Major Moves

Sometimes the market makes big moves during market hours (between the opening bell at 9:30 a.m. and the closing bell at 4:00 p.m. Eastern Time). During earnings season, however, most of the big moves seem to happen during off hours when the market is closed.

Facebook, Inc. (FB) shares made a major move last night after the company released its quarterly earnings numbers. Despite being embroiled in privacy-related controversies in jurisdictions around the world, the company managed to crush analyst earnings expectations.

Facebook beat analyst revenue expectations by $510 million and earnings expectations by $0.20 per share – coming in at $16.91 billion and $2.38 per share, respectively. This news sent Facebook stock from its closing price of $150.42 on Wednesday, Jan. 30, to an after-hours high of $169.68.

The stock did manage to climb a little bit higher than that during market hours today, reaching an intra-day high of $171.68, but most of the bullish move happened in the immediate aftermath of the earnings announcement. Seeing a stock gap higher overnight like this can be frustrating for those investors who don’t own the stock, but it certainly isn’t abnormal price movement. Earnings season is a volatile time on Wall Street.

Volatility can cut both ways. Seeing a stock gap lower is just as likely as seeing a stock gap higher. Today just happened to be Facebook’s day to gap higher with double-digit percentage growth.

S&P 500

Wall Street responded so positively because lower interest rates and continued asset purchases by the FOMC are viewed as stimulative to not only the U.S. economy but also to the financial markets themselves. The index continued its bullish rally today as some of its biggest components rallied on Facebook’s earnings news and expectations for Amazon.com, Inc. (AMZN) to beat earnings estimates after the closing bell.

The S&P 500 is a market-cap weighted index. This means that the price movement of the stocks with larger market caps has a greater impact on the value of the index than the price movement of the stocks with smaller market caps does. Here’s a list of the top 10 largest market cap stocks in the index:

  • Microsoft Corporation (MSFT) – $809 billion
  • Amazon – $809 billion
  • Apple Inc. (AAPL) – $793 billion
  • Alphabet Inc. (GOOGL) – $748 billion
  • Alphabet Inc. (GOOG) – $742 billion
  • Berkshire Hathaway, Inc. (BRK-B) – $508 billion
  • Facebook – $423 billion
  • Johnson & Johnson (JNJ) – $353 billion
  • JPMorgan Chase & Co. (JPM) – $345 billion
  • Exxon Mobil Corporation (XOM) – $309 billion

Out of these 10 stocks, only Microsoft and JPMorgan lost ground today. The other eight all rose, with Facebook leading the way as it climbed 10.82%. This was enough to push the S&P 500 out of the consolidation range it has been in since Jan. 17 and up to the 61.8% Fibonacci retracement level of the bearish pullback the index suffered from late September to late December 2018.

This level at 2,713.88 could serve as short-term resistance, but if earnings season continues to go well, the S&P 500 could easily retest the resistance level the index first established in mid-October at 2,820.

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Risk Indicators – TNX

The 10-year Treasury Yield (TNX) continued to collapse today as the market continues to readjust its expectations for how much of its portfolio the FOMC is going to continue to reinvest in Treasuries. Two weeks ago, the TNX was knocking on the door of breaking through resistance at 2.8%. Today, it closed at 2.64%. This reversal of fortunes appears like it might get worse since it wouldn’t take much to push the indicator down to its Jan. 3 lows of 2.55%.

As Treasury yields are falling, investors are selling bank stocks in anticipation of a flattening of the Treasury yield curve and a compression of net interest margin. Net interest margin is the difference between the rate a bank pays to borrow money from its depositors and the amount the bank charges to lend money to its customers. The wider the margin, the more money the bank makes.

Net interest margin tends to expand when the yield curve steepens and contract when the yield curve flattens. Falling longer-term Treasury yields – like the TNX or the 30-year Treasury Yield (TYX) – are putting downward pressure on the yield curve that is causing it to flatten out.

Investors reacted to this movement today by selling shares of financial stocks like Bank of America Corporation (BAC), Wells Fargo & Company (WFC) and The Goldman Sachs Group, Inc. (GS). These stocks lost 2.06%, 2.36% and 2.21%, respectively, today.

Watch for this bearish pressure to continue to be applied to the financial sector if yields keep dropping, causing these stocks to underperform stocks in the technology, consumer goods or health care sectors.

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The Bottom Line

One of the interesting themes that has developed during the S&P 500’s month-long rally to start 2019 is that it has been a group effort. No one sector has led the way higher for the entire month. 

Different news and economic announcements have caused investors to pass the baton back and forth from one sector to another. Financials started the year strong but are starting to fade back into the pack while tech and consumer stocks gather momentum.

Watch for Wall Street to continue rewarding good news and punishing bad news, even if that news flips overnight.

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