Wall Street Breakfast: What Moved Markets

- The stock market closed out the week higher, with the S&P (SP500) and Dow (DJI) ending at record highs as the strong jobs report buoyed reflation plays. Better-than-expected July payrolls and a bigger-than-anticipated drop in the jobless rate pushed rates sharply higher, with the 10-year Treasury yield jumping more than 8 basis points Friday to 1.3%. That's 15 basis points higher than the low hit Monday as yields tumbled on concerns about the spread of the Delta variant. The payrolls gain also put pressure on metals, with gold futures settling with their worst daily drop since mid-June. For the week, the Nasdaq (COMP.IND) rose 1.1% to lead the major averages, despite a Friday decline. The S&P rose 0.9% and the Dow gained 0.8%.

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Top News Shutterstock The stock market closed out the week higher, with the S&P (SP500) and Dow (DJI) ending at record highs as the strong jobs report buoyed reflation plays. Better-than-expected July payrolls and a bigger-than-anticipated drop in the jobless rate pushed rates sharply higher, with the 10-year Treasury yield jumping more than 8 basis points Friday to 1.3%. That's 15 basis points higher than the low hit Monday as yields tumbled on concerns about the spread of the Delta variant. The payrolls gain also put pressure on metals, with gold futures settling with their worst daily drop since mid-June. For the week, the Nasdaq (COMP.IND) rose 1.1% to lead the major averages, despite a Friday decline. The S&P rose 0.9% and the Dow gained 0.8%.       Economy Job gains jolt yields, but could stifle stocks All things being equal, recovery in the labor market toward pre-pandemic levels should be bullish for equities, further boosting the potential for earnings growth. But with the historic amount of Fed easing involved, the stock market could be back to a good-news-is-bad-news scenario. Fed speakers this week have floated the idea that the FOMC could be ready to start tapering in September. "There's no reason you'd want to go slow on the tapering to prolong this. You want to get it done and get it over with," Fed Governor Christopher Waller says. Tapering would likely push Treasury yields higher, removing a key reason for the path of least resistance for stocks still being up and to the right, even at record levels. This week, Citi downgraded U.S. equities to Neutral, calling for the 10-year Treasury yield (TBT) to rise to 2%, with a 70 basis-point rise in real yields, which are now at record lows. Global equity strategist Robert Buckland writes that Citi's rate strategists "attribute much of the move to technical factors. Most notably, US treasury issuance has dropped over the summer, but will rise again later in the year. They think that this, along with ongoing economic recovery and likely QE tapering, will push 10-year bond yields back towards 2.0%." Goldman Sachs just boosted its 2021 target for the S&P 500 (SP500) to 4,700 from 4,300 in part due the lower-than-expected rates. But strategist David Kostin says that rates above 1.6% would cut fair value back down to 4,350, below current levels.       Sponsored By VantagePoint Are You Sabotaging Your Trading? Would you prevent that early exit if knew for a fact there were more gains in your future? You could finally stop leaving too soon and get out at the most opportune time. But…how do you know what's going to happen next for the markets? A.I. forecasting predicts the behavior of your stocks up to 72 hours in advance, which no other tool can offer. You need to be ready for rapid market changes, and it's our job to help you avoid potential losses. Save a seat at our exclusive LIVE training session, where we will demo this top-of-the-line A.I. for free. Registrations close after 200 guests. Financials Robinhood becomes a meme stock Have you heard the latest joke on Wall Street? "Would investors buy Robinhood shares after a disastrous IPO? Yes, they Sherwood." Robinhood Markets (HOOD) had a wild week of trading, including a 50% jump in a single day, to finish the week up nearly 50%. In a storyline worthy of Mary Shelley, the creator has become the target of its creation, although its doubtful insiders are complaining. HOOD has been the most-mentioned stock on WallStreetBets, according to Quiver Quantitative. The rally is reminiscent of moves in GameStop and AMC), both of which are on losing streaks since HOOD came to market, leading to some speculation that retail investors are rotating cash from those names. But options experts say the trade in Robinhood stock is different from other meme rallies. Puts outweighing calls: Like previous retail-driven rallies, the surge in HOOD has been supported by deep-out-of-the-money call buying. The biggest volume of any option was for $70 calls. But that doesn't necessarily mean a gamma squeeze is in effect, like the original GameStop move. Gamma squeezes occur as the writers, or sellers, of call options buy the underlying stock as a hedge, increasing demand for shares and pushing the price higher. While the $70 call was the most popular single option, bearish puts overall had more volume, Christopher Murphy, co-head of derivatives strategy at Susquehanna, said. The biggest plays were August 20 $30 and $20 puts, Murphy said. "All of it appears to be small lots, but that doesn't necessarily mean it's all retail," he wrote, according to Barron's. "Because the options are so thin and the volatility is so high, it makes sense all the trading (whether institutional or retail) would be in small lots." Another sign the rally may stall is that the 10-day moving average of call volume is on a downward trend, according to Bloomberg. And the 10-day average of shares traded on all exchanges is at its lowest level since November. What next for the stock? Two big names have stepped to the sidelines after yesterday's big run-up in HOOD. Cathie Wood's ARK Investment Management was an early fan of Robinhood and bought on the dip as it went public and steadily increased holdings to more than 3M shares for three funds, including the flagship ARK Innovation ETF (ARKK). But ARK didn't accumulate any shares during Wednesday's trading, according to its daily trading statement. Jim Cramer said the stock could be "bought here" on his "Mad Money" show Monday night. But he's advising locking in some gains. "Meme stocks are easy money on the way up. But as we've seen with GameStop and AMC of late, you have to take profits while you still have them by selling gradually on the way up," Cramer said. "It doesn't matter how much you love (Robinhood), discipline always trumps conviction, and discipline says you need to take something off the table when you've got an 80% gain in two days." What could separate Robinhood from GameStop, AMC and other WallStreetBets favorites is that it can be a proxy for retail trading for the broader market. If funds believe that retail enthusiasm is here to stay, they will likely be bullish on HOOD and the potential for higher trading volumes.       Covid Rising COVID Restrictions Companies are taking the lead in adopting mask and vaccine requirements as COVID Delta cases grow and equities remain resilient. A host of headlines about new policies and restrictions hit Tuesday, including New York City requiring proof of vaccination for entry to restaurants, gyms and leisure events. But again, most moves came from private companies.

