Weekly Market Analysis – 12 November 2018 BMO

WEEK IN REVIEW – 05 to 09 NOVEMBER 2018 :
Fed Policy Statement Not Enough to Derail U.S. Midterm Gains

The S&P 500 rose 2.1% this week, but had to weather a late week sell-off after the latest policy statement from the Federal Reserve humbled an upbeat reaction to the midterm elections. Neither outcome was a surprise, but they were representative of recent market volatility. The Dow Jones Industrial Average and the Nasdaq Composite also finished the week higher, adding 2.8% and 0.7%, respectively. The Russell 2000 added 0.1%.

The midterm elections produced a split Congress with the Democrats taking control of the House and the Republicans retaining control of the Senate. The prevailing assumption in the market was that a newly divided Congress would preserve market-friendly policies, namely the tax cut and deregulation efforts. In addition, investors took delight in the fact that the stock market has historically done well in years with a Republican president and split Congress.

The Fed released its policy statement on Thursday, in which it decided to leave the fed funds rate unchanged as expected. The central bank noted that it expects further rate hikes that are consistent with sustained economic growth, strong labor market conditions, and inflation near its symmetric 2% target over the medium term, but omitted October’s sell-off and U.S.-China trade developments from its policy statement. Those omissions were a clear, between-the-lines message that the FOMC remains poised to raise rates for a fourth time this year in December.

In the stock market, the health care (+4.0%), real estate (+3.6%), and utility (+3.1%) groups led the way. Of note, health care has surpassed the information technology (+1.4%) and consumer discretionary (+2.0%) sectors for the top spot in the yearly sector standings with a 2018 gain of 12.4%. For comparison, tech is up 10.7%, and consumer discretionary is up 10.9%.

Conversely, the communication services sector was the only group to finish in negative territory with a weekly loss of 0.2%.

In earnings, some notable companies that had upbeat reports included Berkshire Hathaway (BRK.B), CVS (CVS), Eli Lilly (LLY), Humana (HUM), and Walt Disney (DIS). On the other hand, Skyworks Solution (SWKS) led chip stocks lower on Friday after it issued below-consensus Q1 earnings and revenue guidance. Skyworks, which is an Apple (AAPL) supplier, warned of slowing chip demand, continuing a disappointing trend out of the semiconductor industry.

On a related note, Japan’s Nikkei Asian Review reported that Apple decided to cancel a production increase in its newest low-end iPhone XR. However, the Nikkei also said that demand for the older generation iPhone 8 and iPhone 8 Plus has been higher than expected. Nevertheless, the report corroborated fears over the company reaching peak iPhone sales.

In politics, Attorney General Jeff Sessions resigned his post effective immediately per President Trump’s request. Pot stocks initially surged in response to his resignation, as his adamant anti-marijuana stance has been seen as a roadblock to advancing the national discussion for legalization. However, pot stocks pulled back as replacement names currently being floated are against marijuana legalization; acting Attorney General Matthew Whitaker has a mixed record on the issue.

Looking at other markets, U.S. Treasuries had a volatile week, and closed near last week’s levels. This week, the 2-yr yield decreased two basis points to 2.91%, and the 10-yr yield added two basis points to 3.21%.

Also of note, WTI crude lost 4.8% this week, entering bear market territory and extending its decline from last month’s four-year high. U.S. President Donald Trump granted temporary wavers on Monday to eight countries who import oil from Iran after the U.S.’s energy sanctions on the OPEC member were officially reimposed.

(Economic Excerpts from Briefing.com)

U.S. ECONOMIC UPDATE

Monday 05 November:

ISM Non-Manufacturing Index Sees Some Natural Slowing in October

The ISM Non-Manufacturing Index for October checked in at 60.3% (consensus 58.8%).  That was down slightly from 61.6% in September, which was the highest reading for the composite index since its inception in 2008.

The key takeaway from the report is that business activity in the non-manufacturing sector is still strong, as the October deceleration can be interpreted at this juncture as a natural slowing following some solid acceleration since July when the index registered 55.7%.

Wednesday 07 November:

Consumer Credit Expansion Softens in September 

Total outstanding consumer credit increased by $11.0 billion in September after increasing an upwardly revised $22.8 billion (from $20.1 billion) in August.

The key takeaway from the report is that it reflects a deceleration in credit expansion that could contribute to concerns about the U.S. economy hitting/nearing peak growth.

Thursday 08 November:

Initial and Continuing Claims Continue to Garner Fed’s Close Attention

Initial claims for the week ending November 3 decreased by 1,000 to 214,000 (consensus 213,000) while continuing claims for the week ending October 27 decreased by 8,000 to 1.623 million.

The key takeaway from the report is that it is supportive of the Federal Reserve’s rate-hike bias.

Friday 09 November:

October PPI Generates Some Inflation Surprise

The Producer Price Index for final demand jumped 0.6% in October (consensus +0.2%) while the index for final demand, less food and energy, rose 0.5% (consensus +0.2%).

Those increases left the index for final demand up 2.9% year-over-year, versus 2.6% in September, and the index for final demand, less food and energy, up 2.6% year-over-year, versus 2.5% in September.

The key takeaway from the report is that it will stoke concerns about pass-through inflation to the consumer, which have already been stoked by numerous companies during the third quarter earnings-reporting period talking about higher input costs and increasing prices.

Consumer Sentiment Holds at High Level in November

The preliminary University of Michigan Index of Consumer Sentiment for November held quite steady, edging down to 98.3 (consensus 98.0) from the final reading of 98.6 for October.

The key takeaway from the report is that stock market sell-off in October had no real impact on consumer sentiment, which was rooted more in favorable views about income expectations and job growth that are key drivers of consumer spending.

Wholesale Inventories Increase in September 

Wholesale inventories increased 0.4% in September (consensus 0.3%) on top of a downwardly revised 0.9% increase (from 1.0%) in August. Wholesale sales were up 0.2% following a 0.7% increase in August.

The key takeaway from the report is that sales are increasing year-over-year at a faster rate than inventories, which can be a precursor to improved pricing power for wholesalers.

Other International Events of Interest

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FOMC Monetary Policy Statement
Thursday 08 November
Fed leaves rates unchanged at 2.00-2.25%
Economic activity has been rising at strong rate

Fed Talk: A Policy Directive with a Hitch

The November Federal Open Market Committee (FOMC) meeting went off without a hitch. There was unanimity in the decision to leave the target range for the fed funds rate unchanged at 2.00% to 2.25%.  In turn, there were a lot of similarities in the wording of the November directive with the one issued in September.

The one hitch, if it can be called that, is that the FOMC statement acknowledged business fixed investment has moderated. Even so, the FOMC still expects “further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.”

There was no mention of concerns related to the stock market sell-off in October or the increase in protectionist trade measures. Those omissions were a clear, between-the-lines message that the FOMC remains poised to raise the target range for the fed funds rate again in December.

This directive shouldn’t elicit much of a trading response since it was very much in-line with prevailing expectations ahead of its release. Nevertheless, it serves as a timely reminder that monetary policy is less of a friend to the stock market than it was in the past.

The Federal Reserve says the risks to the economic outlook appear roughly balanced, yet that isn’t the case with monetary policy itself.  The risk with the fed funds rate is tilted to the upside since labor market conditions remain strong and inflation trends are firm.

The latest FOMC meeting may have been conducted without a hitch, yet that doesn’t mean there isn’t a hitch for the stock and bond markets.

The specter of rising rates is plain to see, yet there is ongoing uncertainty over how much further the target range for the fed funds rate will increase. That will be an ongoing source of volatility for both markets.

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Friday 09 November
S&P500 Pulls Back from Midterm Election Spike

The S&P 500 lost 0.9% on Friday, with the pullback suggesting a natural consequence of an overreaction to this week’s election spike. The Dow Jones Industrial Average lost 0.8%, the Nasdaq Composite lost 1.7%, and the Russell 2000 lost 1.8%. For the week, the S&P 500 advanced 2.1%.

