Bears Take Their Turn

Equities clanked lower on Monday as investors booked profits from last week's gains and looked forward to the start of earnings season late this week, notes Jon Markman of Pivotal Point.

The Dow ended down nearly 0.3% while the S&P 500 fell almost 0.7%. The Nasdaq dropped about 1.3% and the Smallcap 600 bucked the negative vibe and rose 0.4%.

Breadth favored decliners slightly over advancers Monoday. There were 470 new highs and just 12 new lows. Topping the new highs list was Eli Lilly (LLY), Advanced Micro Devices (AMD), BlackRock (BLK), Charles Schwab (SCHW), and Target (TGT). Very old school, interesting.

Stocks rose to new highs last week on expectations that the two victories by Democrats in the pair of Senate runoff elections would lead to higher direct payments to Americans during the pandemic. But now there’s some concern that people will save their stimulus check instead of blowing them on rent, food, and iPhones. That’s a chic new argument but I suspect consumers gonna consume.

Now attention turns to the big banks, including JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C), which are set to kick off the fourth-quarter earnings season on Friday. Estimates are pretty low, so this bedeviled group doesn’t have to report super-great results to beat expectations.

The market seemed unfazed by growing calls for the President to step down after rioters stormed the Capitol building to stop the certification of Joe Biden's election victory. Democrats in the House introduced an article of impeachment against Trump on Monday.

Consumer discretionary shares lost almost 1.9%, pulled lower by Tesla's (TSLA) 7.8% skid. Communication services fell about 1.8%. Twitter (TWTR) lost 6.4% after the social-media company permanently barred Trump from its platform following the riot. Facebook (FB) shed 4% after it temporarily banned Trump. Tech shares slid more than 0.9%, pulled lower by Apple's (AAPL) 2.3% slide. Energy led advancing sectors, surging 1.6% even as crude futures lost ground.

In corporate news, Office Depot (ODP) surged more than 19% after privately held rival Staples made a $2.11 billion cash offer for the office-supply retailer. It’s always amusing to see two bad companies merge. But the idea is right: there are too many physical office stores in this digital age.

Bottom Line: Mid-January tends to be a rough stretch for stocks as investors prepare for earnings season that starts in earnest next week. Research leads me to think that estimates are too low for Q4 2020, so bulls have a fighting chance to beat the historical bias and surprise with upside. Sentiment overall is very upbeat—but fears of government turmoil appear set to prevent dangerous euphoria. Stay the course for now; we might make some portfolio adjustments soon.

Learn more about Jon Markman at Pivotal Point.