- Equity Index Futures Rally on Positive Earnings Reports
- Small-Cap Stocks Diverge From Large-Cap Stocks Signaling Market Weakness
- Investors Have Reasons to Remain Positive About Stocks
Equity index futures are pointing to a higher open as investors try to bounce back from two days of selling and a very weak start to 2022. The problem may be that this morning's rally looks similar to Wednesday where stocks pushed higher before the open but weren't able to hold the gains. Perhaps Thursday will be different because of some positive earnings announcements; the S&P 500 (SPX) appears to be testing a short-term level of support, and the VIX (Cboe Market Volatility Index) was trading lower before the bell.
The financials may get a much needed shot in the arm as bellwether insurer Travelers (TRV) put up an excellent quarter by reporting better-than-expected earnings and revenue. TRV rallied 4.63% in premarket trading because the company was able to fend off rising catastrophe-related claims with higher returns on its investments.
Transportation companies are moving in different directions this morning as a couple of earnings announcements spark opposing reactions. Railroad company Union Pacific
Overnight, China's central bank cut its key lending rate in an attempt to bolster its weakening economy. The country's real estate and property markets have struggled over the last year, and President Xi Jinping is looking to break precedence with the Chinese Communist Party and seek a third term.
The United States economy appears to still be growing despite Omicron setbacks because the Philadelphia Fed Manufacturing Index came in much higher-than-expected. However, initial and continuing jobless claims were also higher than expected.
After the open, the existing home sales report will be released. Wednesday saw increases in building permits and housing starts, but many investors were concerned that much of the housing growth is coming from multi-family units. The S&P Homebuilders Select Industry Index fell almost 2% on the news, extending its five-day losing streak. The index is down about 12% from the beginning of the year.
The major stock indices closed lower on Wednesday, with the tech-heavy Nasdaq Composite (COMP:GIDS) down the most at 1.15%. The Dow Jones Industrial Average ($DJI) and the S&P 500 (SPX) were down about the same at nearly 1%. Investors showed a lack of conviction after starting the day strong in response to the 10-year Treasury yield (TNX) pulling back 2%. But stocks faded later in the day and sold off into losses.
Traders appeared to be taking profits on value stocks because the S&P 500 Pure Value Index fell 1.70%. The value index has fallen more than 3% in the last two days after a 15% rally that stretched back to late November of 2021.
Investors went defensive on Wednesday, with consumer staples and utilities leading the day and being the only two sectors to close in positive territory. Procter & Gamble
Consumer discretionary and financials were among the worst sectors on Tuesday. Financials continue to be plagued with poor showings on earnings reports. JP Morgan Chase
Some analysts use the S&P 500 (SPX) and the Russell 2000 (RUT) as an indicator of market breadth and strength. The large-cap stocks of the SPX are known as the generals, while the small-cap stocks of the RUT are the soldiers. When the soldiers quit following the generals, the battle may be lost. On Tuesday, the battle wasn't looking so good because the soldiers are going AWOL.
The RUT has traded in a well-defined range for nearly a year, and on Monday, it broke the lower band. Over the latter half of 2021, the SPX continued to climb and left the RUT behind. Now, the break of support for the RUT may be seen by some investors as a major sign of weakness for the stock market. With that said, and the fact that the SPX is only 5.5% off its all-time high and with the RUT down 15% from its all-time high and still in "correction" territory, it's probably not time to hit the panic button.
Dow Theory: The Dow Jones Transportation Index ($DJT) is still trading above its recent support level. This is important, according to the late-great Charles Dow, an American journalist who co-founded Dow Jones & Company and created the Dow Jones Industrial Average ($DJI) and other important indices, because a strong transportation industry is a sign of economic strength.
According to people who follow Mr. Dow's late-1800 writings, a bear market isn't confirmed until both the industrials index and the transportation index are downtrending together. A downtrend occurs when an index is creating lower highs and lower lows on a yearly chart. Neither index is currently downtrending. Dow Theorists see transports as a sign that materials, parts, and products are still in demand and therefore the economy is still growing. Currently, businesses aren't struggling for a lack of demand as much as they're having trouble getting supply to meet demand.
Returning Again: On Wednesday, British Prime Minister Boris Johnson announced plans to end England's Plan B COVID-19 pandemic measures and return to the less strict Plan A. Plan A doesn't advise people to work from home, and starting next Thursday, the British government will no longer require masks. According the BBC, the doctors advising Mr. Johnson believe that the Omicron surge has peaked and is trending down.
According to Our World in Data, the United Kingdom has seen cases fall dramatically in recent weeks. Germany has also seen a substantial drop in cases. The United States and France are also experiencing some decline in cases too.
As the more countries lift restrictions and return to normal, the economy should strengthen again. Factories and businesses can get back to full capacity, supplies lines can open, and consumers can get out and about to take advantage of the service industry and put less pressure on products.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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