Outperforming the broader market on Friday were the defensive-oriented consumer staples (+0.5%), real estate (+0.1%), and utilities (+0.1%) sectors. Conversely, FANG stocks within the lagging communication services (-1.5%), consumer discretionary (-1.5%), and information technology (-1.7%) sectors underperformed. Netflix led the FANG group lower with a loss of 4.6%. Apple (AAPL), Amazon (AMZN), Alphabet (GOOG), and Facebook (FB) bared losses between 1.5% and 2.4%.

Chip stocks dragged on the lagging tech sector, as key Apple supplier Skyworks Solutions (SWKS) fell 8.1% after it issued below-consensus top and bottom line guidance for its fiscal first quarter. Its guidance has extended a trend within the semiconductor industry that has warned of slowing chip demand. The Philadelphia Semiconductor Index lost 1.9%.

In other corporate news, Walt Disney (DIS) rose after an upbeat earnings report, while General Electric (GE) took a hit after JPMorgan cut its price target on the stock to $6 from $10. In response, the former Dow component responded that it is a “fundamentally strong company with a sound liquidity position,” according to a CNBC report.

Demand for Treasuries increased amid the equity setback, pushing yields lower across the curve. The 2-yr yield lost four basis points to 2.93%, and the 10-yr yield lost five basis points to 3.19%. For the week, the 2-yr yield added two basis points, while the 10-yr yield shed two basis points.

Separately, WTI crude, which is the U.S. benchmark for oil, fell 0.9% to settle at $60.16/bbl. Friday’s loss has extended its decline to 21.8% from its Oct 3 four-year high. On a related note, the oil-sensitive energy sector lost 0.4% on Friday.

In trade news, White House National Trade Council Director Peter Navarro made some combative comments against CEOs for pushing President Trump to make a trade deal with China and stated a trade deal will be on the president’s terms. Separately, President Trump has reportedly been telling associates that he wants to replace Commerce Secretary Wilbur Ross by the end of the year.

Overseas, China reported just a 0.2% rise in its Consumer Price Index on Friday, which was in-line with estimates but significantly below last month’s increase of 0.7%. Its softening inflation has continued to fuel concerns over a slowing Chinese economy.

Market Internals – Friday 09 November 2018

Dollar: October High in Sight

The U.S. Dollar Index closed up 0.2% at 96.90, in its second consecutive advance. The Dollar Index built on Thursday’s rally, but Friday’s uptick was more modest. The dollar saw some pressure in morning trade, but pullbacks have been met with rebounds to fresh highs, putting the Index just below its high from October (97.20). The Dollar Index gained 0.4% for the week after being down 0.9% on Wednesday morning.

Bonds: Belly of the Curve Leads Treasuries Higher

U.S. Treasuries ended the week on a flatter note across the curve. Treasuries started the Friday session on a higher note after Treasury futures rallied during a weak overnight showing from Asian and European equity markets. Treasuries backed down from their opening levels after the release of a hotter than expected PPI report for October (actual 0.6%; consensus 0.2%), but it wasn’t long before the complex reversed again, rising to fresh highs. Treasuries continued advancing into the early afternoon against the backdrop of falling equities and continued weakness in crude oil. Crude oil futures saw their tenth consecutive decline, which pressured price to levels from early March. The nine-day slide makes for a continuation of selling pressure that appeared in October. Crude oil is now down nearly 22.0% from its early-October high, fueling concerns that the recent weakness is a statement about fading global growth. The Treasury yield curve faced notable flattening pressure this week, as the 2s10s spread tightened by four basis points to 26 bps while the 2s30s spread narrowed by eight basis points to 46 bps.

The yield curve flattened across the board. The spread between the 5s10s narrowed to 15bps from 17bps the previous week while the 10s30s narrowed to 20bps from 24bps the previous week. The 2-30 spread has widened to 100bps from 54bps a week ago.

Commodities 

The Bloomberg Commodity Index settled at 82.89, lower than 83.88 the previous week as energy and metals took a lot of pressure.

WTI oil fell, settling the week at $60.19. The spread between WTI and Brent widened to $9.99 from $9.69 the previous week as Brent settled at $70.18 p/b.

EIA petroleum data for the week ended November 02

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 5.8 mln barrels from the previous week. At 431.8 mln barrels, U.S. crude oil inventories are about 3% above the five year average for this time of year. Total motor gasoline inventories increased by 1.9 mln barrels last week and are about 8% above the five year average for this time of year. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories decreased by 3.5 mln barrels last week and are about 6% below the five year average for this time of year. Propane/propylene inventories increased by 1.5 mln barrels last week and are at the five year average for this time of year. Total commercial petroleum inventories increased last week by 4.8 mln barrels last week. 

Natural gas inventory showed a build of 65 bcf vs a build of 8 bcf in the prior week. Working gas in storage was 3,208 Bcf as of Friday, November 2, 2018, according to EIA estimates. This represents a net increase of 65 Bcf from the previous week. Stocks were 580 Bcf less than last year at this time and 621 Bcf below the five-year average of 3,829 Bcf. At 3,208 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count increased by +14 to 1081 following last week’s decrease of -1.

Metals: Precious Corrrects Further

Agriculture: Grains Falter

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THE WEEK AHEAD
Week 46 (November 12 to 16)

According to our 5, 10 and 15 year seasonal models;

Benchmarks Indices (21 year average) for wk46:

Week 46 Key Economic Dates

In the coming week the most important releases include US inflation, retail sales and industrial production; UK inflation and employment; Germany and Japan Q3 GDP growth; China industrial output, retail sales and fixed asset investment; India inflation; and Australia employment.

Mon 12 November

Tue 13 November

Wed 14 November

Thu 15 November

Fri 16 November

Earnings 

Third quarter earnings season is wrapping up with 90% of the S&P 500 having reported quarterly results. Third quarter EPS are now expected to grow just over 25% in aggregate with sales up 9.3%. Expectations were for 19% EPS growth with sales up 7% heading into the reporting season. Just over 77% of the S&P 500 beat earnings estimates while 62% beat revenue estimates; 52% traded higher in response.

Fourth quarter EPS are expected to grow 14.3% with sales up 6.7%. Expectations were for 17% EPS growth with revenue up 6.5% one month ago. Estimates for the following quarter normally get pared down a bit based on conservative guidance but higher input costs (raw materials, transportation, wages, etc.) have consistently been cited as a headwind this earnings season.

For 2018 as a whole, S&P 500 EPS are expected to grow 20.6% with sales up 9%, marginally higher than one month ago. In 2019, EPS are expected to grow 9% with sales up 5.5%. But third quarter earnings season isn’t over just yet. Retail earnings season starts kicks off next week and ends Earnings Season on Thursday with WMT’s results.

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COMMENTARY

“I might start lightening my hedges and prepare for the annual year-end bull run if this market doesn’t fall apart after the FOMC Policy Meeting.”

It’s the last week of earnings season and its back to normal trading without the excessive volatility. I am expecting to see some semblance of normalcy returning to the market. If it does this week, I am back to the usual seasonal trades starting with the retail sector as earnings season winds down.

Happy Hunting!

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Comments Off on Weekly Market Analysis – 05 November 2018 BMO

Weekly Market Analysis – 05 November 2018 BMO

WEEK IN REVIEW – 29 OCTOBER to 02 NOVEMBER 2018 :
Stocks Stage Rebound Following October Sell-Off

The S&P 500 staged a rebound effort this week, tallying a 2.4% weekly gain. The continued expectation that the market was due for a bounce-back after last month’s sell-off, compounded with mostly upbeat earnings and easing trade tensions underpinned the rally. As for the other major averages, the blue-chip Dow Jones Industrial Average gained 2.4%, the tech-sensitive Nasdaq Composite gained 2.7%, and the small-cap Russell 2000 gained 4.3%.

