U.S. equities mostly finished higher on Monday following the third straight weekly gain of more than 1%. A failed coup in Turkey on Friday faded as a catalyst, leaving nonspecific hopes of more global monetary policy stimulus (in the wake of the Brexit vote in June) as the main motivator of higher prices.
Technical buying, amid aggressive short covering, has also been a big factor.
In the end, the Dow Jones Industrial Average gained 0.1%, the S&P 500 Index gained 0.2%, the Nasdaq Composite gained 0.5% and the Russell 2000 gained 0.2%. Treasury bonds were mostly weaker, the dollar rallied again against the yen (boosting carry trades) as Japan looks ready to become the first major economy to monetize government debt since 1945, gold gained 0.1% and oil weakened with a 1.6% loss.
Bank of America Corp (NYSE:BAC) gained 3.3% after reporting better-than-expected second-quarter earnings with trading revenues and expense control the bright spots. Groupon Inc (NASDAQ:GRPN) gained 10.3% after being upgraded to “buy” by analysts at Piper Jaffray on the potential for large marketing spending to drive new account growth.
Japan’s Softbank Group Corp (OTCMKTS:SFTBF) announced it would acquire iPhone chip supplier ARM Holdings plc (ADR) (NASDAQ:ARMH) for more than $32 billion in cash — boosting the target’s share price by 40.6%.
After the close, Netflix, Inc. (NASDAQ:NFLX) dropped 15.5% on surprisingly weak subscriber additions of 0.16 million domestically versus 2.23 million last quarter and the 0.5 million expected. International additions totaled just 1.5 million versus 4.5 million last quarter and 2 million expected. Management did not believe increased competitive pressures from the likes of Alphabet Inc’s (NASDAQ:GOOGL, NASDAQ:GOOG) YouTube Red or Amazon.com, Inc’s (NASDAQ:AMZN) Amazon Prime as “material” factors.
Also after the close, International Business Machines Corp. (NYSE:IBM) gained initially gained 2.8% (since tempering to a 10 basis-point gain) after reporting a top- and bottom line Q2 beat and the reaffirmation of prior forward guidance. The results were marred by the fact that this was the 17th straight revenue decline, profit margins missed expectations and acquisition activity has caused debt levels to swell.
Breadth was relatively narrow, with the bulls focusing on large-cap internet stocks like Facebook Inc (NASDAQ:FB) and GOOG stock — with gains of 2.2% and 1.9% respectively — to push the major averages higher. With stocks badly overbought on short-term technical measures, watch for narrowing breadth to result in some profit-taking and the cooling of heels in the days to come.
Seasonality should play a role as well since stocks tends to flat line or drift lower between July and October. We remain the midst of the weakest period of the year for stocks (which, admittedly hasn’t mattered so far). This setup suggests once the strongest six-month seasonal period restarts in November stocks could surge into the holidays on clarity following the U.S. presidential election.
The set-to-be-disappointing Q2 earnings season will heat up as well, with 140 S&P 500 companies set to report this week. According to FactSet, S&P 500 earnings are set to decline 5.5% from last year for the fifth consecutive quarterly decline.
As earnings have stalled but prices keep rising, the S&P 500’s trailing 12-month price-to-earnings valuation ratio has swelled to its highest level since 2010 (19.4) and is well above its five-year (15.8) and 15-year (17.6) averages.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
