Dow Crawls Higher But a 20-Year-Old Warning Just Flashed Red

• The Dow Jones Industrial Average (DJIA) edged higher on Tuesday after a rocky start to the week.
• Tech stocks rallied 2% on Monday before ending the day 2% down. This hasn’t happened since the peak of the dot-com bubble.
• Wall Street giants JP Morgan, Citigroup, and Wells Fargo report second-quarter earnings today.

It’s a big day for the U.S. stock market. Earnings season is upon us, with JP Morgan, Citigroup, and Wells Fargo delivering the most anticipated quarterly results in recent history. The Dow Jones Industrial Average (DJIA) edged higher on Tuesday morning.

While the Dow looks optimistic, it’s hard to ignore the warning bell from the Nasdaq yesterday. In a wild bout of trading, the tech index soared 2% to an all-time high before ending the session 2% lower.

The last time this bizarre intraday round-trip happened? Right before the top of the dot-com bubble. March 7, 2000, to be exact.

Yesterday’s volatile session saw Apple, Amazon, Nvidia, Facebook, and Adobe hit new record highs before reversing lower.

Does this mark the top of this remarkable three-month rally? Peter Boockvar, chief investment strategist at Bleakley Advisory Group thinks maybe it was:

There is a case to be made that this is what reversal days are made of.

Dow rises nervously as earnings roll in

The Dow Jones continued to anchor the US stock market on Tuesday, rising 53.94 points or 0.21% to 26,139.74 as of 9:46 am ET.

The index steadily outperformed the S&P 500 and Nasdaq yesterday – a rare show of strength in a period dominated by tech stocks.

The S&P 500 traded flat at 3,155.31, while the Nasdaq ticked 0.04% higher to 10,394.94.

Stock market valuations are ‘elevated’

Yesterday’s blow off in the Nasdaq comes as tech stocks stretch their valuations to eye-watering levels. Maurice Gravier, chief investment officer at Emirates NBD said equities aren’t leaving much room for error at these prices.

Looking forward, valuations are elevated – not crazily – but elevated enough to create vulnerability and we think markets are simply priced for a perfect recovery.

Gravier has nailed the market timings since February. He took risk off the table ahead of the March crash, then bought back in during the dip. Now he’s cautious again, reducing his exposure to stocks.

A full recovery is still coming in 2021, he predicted, but the ‘perfect trajectory’ will be questioned by the outbreak, geopolitics, and the U.S. election.

Not everyone is so cautious. Analysts are still tripping over themselves to upgrade tech stocks.

Dow digests Wall Street earnings

Second-quarter earnings are finally rolling in. Today it’s the turn of JP Morgan, Citigroup, and Wells Fargo. Gravier is confident that Wall Street has set the bar low enough to beat expectations.

I think that banks, and probably many, many listed companies, they have set expectations in a manner that they make sure they are going to be beaten.

Bank profits were dashed in Q1 as Wall Street set aside billions for a wave of coming loan losses and defaults. Will we see more of the same in Q2?

The good news is analysts aren’t expecting a a 2008-style collapse. Banks are better capitalized and operate stricter loan standards than the last recession. Not to mention, the trillions of dollars of fresh liquidity sloshing through the financial backend. Gravier summed up his thoughts:

I’m not worried about the level of capitalization of banks in the context of massive liquidity injections. There is no systemic risk whatsoever.

What about the growing outbreak?

Rising cases across the U.S. remain a headwind for investors. California Governor Gavin Newsom tightened restrictions in at least 30 counties. Gyms, churches, hair salons, movie theatres, and bars were forced to close for a second time. Indoor dining is now prohibited.

Why is the Dow rising despite this sweeping rollback? Hartmut Issel of UBS Wealth Management offered an answer in an interview with CNBC this morning.

I don’t think the market is ignoring it as such. What the market is doing in my view, is pricing 2021. And in 2021 most of Covid is gone.

The stock market right now is overlooking the disastrous numbers and focusing on the recovery next year. This quarter’s earnings season will give us the first glimpse into whether that recovery is really possible.