Cyclical sectors were largely the best-performing groups this week, with the lightly-weighted materials sector (+6.1%) and the heavily-weighted financials (+4.4%) sectors leading the advance. The consumer discretionary sector (+4.0%) also had a notable gain. On the downside, utilities was the only group to settle in the red, losing 0.6%.

U.S.-China trade tensions eased this week, with U.S. President Trump saying that he had a “long and very good conversation” with China’s President Xi, adding that the two leaders will be getting together at the upcoming G-20 summit in Argentina. There were some conflicting reports as to whether Mr. Trump has asked his cabinet to begin drafting a trade deal, but the president did say he thinks a deal will eventually be reached.

On the earnings front, Facebook‘s (FB) third quarter report was “good enough” to temper negativity surrounding the stock, helping to ease growth-related worries. Apple (AAPL), on the other hand, raised some red flags after forecasting softer-than-expected revenue guidance for the holiday quarter and announcing that it will no longer provide unit-sales data for the iPhone, iPad, and Mac.

Other notable companies to report earnings this week included Pfizer (PFE), Coca-Cola (KO), Chevron (CVX), Exxon Mobil (XOM), General Motors (GM), eBay (EBAY), T-Mobile US (TMUS), DowDuPont (DWDP), and Starbucks (SBUX), all of which beat estimates. Conversely, results from General Electric (GE), Kellogg (K), Spotify (SPOT), and Wayfair (W) came in below consensus.

In M&A news, IBM (IBM) acquired Red Hat (RHT) over the weekend for an all-cash offer of $190 per share; that represents a 63% premium over Red Hat’s October 26 closing price.

Highlighting this week’s batch of economic data was the Employment Situation report for October. Nonfarm payrolls increased by 250,000, higher than the Briefing.com consensus of 190,000, while average hourly earnings increased 0.2% as expected. The unemployment rate remained at a nearly 50-year low of 3.7%. The key takeaway from the report is that it is consistent with labor market trends that will keep the Federal Reserve on a tightening path. The U.S. Federal Reserve will be meeting next week, but no rate hike is expected until December.

Overseas, European and Asian stocks rose with Wall Street this week. In Germany, Chancellor Angela Merkel announced that she won’t be seeking re-election as head of the CDU, following disappointing results for her party in a regional election. Her plan, however, is to remain Chancellor until 2021. Meanwhile, the Bank of England and the Bank of Japan released their latest policy decisions, keeping interest rates unchanged.

(Economic Excerpts from Briefing.com)

U.S. ECONOMIC UPDATE

Monday 29 October:

Spending outpaces income in September 

Personal income increased 0.2% in September (consensus +0.4%) while personal spending jumped 0.4% (consensus +0.4%). The PCE Price Index was up 0.1% (consensus +0.1%) while the core PCE Price Index, which excludes food and energy, increased 0.2% (consensus +0.1%).

The key takeaway from the report is the recognition that PCE price inflation decelerated to 2.0% year-over-year from 2.2% in August. Core PCE price inflation held steady at 2.0%. The inflation readings are on par with the Federal Reserve’s longer run target, yet they haven’t moved to such a degree that they are going to alter the Federal Reserve’s current policy stance, which involves an expectation for further gradual rate hikes.

Tuesday 30 October:

Consumer Confidence Picks Up in October; Highest since September 2000

The Conference Board’s Consumer Confidence Index, which revolves heavily around labor market and business conditions, increased to 137.9 in October (consensus 135.8) from a downwardly revised 135.3 (from 138.4) in September.   The October reading is the highest since September 2000.

The key takeaway from the report is that strong employment growth continues to underpin favorable consumer attitudes about present-day conditions and the outlook.

Wednesday 31 October:

Q3 Employment Cost Index Points to Rising Employment Costs

The third quarter employment cost index increased 0.8% (consensus +0.7) versus 0.6% in the second quarter.  Wages and salaries, which comprise about 70% of compensation costs, increased 0.9%, while benefit costs jumped 0.4%.

The key takeaway from the report is that it corroborates a trend of rising compensation costs for civilian workers that have been discussed by employers and which have kept the Federal Reserve on a tightening path.

October ADP above expectations; 227K vs consensus of 180K; September was 230K

Commentary;

Thursday 01 November:

Q3 Productivity shows a move in the right direction

Third quarter productivity increased 2.2% (consensus 2.1%) on the heels of an upwardly revised 3.0% (from 2.9%) in the second quarter. Unit labor costs rose 1.2% (consensus 1.1%) following a downwardly revised 1.1% decline (from -1.0%) in the second quarter.

The key takeaway from the report is that productivity is picking up. The third quarter increase was double the prior 10-quarter average increase of 1.1%. Faster productivity is a springboard for a better standard of living.

Unemployment claims remain on historically low side

Initial claims for the week ending October 27 decreased by 2,000 to 214,000 (consensus 213,000). Continuing claims for the week ending October 20 decreased by 7,000 to 1.631 million, which is the lowest level since July 28, 1973.

The key takeaway from the report is that the low level of initial and continuing claims remains indicative of a tight labor market.

ISM Manufacturing Index points to some deceleration in October

The ISM Manufacturing Index for October checked in at 57.7% (consensus 59.0%) versus 59.8% in September.  It is important to note that the September reading was close to an 18-year high.

The key takeaway from the report is that the pullback is most likely a natural slowing of activity following what has been an impressive acceleration in manufacturing activity on a national level.  That point notwithstanding, the deceleration in what has been one of the hottest sectors will feed into the peak-growth narrative that has been prominent of late.

Construction Spending flat in September

Total construction spending in September was little changed from August (consensus +0.2%) following an upwardly revised 0.8% increase (from +0.1%) in August.

The key takeaway from the report is the recognition that there was no growth in public construction spending in September.

Friday 02 November:

October Employment Report to Keep Fed on Tightening Path

The key takeaway from the October employment report is that it is consistent with labor market trends that will keep the Federal Reserve on a tightening path. Nonfarm payroll growth is strong, the labor force participation rate is increasing, and most importantly, average hourly earnings growth is trending higher at 3.1% year-over-year, its strongest pace since April 2009.

September Trade Deficit Widens, which Is More of the Same 

The Trade Balance Report for September showed a widening in the trade deficit to $54.0 billion (consensus -$53.4B) from a downwardly revised $53.3 billion (from -$53.2 billion) in August.

The key takeaway from the report is the same as last month in that it has yet to confirm the tariff actions are succeeding in cutting the trade deficit with China specifically and in general.

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Friday 02 November
Apple, Conflicting Trade News Drag Market Lower

Stocks fell on Friday following conflicting U.S.-China trade reports and softer-than-expected sales guidance from Apple (AAPL 207.48). Futures rallied overnight on a Bloomberg report indicating U.S. President Trump asked his cabinet to draft a trade deal, but stocks eventually fell into negative territory after White House officials denied the report.

The S&P 500 lost 0.6%, the Dow Jones Industrial Average lost 0.4%, and the Nasdaq Composite lost 1.0%. Small caps outperformed, with the Russell 2000 adding 0.2%. All four major indices closed solidly higher for the week, adding between 2.4% and 4.3% apiece.

Director of the United States National Economic Council Larry Kudlow confirmed in a CNBC interview that the cabinet was not asked by President Trump to draw up a trade plan for China. Later, as stocks traded at session lows, President Trump reiterated his belief to reporters that the U.S. will reach a trade deal with China. This led stocks to cut their losses in late afternoon trading.

In earnings, Apple raised some red flags after forecasting weaker-than-expected sales for the holiday quarter and announcing it will no longer provide unit-sales data for the iPhone, iPad, and Mac moving forward. The company did beat both top and bottom line estimates though.

On the other hand, energy Dow components Exxon Mobil (XOM) and Chevron (CVX) rose after both reported above-consensus earnings. The energy sector showed relative strength, but still lost 0.1%. On a related note, WTI crude extended its recent downward trend, losing 0.9% to $63.20/bbl and reaching its lowest level since April.

