Market Perspective January 31, 2021

This past volatile trading week for stocks culminated for losses on Friday for all major Indexes. The markets were significantly affected by the unprecedented trading chaos behind wildly popular and drastically-shorted stocks targeted by groups of retail investors, such as members of a popular Reddit forum, including GameStop (GME) and several others.

The Dow dropped 2.03 percent on Friday to its lowest point over the last six-week period. Of the 11 sectors, Energy and Information Technology declined, with Friday losses of 3.11 percent and 2.64 percent, respectively. The Nasdaq and the S&P 500 followed closely behind the Dow for the day with losses of 2.0 percent and 1.93 percent, respectively. The Russell 2000 Index also fell 1.56 percent for the day.

For the week, the Dow Jones Industrial Average slipped 3.27 percent, the S&P 500 Index 3.31 percent, the Nasdaq 3.49 percent and the Russell 2000 Index 4.39 percent.

Gamestop shares closed at $328.24 on Friday, an incredible 400-percent gain over its closing price at the end of last week, $65.01. Likewise, the secondary targets for buying and holding by the groups of online retail investors (because they are believed to be heavily-shorted) also saw increases in share prices on Friday, including AMC (AMC), BlackBerry (BB), Express (EXPR), Bed Bath & Beyond (BBBY) and Nokia (NOK). Meanwhile, major hedge funds started incurring billions of dollars in losses due to the short positions they held in those companies.

As an indicator of the impact of the magnitude of the sky-rocketing share values of these companies, and Gamestop in particular, the Cboe Volatility Index, which showcases the stress level of the markets, rose 9.5 percent on Friday. This severe volatility triggered the Securities and Exchange Commission (SEC) to announce publicly on Friday that will continue to be monitoring the short-squeeze situation involving Gamestop and companies in similar positions. This includes reviewing the controversial decision of some no-fee brokerage firms, such as RobinHood, to restrict traders’ ability to purchase shares of volatile stocks, including GameStop.

Several ETFs have exposure to GameStop. The most important one, in terms of the size of the fund and the weight of GME, is SPDR S&P Retail (XRT). On Thursday we recommended investors take profits if they held XRT since GME climbed to 20 percent of assets from only a few percentage points at the start of the year. XRT was about $70 per share before the GameStop squeeze began, or about 20 percent lower than the $88 per share it closed at on Friday.

Novavax Inc. (NVAX) shares leaped 65 percent on Friday on the announcement that the pharmaceutical company’s coronavirus vaccine achieved an 89-percent efficacy rate from clinical data. On the other hand, shares of Johnson & Johnson (JNJ) dropped 3.56 on the day based on disappointing reports that its COVID-19 vaccine candidate was only 66 percent effective in late-stage clinical trials.

Corporate earnings reports for the fourth quarter published on Friday showed that Chevron (CVX) posted losses for the last three quarters in a row and had its worst overall year since 2016. Chevron shares fell 4.3 percent on the day.

Eli Lilly & Co. (LLY) shares dropped 1.0 percent after the company released a positive earnings report well above expectations and with the potential for significant growth based on the success of its coronavirus treatments.

Skyworks Solutions Inc. (SWKS), a primary chip supplier for Apple (APPL), saw its shares jump 5.9 percent on the day after the release of a positive earnings report above estimates.

Earnings season remained strong this week. The blended earnings growth rate between reported earnings and remaining estimates in the S&P 500 Index climbed to negative 2.3 percent. At the current pace of earnings beats, S&P 500 earnings could turn positive by the end of fourth quarter earnings season. American Airlines (AAL) was one of the big winners this week. It beat estimates and shares climbed 8.57 percent.

Crude Oil Futures were down by 0.38 percent after trading closed for the day to $52.14 per barrel. Brent Crude Futures were up by 0.11 percent to $55.10 per barrel at the close of the trading week.

Gold gained 0.47 percent on the day and rose to $1,849.80 an ounce. Silver was likewise up 4.39 percent Friday to $27.06 an ounce. The U.S. dollar Index rose 0.09 percent on the day to 90.53.

The 10-Year Treasury bond yield was up 0.014 percent to a rate of 1.064 percent on Friday.

The economy grew at a 4.0 percent pace in the fourth quarter, slightly missing economist forecasts. Consumer spending decreased 0.2 percent, but that was better than forecast. Personal income climbed 0.6 percent aided by stimulus checks.

The Pending Home Sales Index dipped 0.3 percent for December, however pending home sales for the same month were up 21.4 percent relative to December of 2019. New home sales hit an annualized pace of 842,000 over the month.

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