Emotions Flip Away From Safe Havens as Earnings Season Begins

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Emotions Flip Away From Safe Havens as Earnings Season Begins

Emotions seem to be flipping away from caution as earnings season begins.

Safe-haven sectors including utilities, consumer staples, bonds and precious metals are all lagging this week. Meanwhile “risk-on” groups like financials, semiconductors and industrials are coming to life.

It’s a sharp change from recent weeks, when President Trump’s trade war with China spread fear throughout the market. Consider these points:

  • 10/10: The American Association of Individual Investors said sentiment was the most bearish in more than three years.
  • 10/12: Factset reported money markets attracted cash at the quickest pace since 2008.
  • 10/14: Bank of America-Merrill Lynch noted that the S&P 500’s dividend yield was greater than the 10-year Treasury note. That panic indicator has been followed by a rally 94 percent of the time, according to the bank.

Stories like that beg the question: Has the fear pendulum swung too far in one direction? Other reports like Thursday’s initial jobless claims and today’s Empire Manufacturing index, beat forecasts. Without a recession looming, does it make sense to have so much cash?

RadarScreen® showing price changes in the last three days and last six months. Notice the recent outperformance of "risk on" sectors.
RadarScreen® showing price changes in the last three days and last six months. Notice the recent outperformance of “risk on” sectors.

JPMorgan Breaks Out

JPMorgan Chase (JPM), the biggest U.S. bank, helped fuel today’s rally with stronger-than-expected profit and revenue. Perhaps even more important, CEO Jamie Dimon pointed to gains in consumer banking. Remember, the consumer has become more important for the stock market since the summer. We’ll also get another dose of consumer news in the morning with monthly retail sales.

Chinese Internet stocks including Alibaba (BABA) and JD.com (JD) also surged. This group, tracked by the Golden Dragon Index ($HXC) outperformed the broader market by a huge margin in 2017, before giving back most of its gains. Traders have eyed it as a potential beneficiary of the trade war easing.

Most safe havens are moving in the opposite direction. Japanese yen futures (@JY) dropped to their lowest price since May. Gold (@GC), silver (@SI) and bonds (@US) are also under pressure.

Treasury bond futures (@US) with 50-day moving average and markups.
Treasury bond futures (@US) with 50-day moving average and markups.

Chart watchers may notice that @US made a lower high earlier this month versus late August — a potentially bearish pattern. If money flows out of bonds, recent trends suggest it would lift banking stocks.

Busy Calendar Ahead

Finally, today’s earnings reports are just the tip of the iceberg. Several major events are coming before the end of the month that could also draw attention away from China fears:

  • Tomorrow: Monthly retail sales for September.
  • Next week: At least 130 members of the S&P 500 report earnings, including Microsoft (MSFT), Amazon.com (AMZN) and Advanced Micro Devices (AMD).
  • 10/28-11/1: A huge week of events, including a Federal Reserve meeting, gross domestic product, plus Apple (AAPL) and Facebook (FB) results.

In conclusion, the market heavily focused on trade-war anxieties in recent weeks and months. But now attention is starting to turn. And more events are coming that could continue to push sentiment in a more positive direction.

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