Highlighting Friday’s batch of economic data was the influential Employment Situation report for October, which showed a nonfarm payrolls increase of 250,000, higher than the Briefing.com consensus of 190,000. Also, as expected, average hourly earnings increased 0.2%, and the unemployment rate remained at 3.7%.

In short, the strong jobs report validated labor market trends that will keep the Federal Reserve on a tightening path. The CME FedWatch Tool indicated a 80.7% chance of another Fed rate hike in December, up from a 74.5% chance the previous day. The Fed will meet next week, but no rate hike is expected.

Treasuries sold-off with equities on Friday, pushing yields notably higher across the curve. The Fed-sensitive 2-yr yield and benchmark 10-yr yield spiked seven basis points each to 2.91% and 3.21%, respectively, compared to 2.81% and 3.08% yields last week. Also, the U.S. Dollar Index added 0.2% to 96.48.

Market Internals – Friday 02 November 2018

Dollar: Overnight Loss Erased

The U.S. Dollar Index closed up 0.2% at 96.50 after reclaiming its overnight decline on Friday. The Dollar Index saw a continuation of Thursday’s retreat in overnight trade, as market participants focused on conciliatory-sounding remarks from President Trump and Chinese President Xi Jinping. China’s President Xi said that both he and President Trump want to expand China-US trade cooperation while a separate report indicated that President Trump asked his cabinet to draft a trade deal for the two countries. The Dollar Index hit a session low in Friday’s early-morning trade and rebounded shortly thereafter. The rebound took place after CNBC correspondent Eamon Javers reported that a senior administration official told him that “There is a long way to go” in negotiations. The Index accelerated its rebound after the release of another solid Employment Situation report. It is worth noting that National Economic Council Director Larry Kudlow appeared on CNBC in the early afternoon, saying it is not true that the cabinet was asked to draft a trade deal. The U.S. Dollar Index booked its third consecutive weekly advance, having climbed 0.2% since last Friday.

Bonds: 30-Yr Yield Hits Four-Year High

U.S. Treasuries ended the week on a lower note with the 30-yr yield rising to its highest level since July 2014. The overnight session saw an upbeat showing from equity markets in Asia as participants locked in on positive-sounding comments from the Chinese president and a Bloomberg report, which suggested that President Trump ordered his cabinet to prepare a draft for a trade deal with China. However, it wasn’t long before CNBC’s Washington correspondent Eamon Javers reported that a senior administration official told him that “There is a long way to go” in negotiations with China. That revelation was followed by the release of a solid Employment Situation report for October, which stayed true to the trend observed in recent years. Treasuries spent the session in a steady retreat while the U.S. Dollar Index (96.55, +0.28) rebounded off its overnight low as optimism about an immediate relief to U.S.-China tensions dissipated. The Dollar Index jumped to a fresh high in the afternoon, extending its advance after National Economic Council Director Larry Kudlow told CNBC it is not true that the cabinet was asked to draft a trade deal. Treasuries of all tenors finished the session on their lows.

The yield curve rose across the board. The spread between the 5s10s was unchanged at 17bps from 17bps the previous week while the 10s30s maintained its 24bps spread from 24bps the previous week. 

Commodities 

The Bloomberg Commodity Index settled at 83.88, lower than 85.00 the previous week.

WTI oil fell, settling the week at $63.14. The spread between WTI and Brent narrowed to $9.69 from $10.03 the previous week as Brent settled at $72.83 p/b.

EIA petroleum data for the week ended October 26

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 3.2 mln barrels from the previous week. At 426.0 mln barrels, U.S. crude oil inventories are about 2% above the five year average for this time of year. Total motor gasoline inventories decreased by 3.2 mln barrels last week and are about 6% above the five year average for this time of year. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories decreased by 4.1 mln barrels last week and are about 5% below the five year average for this time of year. Propane/propylene inventories increased by 1.0 mln barrels last week and are about 3% below the five year average for this time of year. Total commercial petroleum inventories decreased last week by 6.4 mln barrels last week.

Natural gas inventory showed a build of 48 bcf vs a build of 58 bcf in the prior week. Working gas in storage was 3,143 Bcf as of Friday, October 26, 2018, according to EIA estimates. This represents a net increase of 48 Bcf from the previous week. Stocks were 623 Bcf less than last year at this time and 638 Bcf below the five-year average of 3,781 Bcf. At 3,143 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count decreased by -1 to 1067 following last week’s increase of 1.

Metals: Gold Drops, Copper Continues Strength

Agriculture: Grains Bounce

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THE WEEK AHEAD
Week 45 (November 05 to 09)

According to our 5, 10 and 15 year seasonal models;

Benchmarks Indices (21 year average) for wk45:

Week 45 Key Economic Dates

For the coming week, the Fed will decide on monetary policy. Other important releases for the US: ISM Non-Manufacturing PMI, preliminary Michigan consumer sentiment, and producer prices.

Elsewhere: UK Q3 GDP growth; China foreign trade and inflation; and RBA interest rate decision will also be in the spotlight. Investors will also react to the US midterm elections and President Xi Jinping speech.

Mon 05 November

Tue 06 November

Wed 07 November

Thu 08 November

Fri 09 November

Earnings 

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

COMMENTARY

“I remain bearish (but less so now) and heavily hedged on my longs. The coming week is only the second of three of the busiest weeks in earnings season. If you’re thinking of turning Bear now, you might just be a tad late. Stay safe and stay out – never chase the trend.”

That turned out to be pretty sound advice. Now that the major benchmarks are above their respective 200DSMAs, let’s see if they are able to stay above it in the coming two weeks given that the end of this coming week is traditionally quite bearish. I might start lightening my hedges and prepare for the annual year-end bull run if this market doesn’t fall apart after the FOMC Policy Meeting.

