M2 BARRON’S October 12, 2020
More-promising Covid treatments might
be a better way to explain the market’s
gains. The week, after all, saw further evi-
dence that Gilead Sciences ’ (ticker: GILD)
remdesivir helps treat Covid, while Eli
Lilly (LLY) announced its coronavirus
cocktail had begun Phase 2 trials. Then
there was Regeneron Pharmaceuticals’
(REGN) experimental treatment, which
apparently helped the president recover
and was being considered for an emer-
gency-use exemption by the Food and Drug
Administration. “If the trajectory seen by
President Trump (from at risk of serious
illness to all better in less than a week) be-
comes standard of care in, say, four to six
months, then life can get back much closer
to normal,” writes Stephen Stanley, chief
economist at Amherst Pierpont Securities.
Why the market is going higher might be
less important than how it’s rising. It
wasn’t that long ago that everyone was
worried because big tech stocks like Apple
(AAPL) and the other FAANGs were lead-
ing the market higher, while everything
else sat out. Megacap strength was taken as
a sign of that investors were playing de-
fense, making the rally suspect in the pro-
cess. Now, most stocks are participating.
Need proof? The Invesco S&P 500 Equal
Weight exchange-traded fund (RSP) has
risen more than 13% during the past three
months, outpacing the SPDR S&P 500
ETF’s (SPY) 10% rise during the same pe-
riod. It isn’t just Apple.
In fact, the market rally has broadened
out so much that future gains look likely, if
history is a judge. The reason? The S&P
500 just experienced a “breadth thrust,” the
term used to describe a 10-day period in
which advancing stocks outnumbered de-
cliners by at least 2-to-1. That doesn’t hap-
pen very often—just 29 times since 1990—
and it signals massive buying pressure in
the market, according to Keith Lerner, chief
market strategist at SunTrust Advisory
Services. When a breadth thrust occurs, the
S&P 500 has been higher 12 months later
96% of the time for an average gain of 13%.
Of course, higher in a year is very differ-
ent than higher next week. While breadth
thrusts point to a higher market in the fu-
ture, they’re often followed by short-term
drops. The last one, for instance, occurred
on June 5, when May’s payrolls data
showed a massive increase in the number
of jobs that the U.S. economy had added.
The market peaked one day later, and then
the S&P 500 dropped 7% over just three
days. Still, even including that drop, the
index has gained 8.8% since then.
The takeaway: Dips are to be bought.
“The market is not going straight up,” Ler-
ner says. “But bull market rules apply.”
Handicapping Earnings Season
JPMorgan Chase (JPM) is scheduled to
report earnings on Tuesday, marking the
unofficial start to earnings season—even if
you wouldn’t know it given all the attention
being paid to the Biden-Trump election
face-off and a Covid stimulus plan.
It’s supposed to be a dreadful quarter if
we simply look at the year-over-year num-
bers. S&P 500 companies are expected to
report earnings of $32.97 a share, down
22% from the same quarter a year ago.
Still, that’s smaller than the 32% drop
reported in the second quarter, and it almost
certainly underestimates actual earnings.
Companies have gotten very good at guiding
the analyst community, to the point that a
miss is a much bigger surprise than a beat.
About three-fourths of S&P 500 companies
beat earnings forecasts during the past four
quarters, according to Refinitiv data. Some
85% beat during the second quarter, and
they did it by 20%, far more than usual.
The third quarter should provide more
of the same, when companies like Bank of
America (BAC), Delta Air Lines (DAL),
and UnitedHealth Group (UNH) report.
Deutsche Bank strategist Binky Chadha
notes that the increases in earnings esti-
Vital Signs
Friday's Week's Week's
Close Change % Chg.DJ Industrials 28586.90 +904.09 +3.27DJ Transportation 11861.95 +564.85 +5.00DJ Utilities 875.81 +43.32 +5.20DJ 65 Stocks 9588.90 +371.00 +4.02DJ US Market 867.82 +33.32 +3.99NYSE Comp. 13252.62 +502.83 +3.94NYSE Amer Comp. 1997.03 +86.66 +4.54S&P 500 3477.13 +128.69 +3.84S&P MidCap 1996.36 +93.57 +4.92S&P SmallCap 926.19 +49.61 +5.66Nasdaq 11579.94 +504.93 +4.56Value Line (arith.) 6671.22 +334.42 +5.28Russell 2000 1637.55 +98.25 +6.38DJ US TSM Float 35696.38 +1412.98 +4.12Last Week Week EarlierNYSEAdvances 2,407 2,348Declines 723 766Unchanged 55 43New Highs 325 190New Lows 78 69Av Daily Vol (mil) 3,991.7 4,112.5Dollar(Finex spot index) 93.01 93.84T-Bond(CBT nearby futures) 174-010 175-290Crude Oil(NYM light sweet crude) 40.60 37.05Inflation KR-CRB(Futures Price Index) 151.74 144.12Gold(CMX nearby futures) 1919.50 1900.20Interactive Brokers Rated #1
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