Stealth Rally In Stocks
The stock market is forward looking. It has been rallying on the decline in new COVID-19 cases, stimulus, and the expected end to the shutdowns. This index has been helped in the past few weeks by the fact that the companies the least hurt/helped by this shutdown are huge components. We will see how Amazon actually did on Thursday. It likely did amazingly, but the stock declines because that was already priced in.
Amazon wasn’t a bubble stock like Shopify or Zoom. However, one must wonder if there will be increased regulation on the company because of its massive share of online retail. We saw complaints that Amazon used what it learned from 3rd party sellers to sell its basics. Frankly, basics aren’t a huge profit driver for the company. It might make sense to end that program to save itself from regulations.
Even though the stock market fell on Tuesday, there was a stealth rally in the small caps. Investors wanted to buy the stocks that were hit the hardest because of COVID-19. Energy and retail stocks rallied, while the tankers fell. For example, the frack sand company U.S. Silica rose 13.51% and the movie theater company AMC rose 23.2%.
Amazon stock fell 2.61%. Amazon stock could end up being a strong buy if it falls in the next few weeks as the work from home trade unwinds. It’s still a great company. Fed decision is on Wednesday. We don’t expect it to be a boon for markets. Fed will likely gradually taper QE and keep rates at 0% for at least another year.
Huge Burst In Trading Activity
There has been a massive increase in trading activity from retail traders because they are stuck at home and the volatility is enticing. There’s also an urge retail traders have to buy the dip. It makes sense to buy stocks when they go on sale. But retail traders take this to the extreme and literally buy everything that falls even if it deserves to fall. CNN fear and greed index fell 2 points to 41 which is fear.
The chart below suggests there is euphoria from retail traders. It shows trading platforms’ revenues have exploded in the past few weeks. That’s from E-Trade, TD Ameritrade, and Charles Schwab. There has also been a huge increase in Robinhood investors. However, keep in mind that some of these traders are bearish. Not everyone that creates an account is going leveraged long the market.
Many of these people are trading a lot with no opinion on the overall market. Some don’t know the market prices future expectations, so they think another worse decline is coming. That being said, I’m guessing there is a major downdraft in the percentage of bears in the AAII investor sentiment survey which comes out on Thursday.
Review Of Tuesday’s Action
Tuesday was a great day for energy stocks and not the best for tankers. Nordic American Tankers rose 1.94% and Scorpio Tankers fell 1.46%. This is supposed to be the best time ever for tankers, but I think the good news is already priced in. This is supposed to be the worst time ever for energy stocks. But investors are looking past the disaster of 2020.
As you can see from the chart below, the decline in Brent this year has been the worst ever. That’s good news for oil stocks as it means the worst is likely over.
S&P 500 fell 0.52%, the Nasdaq fell 1.4%, and the Russell 2000 rose 1.26%. Russell Microcap index rose for the 5th straight day as it was up 1.39%. Tech, communication services, and consumer discretionary sectors were the losers as they fell 1.41%, 1.89%, and 0.26%. Best sectors were energy and materials which rose 2.19% and 1.96%.
Alphabet’s Earnings: Not As Bad As Feared
Alphabet stock rose 7.65% after hours because its results weren’t as bad as some feared. Its EPS was $9.87 which missed estimates for $10.33. Its revenues were $41.16 billion which beat estimates for $40.29 billion. Cloud revenue was $2.78 billion.
YouTube advertising revenue was $4.04 billion which was 33% growth from last year. The CEO stated coronavirus search activity at its peak was 4 times the size of the Super Bowl. That’s no surprise as a pandemic impacts everyone, while not everyone watches the Super Bowl.
Investors are expecting a recovery so they loved when the CFO stated, “The decline in our Search and other ads revenue was abrupt in March, and although we’re seeing some early signs at this point that users are returning to more commercial behavior, it’s not clear how durable or monetizable that will be.”
10% Decline In Same Store Sales Growth For Starbucks
Starbucks stock fell 1.16% on its earnings as the firm reported a 10% decline in global same store sales growth. Good news its main competitor in China, Luckin, is in deep trouble. That opens the door for Starbucks to take market share in China. The firm had 32 cents in EPS which was down from 53 cents last year. It had just $6 billion in revenues which was down 5%.
Global transactions fell 13%. U.S. same store sales fell 3%, while they fell 50% in China. We can expect a +20% decline in U.S. same store sales in Q2.
Good news is 98% of Chinese stores have reopened. It expects -15% to -25% same store sales growth in 2020 in China. About half of American stores are closed. By early June, 90% of locations will reopen. The firm will add curbside pickup later this summer. It stated, “Based on our substantial experience in China to date, we continue to believe that the impacts of the COVID-19 outbreak are temporary and that our business will fully recover over time.”
Stocks are rallying because they see the economy getting back to normal in the next few months like China has.
1 Comment
Al
April 29, 2020Don, I am going to respectfully and spiritually disagree with you on the DITM puts = synthetic short play.
Several reasons. The primary of which is; on a surprise +$7 upside earns reaction, there is nothing that will lose money faster then DITM puts. And yes, you can sell short dated puts against them many times to (try to) offset such losses. You may have to do so 8-10 times to break even; but after doing so, there will be that one break where your LT short actually comes in, but the 75 cent puts you sold for the 7th time against them go to $6.50. And then you are stuck. And all this time you're just working to break even.
Never mind a completely out of the blue day like today, /ES +40, 50, 90?? You could have 3 DITM puts on each of 3 stocks and be down $3-5K-10K?. Now that is not the worst fate in the world but you will have to stare at that hole for months. In this environment, where you and I may believe that the synthetic market is full of synthetic money and it is all infinicash BS...we equally well know that these giant overnight gaps show up and ruin your day. Big. Whereas, if you buy OTM puts, sure, they can go to zero. But there is no difference between $15 puts going to $4 versus $5 puts going to zero. Plus; if you start out with $15 puts, where might you add? $3? $7?
You could do the same on WMT, where I am long Sept puts that are doing well today. Similar play. Except I have 115 puts which are down under a buck from my buy, WMT ramped huge to ATH these past few weeks. But against them, I can sell my close in puts for well over $1. Yes, that play will eat up significant buying power, and yes, those puts can certainly go to zero. If they were DITMs, I would be making great money IF I SOLD THEM. But the repeated selling of the cheapo covered puts (just like the selling of covered calls) against DITMs IMO is not such a great play.
No one strategy works all the time!