Happy Hunting!

~~~~~~~~~~~~~~~~~~~~~~~~~~~

For more than 12 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive environment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

If you’re looking to make a huge difference in your financial life and get the most value our of your education investment, there’s no better choice than the time-tested and well reputed Pattern Trader™ Tutorial

Download our promo slides here:
The Pattern Trader™ Tutorial 2019

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The schedule for the FEBRUARY 2019 Batch is here:
Pattern Trader™ Tutorial – February 2019

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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Comments Off on Weekly Market Analysis – 29 October 2018 BMO

Weekly Market Analysis – 29 October 2018 BMO

WEEK IN REVIEW – 22 to 26 OCTOBER 2018 :
The Bears Have It Good This October

The Bulls are saying that the stock market just had another terrible, horrible, no good, very bad week, filling in some more blanks on what has been a terrible, horrible, no good, very bad month.

Just how bad has it been?  The Russell 2000 is down 12.5% in October; the Nasdaq Composite is down 10.9%; the S&P 500 is down 8.8%; and the Dow Jones Industrial Average is down 6.7%.

The Bears aren’t complaining. In fact, this has been way overdue and the Bulls are paying back just a little bit compared to what they’ve enjoyed from the over-extended season of gains from the last nine years.

The thrust of matters is that the market is worried about growth.  That might sound odd considering it was revealed on Friday that third quarter real GDP increased at an annual rate of 3.5%, yet it is the sobering message that has resonated loud and clear in the stock market’s price action.

The worry isn’t about the growth that was just left behind.  Rather, it is about the growth to come – or perhaps lack thereof.

There are various explanations regarding the causes of the stock market’s correction: the adverse effect of a strong dollar; the slowdown in China and other foreign markets; tariff issues, raw material price increases; political uncertainty; diplomatic uncertainty; price increases for consumers; rising interest rates; and profit margin pressures.

Ultimately, they all feed into the one thing that matters most for the stock market: earnings growth.

The clearest evidence that the stock market is wrapped up in worries that future earnings growth won’t live up to expectations is in the third quarter earnings results.  They have been quite impressive. 

According to FactSet, the blended third quarter earnings growth rate is 22.5%, up from 19.3% on September 30.  What’s more is that the forward 12-month EPS estimate has increased by 0.8% over the same period.

Analysts, then, aren’t marking down their estimates, yet investors are marking down stock prices sharply, believing those estimates are destined for a downward revision in due time as the effects of tariffs, higher interest rates, and higher operating costs kick in just as the initial thrust of the tax cuts gets kicked out and earnings comparisons become more difficult.

The quantitative result is that there has been a compression in the forward twelve-month P/E ratio to 15.5, versus 16.8, at the beginning of the fourth quarter, according to FactSet, as prices have dropped sharply while the earnings estimate has drifted higher.

Even so, there hasn’t been a concerted effort yet to buy into the weakness, which has been unsettling for investors who have grown accustomed to the stock market, and particularly the mega-cap growth stocks, always bouncing back in confident fashion.

The recognition that any strength has been viewed as an opportunity to sell has shaken investor confidence and has contributed to selling efforts on the part of investors trying to secure profits in crowded trades before they disappear altogether. 

That would take some time yet for anyone buying at the start of this bull market.  To wit, the S&P 500 is still up nearly 300% from its low in March 2009; nevertheless, the ugly price action of late in key leadership stocks (i.e. the FAANG stocks), key leadership groups (i.e. information technology, communication services, consumer discretionary, financials, and industrials), and the major indices has upset the balance of confidence in the stock market.

That all came home to roost in the week that just concluded. 

There were some good reports to be sure and some encouraging reactions to those reports.  Microsoft (MSFT), Tesla (TSLA), Twitter (TWTR), Intel (INTC), and Boeing (BA) come to mind. 

However, the stock market wasn’t governed by their good news.  It was governed by the disappointing guidance from the likes of Caterpillar (CAT), 3M (MMM), Texas Instruments (TXN), Amazon.com (AMZN), Alphabet(GOOG), Mohawk Industries (MHK), Colgate-Palmolive (CL), and Western Digital (WDC) to highlight a few examples.

Nothing cured the stock market this week, because none of its bugaboos got cured.

It is sounding like the trade war between the U.S. and China could be a prolonged one; Italy sounds as if it is thumbing its nose at the EU’s request to revise its budget; Saudi Arabia’s explanation for how Washington Post columnist Jamal Khashoggi died had obvious signs of being a cover up; Brexit negotiations have hit another impasse; the U.S. dollar strengthened; and, perhaps most importantly, Federal Reserve officials continued to make their case for why they think further rate hikes are warranted.

The latter is a central component of why the stock market is wrapped up in growth concerns.  It is bothered by the idea that the Federal Reserve is going to raise rates too much, too soon, and choke off the U.S. economy’s growth trajectory at a time when foreign economies, namely China and Europe, are already slowing down.

The translation heard from the lips of many pundits is that there is a fear of the Federal Reserve making a policy mistake.

Again, though, that gets back to earnings growth concerns, which have fueled broad-based de-risking in the stock market.  All 11 sectors in the S&P 500 ended lower in the week just concluded.  The real estate sector fared the best with a 1.0% decline while the energy sector fared the worst with a 7.1% decline.

There was nowhere to hide other than in cash and risk-free Treasuries.  Yields fell across the curve. The 2-yr note came down 11 basis points to 2.81% and the 10-yr yield dropped 12 basis points to 3.08%.

The fact that the stock market found little comfort in the drop in market rates was a telltale sign that it was a terrible, horrible, no good, very bad week for the bulls caught up in a correction driven by earnings growth concerns.

(Economic Excerpts from Briefing.com)

U.S. ECONOMIC UPDATE

Wednesday 24 October:

October U.S. Markit Manufacturing PMI- Prelim 55.9, Prior 55.6; Services PMI- Prelim 54.7, prior 53.5

Stronger overall business activity growth was driven by the service sector in October, which more than offset a slight loss of momentum in manufacturing. Higher levels of business activity were supported by another sharp rise in new work. Survey respondents noted that improving domestic economic conditions were the main factor behind rising client demand. Robust new business growth placed additional pressure on operating capacity in October, as highlighted by another modest accumulation of unfinished work. Payroll growth remained solid as firms continued to expand capacity, though the rate of private sector job creation eased to its slowest since June 2017

New Home Sales a Real Dud in September

New home sales declined 5.5% month-over-month in September to a seasonally adjusted annual rate of 553,000 (consensus 625,000).  That was the weakest pace since December 2016 and it followed on the heels of a sharp downward revision for August to 585,000 (from 629,000).

The key takeaway from the report is that it underscores how demand is being impacted by rising mortgage rates.  Median and average home prices were both down year-over-year, yet that didn’t seem to provide much of a lift for new home sales.

Thursday 25 October:

Durable Orders Exceed September Estimates

Durable Goods orders for September increased 0.8% (consensus -1.8%) after a revised 4.6% increase (from 4.5%) in August. Excluding transportation, durable goods orders increased 0.1% (consensus 0.3%) after a revised 0.3% increase (from 0.1%) in August.

The key takeaway from the report is that the headline increase was driven by growth in transportation equipment orders and defense aircraft and parts orders while growth in other areas was more of a mixed bag.

Initial Claims Remain Near Multi-Decade Lows

Initial claims for the week ending October 20 increased by 5,000 to 215,000 (consensus 211,000). Continuing claims for the week ending October 13 decreased by 5,000 to 1.636 million, which is the lowest level since August 4, 1973.

The key takeaway from the report is that the trend of steadily decreasing initial and continuing claims has been uninterrupted by today’s report.

Friday 26 October:

Consumer Spending and Inventories Puff Up Q3 GDP

Real GDP increased at an annualized rate of 3.5% (consensus 3.3%) while the price deflator checked in at a lower-than-expected 1.7% (consensus 2.1%).

The key takeaway from the report is that real final sales of domestic product, which subtracts the change in private inventories, were up just 1.4% – the weakest growth rate since the fourth quarter of 2016.

Consumer Sentiment Eases in October, but Still High

The final October reading for the University of Michigan Index of Consumer Sentiment was 98.6, down slightly from the preliminary reading o 99.0 and the final September reading of 100.1.

The key takeaway from the report is that consumer sentiment has not been unduly affected by the stock market sell-off or the jump in interest rates.  The outlook for consumers is still rooted in feelings about job security.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Friday 26 October
S&P 500 Tumbles as Amazon, Alphabet Disappoint

The S&P 500 lost 1.7% in a volatile session on Friday, in which it never touched positive territory. Disappointing earnings reports from Amazon (AMZN) and Alphabet(GOOG) rattled a fragile market pestered by peak-earnings concerns.

The benchmark index briefly dipped into correction territory, characterized by a 10% pullback from a prior high, before it took a sharp turn upwards in late morning trading. Nevertheless, the comeback proved futile, as stocks eventually rolled over again. The 11 S&P 500 sectors all finished lower.

The Dow Jones Industrial Average lost 1.2%, the Nasdaq Composite lost 2.1%, and the Russell 2000 lost 1.1%.

