopening and sell the news of it happening trade. Stocks the most hurt by COVID-19 exploded earlier this week only to plummet later in the week. They still had a great week.
For example, Signet Jewelers was up 19.32% on the week even though it fell 9.65% on Friday. Finally, the big tech firms sold off on the news of their reports late in the week (Apple & Amazon). Remember, Amazon was overheated as it was part of the stay at home trade that went too far.
These signals along with the big spike in the NAAIM positioning index signaled a correction was coming. With the 2.81% decline on Friday, the market is down 3.7% from its bear market high. It felt like extreme optimism on Wednesday. You don’t get through that with a couple down days. We can expect stocks to move lower early next week.
Many have been predicting the market will stabilize for the past couple weeks after the monster run in late March and early April. An initial rally occurred because sentiment got too negative, the Fed started buying corporate bonds, and the period without liquidity ended.
Now the market needs good data from the states that are reopening and the number of new COVID-19 cases to fall for stocks to rally. Instead of those factors, the market would be happy with either a cure or a vaccine. However, those might not come until next year.
So far, this prediction has been accurate as the S&P 500 is down 0.54% since April 14th. The market did little in the 2nd half of April. We don’t expect May to be nearly as good. And we still see at least 2-3 more weeks of the market stabilizing. There isn’t that much upside left unless you look towards the beaten down names in retail and energy.
As you can see from the chart below, in April the market was up 12.8% making it the 3rd best month since WWII. Since the market was down double digits in March, we just set an unusual mark. Only other time the market was down double digits in a month and then up double digits in the next month was in the fall of 1974 during the trough of the 1973-1974 bear market.
Review Of Friday’s Market
Craziest news of the day was that Elon Musk tweeted his own stock, Tesla, was too high. This sent the stock down 10.3%. Some say he wanted the stock lower because sentiment was too high compared to the actual business which is shutdown. His antics seem to make news almost every day. This is the most interesting story on Wall Street.
Tesla’s decline helped push the Nasdaq down 3.2%. Russell 2000 was down 3.83% which sounds terrible, but it actually rallied significantly off the lows. The index was up 1.3% from 11:55. It’s down 7.37% in the past 2 days as the small retailers and banks have done badly recently.
Macy’s fell 11.7% in 2 days. KBW regional bank index fell 8.56% in just 2 days. VIX was up 3.04 to 37.19 on Friday, as its big downturn was mostly over. In down days like Friday, it will spike if it starts from the 30s or lower.
Every sector fell. Energy sector was destroyed on Friday as it fell 6%. Shell cutting its dividend hurt the sector because it implies Exxon and others will need to cut their dividends soon. Shell stock fell 17.68% in 2 days. 2nd worst sector was consumer discretionary which fell 4.61% because of Amazon’s 7.6% decline.
Amazon Missed Heightened Expectations
Amazon was priced for perfection heading into this report and it didn’t deliver. EPS was $5.01 which missed estimates for $6.25. Revenues were $75.45 billion which beat estimates for $73.61 billion. Profits missed estimates because AWS missed revenue expectations. It had $10.22 billion in revenues instead of $10.33 billion. The company plans to spend all its profits in Q2, which is about $4 billion, to combat COVID-19. That includes tests for workers and investments in its delivery network.
A big quote from the call was “If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small. Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit. But these aren’t normal circumstances.”
Short term traders sold the stock on this news. But it’s actually good because it will build up goodwill with the federal government which was about to come knocking because of antitrust issues. The firm expects to spend $1 billion on testing in 2020. Amazon stated, “We’re not sure how far we will get in the relevant timeframe, but we think it’s worth trying, and we stand ready to share anything we learn.”
Some of the $4 billion will fund better wages for workers, PPE, better cleaning standards, and less efficient process paths to allow for social distancing. Remember, Amazon also owns Whole Foods which means it benefited from the grocery store hoarding. Physical store sales were up 8% yearly. Only thing investors should be worried about is AWS’s growth of 33% which is behind Azure again.
The stock market’s correction is here. Stocks will likely fall early next week which will be a solid buying opportunity. Amazon’s weak earnings report and guidance to spend $4 billion to fight COVID-19 isn’t actually why the market fell. Small cap index had a weak day. This could have been profit taking from the enormous rally in the first 3 days of the week.
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