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Morning Commentary

SHAVE & HAIRCUT…TWO BITS

By Charles Payne, CEO & Principal Analyst
5/19/2020 9:40 AM

Freeuse Download Barbershop Smil Animation Big - Barber Shop Pole ...

The market held onto gains and picked up buyers along the way into the close, in part to an announcement of more states opening. Obviously, there are many things for governors to consider when making these decisions, including the toughest of small business operators, especially barbers. The history of barbershops is written in the original Barber Poles.

Hundreds of years ago, barbers cut hair, trimmed beards, pulled teeth, and performed surgery - hence the red and white poles, which represented blood and bandages.

Fast-forward to the coronavirus (COVID-19) crisis. Barbers and hairdressers have become the symbol of the fierce individual independence of Americans. We have seen several of them arrested and hit with large fines. Perhaps that is why the governor of Massachusetts will begin a four-phase reopening, beginning with barbershops, salons, retail, and car washes.

Another governor that seems to be ready to cross the line in the sand is Gavin Newsome of California.  Late in the session, he announced major sports leagues will be allowed to play in the first week of June.  Also, Newsom will allow 53 of California’s 58 counties to move into the second of four stages toward reopening the economy. Newsome was under tremendous pressure from business owners and community leaders.

By now, everyone understands the stakes and the risks of staying on lockdown and the risks associated with coming out too early, but the tide is turning.

Coming into the week, 18 states and Puerto Rico were still in full lockdown mode, with most showing no signs of budging, even as the widely employed criteria improves.

However, the tide is turning, as more states turn the economic spigots back on. There is economic pressure, as well as legal pressure for those with tougher lockdown rules in effect.

They are watching economies in neighboring states pick up before theirs, and even watching citizens flock to neighboring states to spend money or go to their parks. This summer will kick off with New Yorkers flocking to New Jersey beaches as the temperatures rise. 

Yesterday evening, an Oregon judge shot down the governor’s stay-at-home restrictions, making them null and void after a group of churches brought legal action - calling the governor’s declaration unconstitutional.

Meanwhile, testing continues to ramp up, and positive results continue to drift lower.

Image

All Systems Go

Yesterday, the session crept into the top ten-point sessions of all time before late selling foiled its place in the record books. Market breadth was impressive with a big focus on large-cap, blue-chip names like Disney (DIS).

Issues

NYSE

NASDAQ

Advancing

2,654

2,688

Declining

330

597

52 Week High

45

107

52 Week Low

8

11

Advancing

4.82 B

2.85 B

Declining

508 M

917 M

Year-to-date, the NASDAQ Composite continues its remarkable rebound. The last few sessions have seen stronger breadth and buying in blue-chip names, which I think is a very positive sign.

The Message of the Market

Energy (XLE) names rocketed higher, lifting the sector 8.13%, just one day before the June crude contracts expire. What a difference a month makes when the implosion into negative prices shocked the world: 

The Financial rally was a relief after word that Warren Buffett sold most of his Goldman Sachs (GS) stake. Industrials (XLI) was led by airline stocks, which got a boost when Delta Air Lines (DAL) laid out its June flight schedule.  The fact that Energy and airlines enjoyed such large percentage gains in the same session underscores the oversold nature of the market.

Bond Yields

With all the attention on equities, the move in the ten-year yield, +16% to 0.744%, was a huge closing, right on the cusp of a major technical hurdle. There is a wall of resistance between this point and 0.80%.  Beyond that point, we would be looking for perhaps a swift move to 1.00%, which would coincide with an increased rotation into equities.

Climbing Out the Abyss

Once again, we got a May data read that was much better than April. The National Association of Home Builders / Wells Fargo Housing Market Index (HMI) climbed to 37, beating Wall Street’s consensus of 35.

NAHB

May

Apr

HMI

37

30

Present

42

36

Future

46

36

Prospective Customer Traffic

21

13

Earnings & Economic Proxies

After the close, China’s Internet search engine and artificial intelligence company Baidu (BIDU) posted its quarterly results. Daily active users are up +28% from a year ago, and management guided revenue for the current quarter to range from $3.5 to $3.9 billion. The Street was at $3.6 billion. The stock popped on the news.

Today, it’s all about Walmart (WMT), Home Depot (HD), Advanced Auto Parts (AAP), and Kohls (KSS).

Breakout

The S&P 500 is e in the cusp of a massive technical breakout that could lift the index to 3,130.

S&P 500

Portfolio Approach

We added two positions yesterday.

Today’s Session

The markets have been mixed in pre-open trading, initially sagging on Home Depot’s results, then climbing back after Walmart (WMT) posted a remarkable quarter (details below). 

Earnings results from some big retailers are out. The theme of not providing guidance in this environment continues.

- Comp sales for U.S. +7.5% vs 5.8%
- Operating margin 11.6% from 13.63%
- Sales per retail square foot +7.2%

Markets looks pretty good considering how big they  rallied yesterday.


 

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