A stronger-than-expected advance Q3 GDP reading (+3.5% actual vs +3.3% consensus) took a backseat in Friday’s trading action to Amazon lowering its fourth quarter revenue guidance and Alphabet missing third quarter revenue expectations. The encouraging headline GDP figure, though, was tempered by the understanding that real final sales, which exclude the change in private inventories, increased just 1.4%, marking the slowest growth rate since the fourth quarter of 2016.

Amazon and Alphabet weighed heavily on the underperforming consumer discretionary (-3.6%) and communication services (-2.4%) sectors, as their disappointments filtered through to other growth stocks, which have been beaten down sharply this month on valuation concerns.

Facebook (FB), Netflix (NFLX), and Apple (AAPL) also backpedaled from notable gains in the previous session, adding pressure to the communication services and information technology (-1.9%) sectors.

In other earnings news, Mohawk Industries (MHK), Western Digital (WDC), and Colgate-Palmolive (CL) contributed to angst over future earnings growth.

Flooring manufacturing company Mohawk cited weakening demand, inflation, and pricing pressures for its lower outlook; Western Digital said customers are being more conservative, resulting in softening demand; and Colgate-Palmolive encountered profit margin pressures from higher raw material and packaging material costs.

Conversely, Dow component Intel (INTC) easily beat consensus revenue and EPS estimates for the third quarter and issued fourth quarter guidance that exceeded analysts’ average estimates. Shares of the chip maker finished 3.1% higher.

U.S. Treasuries prices rose, as the market turmoil drove some safe-haven positioning. The 2-yr yield decreased five basis points to 2.81%, and the 10-yr yield dropped six basis points to 3.08%. The U.S. Dollar Index traded 0.3% lower at 96.37, though not far from its two-month high.

Overseas, markets closed on a downbeat note amid the early negative price action in the U.S. market.

Market Internals – Friday 26 October 2018

Dollar: Index Backtracks From August High

The U.S. Dollar Index closed down at 96.32 after surrendering a modest early Friday-morning gain. The Dollar Index climbed during the European session while European equities faced early selling pressure. The Index marked a session high (96.86) just below its high from August (96.98), but backed off its best level of the session as European equities and the euro rebounded. The Dollar Index booked its second consecutive weekly advance, having climbed 0.8% since last Friday.

Bonds: Treasuries Climb as December Rate Hike Odds Recede

U.S. Treasuries ended the week with gains across the curve. The cash session started with solid gains after Treasury futures rallied amid another weak showing from equity markets in Asia and Europe. Treasuries backed off their starting levels after the release of a slightly stronger than expected advance GDP for the third quarter (actual 3.5%; Briefing.com consensus 3.3%), but that pullback was short-lived. Treasuries overtook their opening levels during a mid-morning push, which coincided with more selling in the stock market. The Treasury complex marked session highs around 11:00 ET, as equities were hitting their lowest levels of the day. Midday action saw Treasuries backpedal to their starting levels while equities reclaimed some of their losses. The recent weakness in stocks and the corresponding bounce in Treasuries have curtailed expectations for a December rate hike, but Federal Reserve officials have not hinted at any imminent changes to the policy course. The implied probability of a December hike declined to 70.3% from 77.1% yesterday and 83.8% one week ago, according to the fed funds futures market.

The yield curve fell across the board with the sharpest drop along the belly of the curve in a steepening move. The spread between the 5s10s widened to 17bps from 15bps the previous week while the 10s30s widened to 24bps from 18bps the previous week. 

Commodities 

The Bloomberg Commodity Index settled at 85.00, lower than 85.95 the previous week as oil, copper and grains lost ground.

WTI oil fell to $66.00 p/b before settling the week at $67.59. The spread between WTI and Brent narrowed to $10.03 from $10.66 the previous week as Brent settled at $77.62 p/b.

EIA petroleum data for the week ended October 19

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 6.3 mln barrels from the previous week. At 422.8 mln barrels, U.S. crude oil inventories are about 2% above the five year average for this time of year. Total motor gasoline inventories decreased by 4.8 mln barrels last week and are about 6% above the five year average for this time of year. Finished gasoline and blending components inventories both decreased last week. Distillate fuel inventories decreased by 2.3 mln barrels last week and are about 4% below the five year average for this time of year. Propane/propylene inventories decreased by 0.3 mln barrels last week and are about 4% below the five year average for this time of year. Total commercial petroleum inventories decreased last week by 8.0 mln barrels last week.

Natural gas inventory showed a build of 58 bcf vs a build of 81 bcf in the prior week. Working gas in storage was 3,095 Bcf as of Friday, October 19, 2018, according to EIA estimates. This represents a net increase of 58 Bcf from the previous week. Stocks were 606 Bcf less than last year at this time and 624 Bcf below the five-year average of 3,719 Bcf. At 3,095 Bcf, total working gas is below the five-year historical range

Baker Hughes total U.S. rig count increased by +1 to 1068 following last week’s increase of 4.

Metals: Precious Gain, Copper Corrects

Agriculture: Corn Consolidates, Wheat and Soy continue to fall

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

ASIA-PACIFIC REGION

As of Friday’s close, the Shanghai Composite has lost -49.81% from its 2015 high of 5,178.19 and continues to dive deeper into Bear Market territory having lost -21.42% YTD and -23.73% YonY.

Singapore’s Straits Times Index (STI) closed at 2,972.02, breaking below its critical 3,000 support for the first time since January 2017. The STI is now down -12.66% YTD and -8.13% YonY and is digging deeper below its 200DSMA.

Japan’s Nikkei 225 gave up gains to slip 0.4 percent by the closing bell to 21,184.6 while the Topix index declined by 0.31 percent to 1,596.01.

South Korea’s Kospi dropped 1.75 percent to close at 2,027.15 while the Kosdaq index fell 3.46 percent to 663.07.

Australia’s ASX 200 closed near flat at 5,665.2, with the heavily weighted financial subindex up by 0.35 percent.

India’s Sensex lost 1.0%, widening this week’s decline to 4.0%.

Economic Data

News

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE MONTH AHEAD

November is the second month of Quarter Four and the end of Earnings Season for Q3 results. November starts the “Best Six Months” on the DOW and S&P and also begins the “Best Eight Months” on the NASDAQ

October 2018 has twenty (20) trading sessions, one half-day session and one public holiday. November 23 is Black Friday – the start of Christmas Sales. Black Friday is always the Friday after Thanksgiving. 

November Trivia

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD
Week 44 (October 29 to November 02)

According to our 5, 10 and 15 year seasonal models;

Benchmarks Indices (21 year average) for wk44:

Week 44 Key Economic Dates

In the coming week, important releases for the US include the jobs report and unemployment rate, ISM Manufacturing PMI, personal income and spending and PCE prices.

Elsewhere: Interest rate decisions from the BoE and the BoJ; Eurozone Q3 GDP growth; China NBS PMIs and Caixin Manufacturing PMI; and UK budget announcement will also be in the spotlight.

Mon 29 October

Tue 30 October

Wed 31 October

Thu 01 November

Fri 02 November

Earnings 

Big Tech and Big Industrials dominate the coming week’s earnings schedule. Big Oil’s results then ends the second-most busiest week of earnings season.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

TECHNICALS

S&P and Dow Jones closed in negative territory for the year.  The Nasdaq still remains positive on the year while Small & MidCaps have been negative since their aggressive breakdowns below their 200DSMAs early in the month.

All the technical signals have been triggered in the last two weeks with all four benchmarks closing the week below their 200DSMA to signal a Technically Bearish Market. All four benchmarks are also in Correction Territory as of Friday’s close, trading more than 10 percent below its record high reached in September.

Seven of the 11 S&P 500 sectors are down at least 10 percent from their 52-week highs, including energy, materials and financials. Around three quarters of the index’s stocks are also in a correction. At this rate, we’re likely to see the ultimate Death Cross (50DSMA crossing below the 200DSMA) within two weeks.

Even before October has ended, the DOW is already being threatened by its first bearish monthly MACD histogram. As you can see, the MACD histograms in this configuration rarely turns for little or no reason.

COMMENTARY

“I can’t see any reason for this technically bearish signal to be sustained. If we do get a few surprises that shock the market into lower lows, I will be ready as I have not changed my stance from the last two weeks. I am still not a buyer and will stay heavily hedged or short with tight stops.

That was really a good – and profitable – decision to stay hedged and bearish. 

Now as the market delves deeper into bearish territory, let’s see if the dip-buyers come back. Their failure to return will surely spark a further sell-off especially if the Bears stay stubborn and not cover their shorts. Should that happen, I’ll be expecting the yield curve to flatten in a hurry as more monies find a flight to safety amidst the aforementioned uncertainties; a strong dollar, the slowdown in China and other foreign markets, tariff issues, raw material price increases, political uncertainty, diplomatic uncertainty, price increases for consumers, rising interest rates, profit margin pressures and earnings growth.

Cleveland’s Fed Chair, Loretta Mester (Voting Member) said this week that the current volatility is “a natural thing” and I have to agree with her. (Read: Market turmoil is a “risk”) Such is the nature of October’s Earnings Season. The irrational fear of the October Effect especially against a backdrop of over-priced stocks will make any sensible investor nervous and twitchy.

So if this “natural thing” does the normal thing, we should be seeing a bottom very soon and be back on the way up by mid-November. I still maintain that the U.S. economy remains lofty with no damaging signs that would imply any economic weakness or failure for the next quarter or two. 

I remain bearish (but less so now) and heavily hedged on my longs. The coming week is only the second of three of the busiest weeks in earnings season. If you’re thinking of turning Bear now, you might just be a tad late. Stay safe and stay out – never chase the trend.

Happy Hunting!

