MorningWord 7/25/14: Quarter Horses – $AAPL, $FB, INTC, $CMG

by Dan July 25, 2014 9:26 am • Commentary

Last night the SPX notched a new all time high, and as of this morning, almost 40% of the S&P 500 have reported calendar Q2 earnings, registering year over year growth of 5.6% (so far), greater than the consensus estimate of 4.9% (per FactSet Research).  For the most part, the positive outliers as far as moves have caught most of the attention like Facebook, Google, Intel, Biogen, Chipoltle, and Under Armour as the mood in the market as a whole is fairly optimistic.  But taking a closer look under the hood, there have been some sectors showing strain, at least looking at price action.  That should be a cause for concern, possibly showing weakening breadth.

For instance, the industrial sector has traded very poorly post results, with BA down 4%, CAT down 3%, DD down 3.5%, GM down 4.5% and UTX down 3.5%.  You get the picture.

Homebuilders is another sector that has traded very poorly following PHM’s results yesterday morning. That poor result, coupled with the far worse than expected New Homes Sales data reported, sent the stock down 3%.  The whole sector had a leg down, with TOL down 4%, LEN down 3% and suppliers like MAS down 2.65%.

Bank earnings were generally perceived positively, but the price action was a tad divergent as expectations seemed to have been all over the place.  Stocks like C, GS, MS and JPM have enjoyed healthy rallies, while BAC, PNC, USB and WFC have lagged, but for the most part (aside from MS) all remain well below their prior 52 week highs, and none have confirmed the new highs in the SPX.  Here was Enis’ scorecard from last week’s Macro Wrap.

Most consumer discretionary and energy stocks are still left to report.  Interestingly, tech has been the strongest sector among the mega cap stocks reporting earnings so far, while industrials and consumer staples stalwarts have struggled after their reports.  That’s been reflected in the strength of the Nasdaq over the past 3 months, and the index has held up much better even as small cap and momentum stocks have struggled again in July:

Nasdaq 100 Index (red) vs. Russell 2000 index (green) daily chart, Courtesy of Bloomberg
Nasdaq 100 Index (red) vs. Russell 2000 index (green) daily chart, Courtesy of Bloomberg

Of course, as we’ve noted on many prior occasions, the few mega cap stocks are pulling a lot of weight in the major indices, especially in the Nasdaq 100.  AAPL, MSFT, INTC, and GOOG make up more than 30% of the index, making up for the vast majority of smaller-cap stocks that are struggling.

As we look forward to the consumer discretionary and energy reports, the reactions in the energy sector will be closely watched since energy is the best-performing sector in the market so far this year.  As for consumer discretionary, expectations have come down in the retail sector, but if retail results are once again weak for the second quarter despite the warmer weather, perhaps the U.S. consumer’s woes are more to do with stagnant incomes than environmental conditions.