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Why stocks are suddenly back in rally mode

·Anchor, Editor-at-Large
·7 min read
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This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Tuesday, October 19, 2021

Trash.

That's my word of the morning for you all. 

My golf game was in trash-like form on Sunday afternoon while catching a quick 18 holes with Yahoo Finance senior columnist Rick Newman (whose play was not trash). I doff my cap to you, Sir Rick. 

Trash was in my thoughts on the golf course (that led to trash play). I wasn't thinking about the next shot or how amazing I looked in the new outfit I picked up before the round. Nope not my always intense self, I spent four hours or so pondering internally why the stock market is suddenly back in rally mode. Is it a fake rally? Did the bears deserve to have been chopped to pieces last week? Just giving you a peek inside my head to kick off the week.

Of course I didn't let Sir Rick know any of these internal debates were happening, definitely would have been against bro etiquette on the golf course (says my former long-time caddy self). Gotta live in the moment, right?

Here are a couple of reasons I cooked up for why stocks are making power moves higher again:

Momentum: Upside momentum has begun to return to the markets and in the process, the technical damage done to stocks from early September through early October is being repaired. Traders love seeing this type of action as it often becomes self-fulfilling. NYSE senior market strategist Michael Reinking best explains what's unfolding in market internals at the moment. "Early in the week the S&P filled last Thursday's gap and retested the 100-day moving average. Wednesday was important as markets put in intraday short-term reversal patterns (hammer/RDR) and made a higher low. There was follow through Friday confirming those patterns and the index broke above the 20-day moving average and cleared the short-term down trend line. The S&P 500 closed above its 50-day moving average for the first time in two weeks and is trading right where the late September bounce attempt failed." A tip of the cap to you as well, Sir Michael. 

Fundamentals: Make no mistake, I remain seriously concerned about how this earnings season will end up (and by extension, the markets) given the major inflationary and supply chain pressures on the income statements of corporate America. But investors are ignoring these pressures, and reasoning that solid bank earnings are a tell all on how reporting season will go. "At this point in time, more S&P 500 companies are beating EPS estimates for the third quarter than average, and beating EPS estimates by a wider margin than average. Due to these positive surprises, the index is reporting higher earnings for the third quarter today relative to the end of last week and relative to the end of the quarter. The index is now reporting the third-highest (year-over-year) growth in earnings since Q320," the team at FactSet notes. Roughly 80% of S&P 500 companies have reported a positive earnings surprise for the third quarter, which is above the five-year average of 76%. It's worth pointing out that only 8% of the S&P 500 have reported so far so simmer down there, bulls. 

Come to think of it, my workouts this weekend were also trash. I wish you happy trading while I course correct these errors this week and gear up for earnings season. Cheers.

Odds and ends

Coinbase: A potentially big week for the cryptoverse is on tap with the first bitcoin ETF expected to begin trading on Tuesday. Coinbase (COIN) shares are finally beginning to show a pulse again (up 11% in the last five sessions) after having done squat going back to early September, surprising in light of the strong upside move in bitcoin. Investors have been concerned about fee compression (really not a new concern but it hangs over the stock like cigar smoke) nailing Coinbase, but none of that crap matters at this point in time. If you are a swing trader, Coinbase is on your watchlist for the rest of this month due to further developments around ETFs (a floodgate could be opening here) — which may be powerful enough to materially re-rate Coinbase's stock, analysts argue. "We believe the company's shares are very undervalued inasmuch as the upside potential of the digital asset supermarket it is in the process of building has yet to be appreciated by the market," says Mark Palmer, BTIG's fintech analyst. Palmer rates the stock a Buy with a $500 price target (estimated upside potential: 79%).

Ulta: It's lights, camera, action on Tuesday for Ulta Beauty CEO Dave Kimbell, who took the helm from the very well-regarded Mary Dillon on June 2. The Ulta (ULTA) team will hold its bi-annual investor meeting and to say expectations are running as hot as a hair curler would be an understatement. Shares of the cosmetics retailer have surged 8% in a month (while pure play makeup names Estée Lauder and Coty are down 1.9% and 7%, respectively, as makeup sales continue to slowly rebound each week and optimism grows around the company's new shops opening inside of Target. Wall Street is expecting a glamorous spate of news from Kimbell at the event, although we caution anything he says may not be enough to sustain the stock's recent pop. Jefferies retail analyst Stephanie Wissink says whisper numbers are for Ulta to pre-announce at least a 25% same-store sales increase (insanely good in this pandemic environment) for the quarter. "Investor interest remains high in any signs of a makeup recovery. While foot traffic continues to lag 2019 levels, Ulta has signaled their confidence in improvement in demand. Ulta should see the inflection first, given their customer is defined as the 'beauty enthusiast' who over indexes on makeup spend vs. non-enthusiast peers," Wissink notes. 

Earnings: Now that bank earnings are out of the way (Goldman Sachs is seen as the biggest winner), we can get into more fun reports (aka quicker to analyze, but no less important in the grand scheme of things). 

Procter & Gamble's (PG) earnings on Tuesday are of high intrigue — investors appear to have forgotten the company warned back in July of a $1.9 billion after-tax commodities inflation hit in its current fiscal year. Since then, commodities prices (oil, resins, etc.) have stayed in rally mode which may force P&G to 1) warn again on inflation; and 2) disappoint the market on quarterly profit margins. The stock has outperformed the S&P 500 by about two percentage points since that report, which doesn't appear warranted given inflation and pandemic pressures. "Nearer-term, we think September quarter gross margin is likely to be below consensus reflecting higher input costs and negative geographic mix, with gross margin pressures anticipated to lessen beginning in the December quarter, mainly a result of announced, and likely additional, price increases," warns Marks Astrachan, Stifel analyst. Tread lightly, bulls. 

Lots of eyes on earnings out of Tesla (TSLA) and IBM (IBM) after the close on Wednesday, understandably so. But earnings from industrial paint manufacturer PPG Industries, for my money, will be quite helpful to get yet another marker on inflation and supply chain bottlenecks. The company warned in early September it was having challenges. Let's see how things shook out. 

Meanwhile, Chipotle (CMG) has way better compensation than Domino's Pizza and stronger ordering trends. We would be surprised if Chipotle comes up short on earnings Thursday evening because of Domino's-like worker shortages, and then the stock doesn't get a second look by traders (shares are down 2.5% in the last month). 

By Brian Sozzi, editor-at-large at Yahoo Finance and anchor for Yahoo Finance Live. Follow him at @BrianSozzi

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