~~~~~~~~~~~~~~~~~~~~~~~~~~~

For more than 12 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive environment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

If you’re looking to make a huge difference in your financial life and get the most value our of your education investment, there’s no better choice than the time-tested and well reputed Pattern Trader™ Tutorial

Download our promo slides here:
The Pattern Trader™ Tutorial 2019

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The schedule for the FEBRUARY 2019 Batch is here:
Pattern Trader™ Tutorial – February 2019

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Screen Shot 2017-10-01 at 1.38.39 PM

Connect with me at LinkedIn

Share
Comments Off on Weekly Market Analysis – 22 October 2018 BMO

Weekly Market Analysis – 22 October 2018 BMO

WEEK IN REVIEW – 15 to 19 OCTOBER 2018 :
Mixed Outing As Earnings Season Ramps Up

Stocks had a mixed outing this week after suffering heavy losses in the week prior. The benchmark S&P 500 finished flat, leaving its October loss at 5.0%, and the blue-chip Dow ticked up 0.4%. Conversely, the tech-heavy Nasdaq fell 0.6%, and the small-cap Russell 2000 lost 0.3%.

The third quarter earnings season ramped up this week after kicking off last Friday. Financial companies Goldman Sachs (GS), Morgan Stanley (MS), Bank of America(BAC), U.S. Bancorp (USB), Charles Schwab (SCHW), and BlackRock (BLK) reported mostly better-than-expected profits, helping to boost the S&P financial sector 0.8% higher.

Meanwhile, the health care sector rallied 0.5% after Dow components Johnson & Johnson (JNJ) and UnitedHealth (UNH) beat earnings estimates and issued above-consensus guidance.

Software giant Adobe Systems (ADBE) surged nearly 10% on Tuesday after it reaffirmed fourth quarter guidance and said it expects FY19 revenues to be up 20%. The information technology sector trailed the broader market this week overall though, losing 1.2%. Chipmakers were relatively weak, with the Philadelphia Semiconductor Index falling 2.2%.

Netflix (NFLX) was another notable name on this week’s earnings calendar. The streaming media giant beat bottom-line estimates and reported higher-than-expected subscriber growth by adding nearly seven million new subscribers last quarter – six million coming from overseas. However, shares fell later in the week on news that The Wall Street Journal is investigating the company’s corporate culture.

Away from earnings, home-improvement retailers Home Depot (HD) and Lowe’s (LOW) sold off on Wednesday following some disappointing housing data. Housing starts rose to a seasonally adjusted annualized rate of 1.201 million units in September, below the consensus estimate of 1.221 million, and building permits declined to a seasonally adjusted annualized rate of 1.241 million, also below the Briefing.com consensus estimate of 1.273 million.

Also of note, retailer Sears Holdings (SHLD) filed for Chapter 11 bankruptcy. While the news was not a surprise, it did generate a sentimental story line given the retailer’s storied operating history.

The minutes from the September FOMC meeting were released on Wednesday, showing that officials generally agreed on the need for more gradual rate hikes. In addition, the minutes revealed that a number of officials saw the need to hike rates above levels expected to prevail over the long run. The probability of a December rate hike remains high, ticking up to 83.7% from 79.8% last week, according to the CME FedWatch Tool.

As for the 11 S&P 500 sectors, they finished the week pretty evenly mixed between green and red. Defensive groups like consumer staples (+4.3%), utilities (+3.1%), and real estate (+3.2%) were the top performers, while growth-sensitive groups like consumer discretionary (-2.0%), energy (-1.9%) and materials (-1.4%) finished at the bottom of the sector standings.

In other markets, U.S. Treasuries slipped this week, pushing yields higher; the yield on the benchmark 10-yr note climbed three basis points to 3.20%. The U.S. Dollar Index advanced 0.6% to 95.46, but WTI crude fell 2.9% to $69.26/bbl.

The disappearance and alleged murder of Washington Post columnist Jamal Khashoggi pressured U.S. Treasury Secretary Steven Mnuchin into pulling out of next week’s Future Investment Initiative conference in Saudi Arabia. President Trump expressed confidence in intelligence reports that the murder was ordered by high-level Saudi officials, but stopped short of putting the blame on Saudi Arabia’s crown prince Mohammed bin Salman.

Elsewhere overseas, China’s Shanghai Composite touched a new four-year low this week due to investor concerns over slowing economic growth. On Friday, China reported 6.5% year-over-year GDP growth, less than the prior quarter’s growth of 6.7% and less than the expected growth of 6.6%. Meanwhile, the Euro Stoxx 50 advanced 0.5% this week despite continued angst that the Italian budget situation could get nasty.

Additionally, Canada became the second country in the world to legalize marijuana on Wednesday, causing a sell-the-news reaction in weed stocks.

(Economic Excerpts from Briefing.com)

Monday 15 October:

Retail Sales Come Up Short in September :

Retail sales were up just 0.1% in September (consensus +0.6%) after increasing 0.1% in August. Excluding autos, sales declined 0.1%. (consensus +0.4%)

The key takeaway from the report is that core retail sales, which factor into GDP growth models, were up a solid 0.5%. Hence, the headline numbers were disappointing, yet this report will still factor favorably for Q3 real GDP growth prospects.

Business Inventories in August Match Expectations :

Total business inventories increased 0.5% in August, in-line with the consensus estimate, after increasing an upwardly revised 0.7% (from 0.6%) in July. Total business sales also increased 0.5% after increasing 0.2% in July.

The key takeaway from the report is that business sales continued to outpace inventory growth year-over-year, which is a favorable trend that carries the potential to lead to a better pricing environment for businesses.

Treasury Budget Deficit Increases by $113.2 Billion in FY18 :

The Treasury Budget for September showed a surplus of $119.1 billion versus a surplus of $7.9 billion for the same period a year ago. The Treasury Budget data is not seasonally adjusted, so the September surplus cannot be compared to the $214.1 billion deficit for August.

The budget deficit for fiscal 2018 totaled $779.0 billion versus $665.8 billion in fiscal 2017.

Tuesday 16 October:

Industrial Production Up in September Despite Hurricane Florence :

Industrial production increased 0.3% in September, matching the consensus estimate, after increasing an unrevised 0.4% in August.  Hurricane Florence had an estimated effect of less than 0.1 percentage point on output growth.  The capacity utilization rate remained at 78.1% for the second straight month, slightly shy of the consensus estimate of 78.2%.

The key takeaway from the report is that it revealed the strongest year-over-year growth rate in industrial production (+5.1%) since December 2010.

Wednesday 17 October:

Housing Starts Sluggish in September :

The key takeaway from the September Housing Starts and Building Permits report is that the supply of new homes isn’t picking up fast enough to meet the demand for new homes at more affordable price points. Accordingly, overall home sales activity will continue to be curtailed by affordability constraints.

Fed releases minutes from September FOMC policy meeting :

Key Excerpts :

Minutes of the Federal Open Market Committee

Thursday 18 October:

Initial Claims Send Good October Payrolls Signal :

Initial claims for the week ending October 13 dropped by 5,000 to 210,000 (consensus 212,000). Continuing claims for the week ending October 6 decreased by 13,000 to 1.640 million, which is the lowest level since August 4, 1973.

