Sunny days ahead. More risk-on yesterday as stocks surged on optimism, momentum, and some encouraging numbers. An early read on the labor force showed that job losses for May were less than expected, fueling hopes of a rapid recovery… stocks liked that.
N O T E W O R T H Y
The easy life. You know the old saying “if it were easy, everyone would do it”? The saying certainly applies to the stock markets… well kind of. First of all let me tell you, it is NOT easy (more on that in a minute). Second, it appears that lately, everyone IS doing it. Lots of recent data suggests that more and more smaller retail investors have entered the fringe. Trading data which shows an increase in smaller lots of bullish options trading implies to analysts that retail investors are behind the buy-the-dip trades. Further, while options are great investment tools when used properly, they tend to be used for speculative trading and not long term investing, further suggesting that these smaller investors are speculating. More data from no-frills online brokerage firms, which have recently seen record volumes, also suggests that retail investors are behind a lot of the recent activity. Some analysts have conjectured that homebound folks with no access to sports betting have turned to the markets with stimulus checks. That may be extreme, but it is certainly feasible. Several notes ago I addressed some data which showed that institutional investors have been sitting on the sidelines in money markets and bonds, choosing the safer route. They consider it safer because the Fed has been throwing lots of capital into those markets making a large drop less likely.
In the world of stock trading we refer to two types of actors: informed traders, and uninformed traders. Uninformed traders are those that act on partial information and trade in an unsystematic manner. An example would be a person who has a real day job (real, as in not the financial industry) and hears a news report about a company. Liking the company’s products and seeing that the firm’s stock has fallen recently are the drivers for that person to open a free trading application on their phone and place a market buy order to buy some stock. Luck aside, that trader has a 50% chance of success while the no-frills brokerage firm has a 100% chance of making money by selling the order flow. Informed traders are those that have access to all of the available data necessary to not only decide which stocks to buy but also how and when to buy or sell them (down to the millisecond). It is their full-time job to monitor the macro environment, company news stream, technical data, and trading statistics in order to make more informed decisions. As you might have already guessed, being informed doesn’t always guarantee success, but it does offer a statistical edge if traders are consistent.
As I suggested at the top of this note, the stock market is not easy… even for an informed trader and now, more than ever, that holds true. Many professional investors and analysts have been scratching their heads with this recent rally in stocks, despite worrisome data out of companies and the economy. Everyone seems to have their own theory as to what is going on, but most appear to be converging on 2021 for an economic recovery. Looking at recent trends in the markets we can see that on good news days, defensive stocks sell off in favor of cyclicals. Yesterday, Campbell Soup raised its 2020 outlook after announcing a spike in sales growth. Despite the good news, the stock sold off topping the S&P’s biggest losers column. It is clear that the nationwide lockdown has been a driving force for Campbell’s recent growth but it is still not yet clear when that growth will recede back to its former, slower self. What’s more unclear is how and when all of the companies affected by the economic pause will return to their full health. The top of yesterday’s S&P500 winners column shows a pretty clear pattern. It included Simon Properties (a mall operator), Boeing (airplane manufacturer), United (airline operator), The Gap (retail), Kimco Realty (malls), MGM Resorts (casinos), and Wynn Resorts (casinos). A big driver for yesterday’s market movement was the ADP Employment Change number which showed a loss of -2.760 million private sector jobs in May. The number was far lower than last month’s revised -19.557 million jobs and far better than economists’ expectations. That is definitely encouraging news worth noting, however the number of losses is still quite large and Friday’s government-issued employment report is expecting the unemployment rate to be 19.5%. Signs are pointing to better days ahead and those days will surely come… when and how they come remains the focus of much… speculation. Smart investors stick to their core investment strategies which have been statistically proven to produce positive results.
Consider yourself informed.
THE MARKETS
Stocks surged yesterday on good economic numbers and more positive recovery momentum.
The S&P500 climbed by +1.36%, the Dow Jones Industrial Average jumped by +2.05%, the Russell 2000 traded up by +2.39%, and the Nasdaq Composite Index advanced by +0.78%. Bonds fell in response to the risk-on stock trade and 10-year treasury yields climbed by +5 basis points to 0.74%. Gold also sold off yesterday, falling by -1.62% and taking miners like Newmont to the top of the biggest losers column (NEM was down by -4.19%).
NXT UP
– Initial Jobless Claims (May 30) is expected to show that 1.833 million Americans filed for unemployment insurance for the first time, down from last week’s 2.123 million.
– Continuing Claims (May 23) is expected to show a small decrease from last week’s 21.052 million to 20.00 million. Watch this one carefully, it could be a real market mover.
– This morning Ciena beat analyst estimates while Michaels missed. After the bell we will hear from The Gap, lockdown favorite Slack, Broadcom, Vail Resorts, DocuSign, and RH. The post-bell announcements will be a battle between lockdown and post-lockdown stocks.
IMPORTANT DISCLOSURES.
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