Billions of Dollars Shaken Out From Mini-Rout: Taking Stock


Arie Shapira

Oct 19, 2018

October hasn’t been a kind month for stocks, and Thursday was a good example of that as the S&P 500 had its third-worst decline since early April -- though note that we’re seeing a bounce in the futures this morning after positive earnings from megacaps Honeywell and Procter & Gamble just crossed the tape.

Defensive sectors remain in vogue, with utilities the sole sector to gain month-to-date (as the table below shows), while the air continues to get let out of the bull market winners, as seen in the selling that’s going on in tech and consumer discretionary.

It’s no wonder then that investors are starting to look elsewhere for safety -- U.S. stocks have been a bright spot lately relative to most every other global equities market -- with new data showing that U.S. equity funds recorded their largest outflows in many months through the week ending Oct. 17: Lipper says $17.5 billion, the most since June, while EPFR says $14.8 billion.

Part of the problem is that we’re experiencing a wide range of mood swings as the first week of somewhat heavy earnings comes to a close, from early warnings to easy breathing with Netflix and the semis followed by more alarms. Next week’s deluge should help set a more refined tone, as mentioned in the "On Tap for Next Week" section. But there is a much bigger wall of worry that remains an overhang for the market, and it seems like bricks keep getting added as days wear on: Saudi Arabia tensions, China uncertainty, European banks bloodbath, etc.

There is also this infatuation with the 200-day moving average and whether we will ultimately break the level or hold it. So far it’s a hold, if you consider the moves in the benchmark indices over the past week and change (see chart below). In fact, it’s practically serving like a magnet for the S&P 500, which closed less than a point above it after six straight days of testing the mark, and the Nasdaq, which finished a hair below.

Sectors in focus today:

  • Fintech/credit cards with PayPal shooting up about 7% on a beat and raise (BTIG upgrades to buy on progress made in monetizing Venmo) and American Express looking higher in the pre-market; note Stifel downgraded EBAY to a hold on GMV trends read-across from the PayPal release
  • Industrials on a beat from Honeywell (shares indicated up several points) and trucker Werner
  • Consumer staples with Procter & Gamble gaining more than 3% on better-than-expected quarterly numbers
  • Footwear sector, like Deckers (reports next week), after Skechers rose ~9% on a strong forecast
  • Regional banks with a big whiff and soaring loan provisions from Bank OZK (formerly known as Bank of the Ozarks); shares sank 18% this morning on the news
  • Insurance after AIG slips >4% on a higher-than-expected catastrophe loss pre-announcement
  • Chemicals may be volatile after Celanese gained 6% on a beat while the behemoth DowDuPont slipped percentage points on a $4.6 billion impairment that most every analyst sees a buying opportunity since most of the announcement was already announced, and thus baked in
  • Oil services on Schlumberger, which doesn’t appear to be making a major move as of yet after what appears to be a miss on the top and bottom line

On Tap for Next Week (Firehose Edition)

We’ll all be drinking from the same earnings firehouse next week, though I’d imagine we’ll get a better indicator of the various pressure points that certain companies are feeling, from the impact of tariffs and currency volatility to margins being exponentially squeezed.

We’ve already seen some of this in the industrials and materials sectors -- just look at the action in United Rentals on Thursday after its beat-and-raise quarter, as shares of the ~$10 billion market cap machinery name finished down 15% on peak cycle concerns. Or the big slides elsewhere in industrials land yesterday with Textron -11%, Snap-On -9.6%, Lindsay Corp. -6.4%, and small Insteel Industries -19%. Plus ~$30 billion market cap truck maker Volvo tanked as much as 6.1% overnight despite the beat.

So I’d imagine there will be extra scrutiny paid to reports next week from the likes of Caterpillar, Boeing, 3M, United Tech, UPS, Ford, Harley-Davidson, Sherwin-Williams, Eastman Chemical and Freeport-McMoRan. Note that GE was scheduled to report next Thursday, but conspicuously moved it to the following week (things that make you hmmmm...)

Elsewhere, it’ll be the huge week for FANG (ex-Netflix, which already passed its test) and the semiconductors, as we’ll hear from Alphabet, Amazon, Intel, Texas Instruments, STMicro, AMD and Western Digital. Others in the tech space to be aware of are FAAMG member Microsoft, a downtrending Twitter (after a rough print last quarter a la Netflix), a spiraling lower Snap (down 67% from this year’s peak), and quasi-pot stock Shopify.

Non-earnings catalysts include that big Saudi Arabia "Davos in the Desert" conference that has seen a mass exodus of executives’ representation, another round of potentially meager housing data (XHB ETF down 20 of the last 22 sessions), some Fed speak coupled with the Beige Book and the ECB rate decision, an SEC roundtable on market data and market access that could move exchange stocks like Nasdaq (which already reports next week) and Cboe, the Capitalize for Kids conference in Toronto with several big-name funds presenting (Starboard, ValueAct and Trian, to name a few), Canada’s Aurora Cannabis going live on the NYSE with the "ACB" ticker, and Take-Two hoping not to pull an Activision (shares sank 8.3% Thursday on disappointing launch sales for the newest Call of Duty) with the release of "Red Dead Redemption 2."

Notes From the Sell Side

Wedbush’s Dan Ives, formerly of GBH Insights and FBR Capital, rolled out his big tech initiation last night. Apple is the highlight, where he is now the top bull on the Street with a price target of $310 (nearly $100 above where the stock closed last night and >30% higher than the average target) in addition to adding it to the firm’s "Best Ideas List." Ives expects steady iPhone growth for the next few years and sees the services business segment as the "gold mine" (valuation of $400b-$450b).

Morgan Stanley’s Adam Jonas, who abandoned his role as one of Tesla’s biggest bulls last year, is starting to sound a bit more positive over the past few days. On Monday, he wrote how he was surprised by how much he enjoyed driving the high-spec version of the Model 3. Today, he sees conditions supporting the company offering "extremely strong" 4Q guidance with 3Q results on profit and cash flow. He remains at an equal-weight, as the pace of cash flow isn’t seen as sustainable into 2019.

RBC is upgrading Roku to an outperform and a price target of $70 after the recent selloff (down 22% month-to-date), calling it one of the three smallcap Internet stocks with the least fundamental risk.

Gordon Haskett analyst Jeff Farmer, formerly of Wells Fargo, initiates on sixteen restaurant stocks, including some glaring underperforms on Chipotle ("premium multiple unsustainable even if most optimistic Street estimates are met"), Darden ("meaningful EPS growth deceleration lurking") and Texas Roadhouse ("EPS growth could be cut in half with persistent labor cost pressure & loss of tax reform tailwinds").