One earnings report can drastically change the price trajectory of a stock and its industry. Take Snapchat for example. SNAP had a big earnings surprise (over 100% above estimates) and reported a notable acceleration in revenue. It gapped to new all-time highs and had the strongest week in its history, gaining 50% on record volume. Snapchat also projected a significant improvement in digital advertising conditions which boosted the stocks of FB, TWTR, PINS, GOOGL, SPOT.
Small caps outperforming and setting up for a potential breakout with a potential pivot at 164.25. It is not only about the new stimulus. We saw a big spike in interest rates which pushed banks and basic material stocks higher while it pressured homebuilders.
The market is acting as if the new $2 Trillion stimulus (it hasn’t been approved yet) will only help the worst-hit by COVID sectors. The amount of money is significant. It’ll eventually trickle down to the balance sheets of the most profitable companies in Big Tech. This is why I think the dips in AMZN, AAPL, FB, GOOGL, MSFT will continue to get bought. QQQ is setting up for a potential bounce just before the biggest earnings week this season.
There are still plenty of stocks that are holding well and building new bases in various sectors and market caps. In the meantime, the 30% drop last week in a momentum flagship like Fastly is likely to act as a wake-up call for many. This might lead to profit-taking in other momentum high flyers which have been on a hot run most recently – PTON, TTD, Z, etc. No one wants to get caught in a big post-earnings drop. Add to the mix the constant gyrations due to new stimulus package stimulations, the typical pre-election volatility, the rise in COVID cases, and you have a range-bounce market that might not be very easy to trade.
The big catalysts that move the stock market remain the same:
There’s a second COVID wave under way and many of the so-called social distancing stocks continue to ramp up, especially software;
A second COVID wave means more stimulus. More stimulus is positive for stocks in general but more so for small caps. Russell 2000 went up 10% in the past two weeks;
The pre-election period tends to be volatile as it often brings a large number of surprising turns. Clean energy stocks have accelerated their upside ascent in expectations of the changes that a new administration might bring. Cannabis-related stocks might be the next ones to rally.
The next week is also the start of a new earnings season. Financials are the first ones to report followed by tech a couple of weeks later. I would not be surprised to see pre-earnings rallies in strong stocks (mostly in tech) as many speculators try to front-run earnings reports.