Tyson Foods (TSN) will require its workforce to be vaccinated, J.P. Morgan (JPM) is re-evaluating its back-to-the-office policies and Microsoft is requiring vaccinations for its returning workforce. In addition, Google parent Alphabet (GOOGL) has approved 85% of employee requests to work from home or relocate once its offices open, Bloomberg reports. Amid all those moves, Wall Street put together a rally from midday into the close, with recovery sectors leading the way.

Strength in cyclicals, which would be the hardest hit on worries about a stalled economic reopening, could indicate that investors feel the economy can weather moves to stem the spread of the Delta variant. That would be in contrast to last month, when the Delta spread was a major reason for sell-side strategists to hesitate on new allocations, according to BofA.

Looking for the peak. Thomas Lee of Fundstrat Global Advisors argues the company and locality moves will help by driving up vaccination rates.

"Policymaker panic about Delta variant is triggering a vaccination resurgence = good," Lee writes in a note. "The positive upshot of a panic by policymakers is that more Americans are getting vaccinated. The rise in vaccinations is most evident in states hit hardest by this recent Delta variant."

"Policymakers panic = good, businesses respond by pushing/mandating masks = good, businesses respond by pushing/requiring vaccinations = good, Americans witness COVID-19 severe illness and get vaccinated = good."

Fundstrat's base case is that the Delta variant surge in the U.S. will peak in August, which it says should encourage investors.

"Given August is already a poor liquidity month, a buyers strike makes markets more turbulent," Lee says. "But if our base case plays out, August will ultimately be a 'risk on' month and we will chop higher. Thus, the July chop will continue into August, but with an upward bias."

If "the Delta variant does not peak in the next few weeks (as is somewhat expected) then the chances of lockdowns will rise, and that will potentially impact earnings," Kinsale Trading writes.

If "the Delta variant is causing any sort of headwind on the economy, it'll show up in the service sector PMI first, as people pullback on eating out, etc," Kinsale says.

Wells Fargo says it does not think the Delta variant will be a "game changer" for the U.S. economy and sticks with its portfolio recommendation to favor cyclicals, especially Industrials (XLI) and Materials (XLB).

     

Aviation

Ready for Takeoff

Air travel continues to return with a vengeance as many look to take a long due summer vacation or see family for the first time in more than a year. Another high mark was set on Sunday despite a renewed threat from rising coronavirus case numbers fueled by the Delta variant. More than 2.2M people went though airport checkpoints nationwide, according to the Transportation Security Administration, notching the highest number since Feb. 28, 2020.

Thought bubble: Not only does the U.S. have a strong vaccination rate (it just reached 70% of all adults), but the country also has a strong domestic market. Contrast that to nations that rely more on international travel, or require digital health passes or negative PCR tests to board a plane. For the broader market, airline industry executives are relying on the easing of travel restrictions for things to snap back and some say consolidation may be in the cards post-pandemic as carriers look to shore up their balance sheets.

Meanwhile, the resurgence of travel, coupled with bad weather, has led to delays and flight cancellations. Airlines are struggling to rebuild networks and have been caught short-staffed after urging employees to take buyouts or leaves of absence to cut labor costs during the pandemic (they still received $54B in taxpayer money). Sen. Maria Cantwell (D-Wash), chair of the Senate Commerce Committee, is even questioning airlines to explain the high numbers of flight delays and cancellations.

Case in point: American Airlines (AAL) scrapped hundreds of flights on Monday following disruptions caused by severe thunderstorms that swept through its Dallas/Fort Worth International hub. Florida-based discount carrier Spirit Airlines (SAVE) additionally canceled about one-third of its flights and is "working around the clock to get back on track." At least 40% of Southwest (NYSE:LUV) and Spirit flights were also delayed on Sunday, which created long lines at ticket counters at Orlando International Airport.

     

Legislation

Infrastructure Week

Senators were back on Capitol Hill on Sunday as a bipartisan group of lawmakers put the finishing touches on a $1T infrastructure package. Touting the long-term economic benefits of the bill, key Democratic Senator Joe Manchin said the 2,702-page measure was likely to pass before the end of the week and would "keep us going for five to 10 years." The plan is one of President Biden's top legislative priorities and would be the largest investment in U.S. roads, bridges, ports and transit in decades.

What's in it? The Infrastructure Investment and Jobs Act includes $550B in new spending over five years, on top of $450B in previously approved funds. $110B would be allocated for roads and bridges, $66B for rail, $55B for water and wastewater infrastructure and $39B for public transit. There's also money for ports, high-speed broadband internet, replacing lead water pipes and building a network of electric vehicle charging stations.

Senators have clashed over how to pay for the package after ideas like raising revenue from a new gas tax were rejected. Current thought is to finance some of the bill through $205B in untapped COVID-19 relief aid, as well as unemployment assistance that was turned back by some states, but those sources might not pass muster with deficit hawks. The Senate could also impose changes that potentially complicate its chances of becoming law, like paying for the bill via tax hikes on corporations and wealthy Americans earning more than $400K per year.

Outlook: GOP Senator Susan Collins believes that at least 10 Republican senators will support the measure, enabling it to clear a 60-vote procedural hurdle. However, the bill would still need to get through the House of Representatives, where some Democratic progressives have suggested that the $1T price tag is inadequate. Democrats also aim to pass the bill alongside a second multi-trillion dollar package on "human infrastructure," though Biden has confirmed that the "physical infrastructure" proposal would not be dependent on that initiative.

     

U.S. Indices
Dow +0.8% to 35,209. S&P 500 +0.9% to 4,437. Nasdaq +1.1% to 14,836. Russell 2000 +0.9% to 2,246. CBOE Volatility Index -11.5% to 16.15.

S&P 500 Sectors
Consumer Staples -0.6%. Utilities +2.3%. Financials +3.6%. Telecom +0.8%. Healthcare +0.7%. Industrials +0.2%. Information Technology +0.9%. Materials +0.2%. Energy +0.3%. Consumer Discretionary +0.4%.

World Indices
London +1.3% to 7,123. France +3.1% to 6,817. Germany +1.4% to 15,761. Japan +2.% to 27,820. China +1.8% to 3,458. Hong Kong +0.8% to 26,179. India +3.2% to 54,278.

Commodities and Bonds
Crude Oil WTI -8.2% to $67.89/bbl. Gold -3.% to $1,763.5/oz. Natural Gas +5.7% to 4.135. Ten-Year Treasury Yield -0.4% to 133.95.

Forex and Cryptos
EUR/USD -0.92%. USD/JPY +0.49%. GBP/USD -0.22%. Bitcoin +4.3%. Litecoin +6.1%. Ethereum +15.6%. Ripple +2.1%.

Top Stock Gainers
BeyondSpring (NASDAQ:BYSI) +182%. Score Media and Gaming (NASDAQ:SCR) +113%. Bit Digital (NASDAQ:BTBT) +95%. AeroCentury Corp. (NYSE:ACY) +83%. Kaixin Auto Holdings (NASDAQ:KXIN) +66%.

Top Stock Losers
E-Home Household Service Holdings (NASDAQ:EJH) -81%. Zymergen (NASDAQ:ZY) -65%. Live Ventures (NASDAQ:LIVE) -52%. Moxian (NASDAQ:MOXC) -50%. Sprague Resources (NYSE:SRLP) -48%.

Where will the markets be headed next week? Current trends and ideas? Add your thoughts to the comments section.

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