The key takeaway from the report is that it covered the week in which the survey for the October employment report was conducted. Accordingly, with the low level of initial claims, economists will have a basis to forecast another solid increase in nonfarm payrolls.

Philadelphia Fed Index Eases in October, but Remains Rooted in Expansion :

The Philadelphia Fed Index eased to 22.2 in October (consensus 20.0) from 22.9 in September. The dividing line between expansion and contraction for this regional manufacturing survey is 0.0.

The key takeaway from this report is that manufacturers remain optimistic about the outlook, as 48% of respondents expect business activity to increase over the next six months versus only 14% that expect declines.

Leading Economic Index Rides Consumer Expectations to September Gain :

The Conference Board’s Leading Economic Index increased 0.5% in September (consensus +0.5%) after increasing an unrevised 0.4% in August.

The key takeaway from the report is that there was widespread strength in the basket of leading indicators.  The strongest contribution came from average consumer expectations for business conditions (+0.14 percentage points), which should be constructive for consumer spending activity.

Friday 19 October:

Rising Mortgage Rates Clip Existing Home Sales in September :

Existing home sales declined 3.4% month-over-month in September to a seasonally adjusted annual rate of 5.15 million (consensus 5.30 million), which is the lowest sales level since November 2015. Total sales were 4.1% lower than the same period a year ago.

The key takeaway from the report is that home sales activity was pressured by the limited supply of lower-priced homes and the affordability constraints presented by higher mortgage rates.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Friday 19 October
S&P 500 Finishes Flat Despite Strong Start

The S&P 500 closed Friday at its flat line, a fitting end to a flat week; the benchmark index ended just 0.02% above last Friday’s close. The session began with a bang, with the S&P 500 adding as much as 1.0%, following a positive overnight performance from Chinese markets and more upbeat earnings. However, sentiment soon shifted, prompting a slow and steady retreat from early highs.

As for the other major averages, the blue-chip Dow Jones Industrial Average added 0.3%, tech-heavy Nasdaq Composite lost 0.5%, and the small-cap Russell 2000 fumbled 1.2%.

China’s Shanghai Composite rebounded from a four-year low on Friday, adding 2.9%, despite reporting a lower-than-expected GDP reading (+6.5% actual vs +6.6% consensus). Chinese officials made a collaborative effort to ease investor angst about liquidity risk and China’s economic fundamentals.

On the earnings front, Procter & Gamble (PG) and PayPal (PYPL) jumped 8.8% and 9.4%, respectively, after beating earnings estimates. Procter & Gamble wowed investors with quarterly organic sales increasing 4% — its highest increase since Q1 of its fiscal 2014 year. In addition, Dow component American Express (AXP) enjoyed a healthy gain of 3.8% after besting earnings estimates and raising its profit guidance.

Within the S&P 500 sectors, investors played defense again. The consumer staples (+2.3%), utilities (+1.6%), and real estate (+1.0%) sectors finished atop Friday’s leaderboard. Conversely, the consumer discretionary (-0.9%) and health care (-1.0%) sectors weighed on the broader market, and energy (-0.8%) and materials (-0.7%) also underperformed.

Looking at other markets, U.S. Treasuries ticked lower to conclude the week, pushing yields higher. The 2-yr yield and 10-yr yield each increased two basis points to 2.90% and 3.20%, respectively. For the week, the 2-yr yield added four basis points, and the 10-yr yield added three basis points. In addition, the U.S. Dollar Index fell 0.3% to 95.46.

In energy, WTI crude recouped some of its recent losses on Friday, settling 0.8% higher at $69.26/bbl. Still, the commodity remains near a one-month low.

Market Internals – Friday 19 October 2018

Dollar: Streak Snapped

The U.S. Dollar Index closed down on Friday at 0.2% at 95.64, marking its first decline since Monday. The Dollar Index held its ground during the Thursday overnight session, but it began retreating once attention turned to Europe. A rebound in Italian debt boosted the euro, which in turn pressured the Dollar Index to a session low around 12:45 ET. The Index climbed off its low, but it held the bulk of Friday’s decline, trimming this week’s gain to 0.5%.

Bonds: Down Week Ends on Lower Note

U.S. Treasuries ended the week on a lower note, but intraday movement was limited, as the 10-yr note and the 30-yr bond settled within striking distance of their opening levels. Treasury futures held their ground in overnight trade while Asian markets had a mixed showing. China reported slightly weaker than expected year-over-year growth (actual 6.5%; expected 6.6%) for the third quarter, but the report was overshadowed by comments from several Chinese officials, who discussed measures for supporting China’s capital markets. The remarks helped China’s Shanghai Composite jump 2.6% after hitting a four-year low yesterday. The sideways action in the Treasury futures market was followed by selling just before the U.S. cash open. That weakness took place as Italian debt rebounded from this week’s low. Treasuries saw some selling during the first two hours of the session, but longer tenors showed resilience while 2s and 5s remained near their morning lows until the close. The slope of the yield curve was unchanged when compared to last Friday. The 2s10s spread remained at 30 bps while the 2s30s spread held at 48 bps.

The yield curve rose across the board. The spread between the 5s10s remained at 15bps from 15bps the previous week while the 10s30s remained at 18bps from 18bps the previous week. The spread between the 2yr and 30yr yields is only 48bps. 

Commodities 

The Bloomberg Commodity Index settled at 85.95, lower than 86.24 the previous week as energy, grains and copper fell.

WTI oil broke below $70.00 p/b and settled the week at $69.12. The spread between WTI and Brent widened to $10.66 from $9.09 the previous week.

EIA petroleum data for the week ended October 12

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 6.5 mln barrels from the previous week. At 416.4 mln barrels, U.S. crude oil inventories are about 2% above the five year average for this time of year. Total motor gasoline inventories decreased by 2.0 mln barrels last week and are about 7% above the five year average for this time of year. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories decreased by 0.8 mln barrels last week and are about 3% below the five year average for this time of year. Propane/propylene inventories increased by 2.0 mln barrels last week and are about 5% below the five year average for this time of year. Total commercial petroleum inventories increased last week by 3.0 mln barrels last week.

Natural gas inventory showed a build of 81 bcf vs a build of 90 bcf in the prior week. Working gas in storage was 3,037 Bcf as of Friday, October 12, 2018, according to EIA estimates. This represents a net increase of 81 Bcf from the previous week. Stocks were 601 Bcf less than last year at this time and 605 Bcf below the five-year average of 3,642 Bcf. At 3,037 Bcf, total working gas is below the five-year historical range.

OPEC sees oil prices continuing lower over the coming weeks, according to the WSJ.

Baker Hughes total U.S. rig count increased by +4 to 1067 following last week’s increase of 11.

Metals: 

Agriculture:

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD
Week 43 (October 22 to 26)

According to our 5, 10 and 15 year seasonal models;

Benchmarks Indices (21 year average) for wk43:

Week 43 Key Economic Dates

Next week, important releases for the US include: Q3 GDP growth, flash Markit PMIs, new and pending home sales and durable goods. Elsewhere, ECB and Bank of Canada monetary policy decisions; Eurozone, Germany and France flash Markit PMIs; and Japan flash Markit Manufacturing PMI will also be in the spotlight.

Sun 21 October

Mon 22 October

Tue 23 October

Wed 24 October

Thu 25 October

Fri 26 October

Earnings 

With 17% of the S&P 500 having reported quarterly results, reported earnings are up 22%; 81% have beat on the bottom line but only 51% have traded higher in response.

Next week is the start of three very heavy weeks of earnings reports with almost a third of the DOW and S&P 500 reporting quarterly results.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

COMMENTARY

Despite the recent drop, I am still not a buyer yet. For now, I prefer to stay heavily hedged on any long position or just stay short (with tight stops) for the possibility of a further drop given October’s reputation.”

That was definitely a good plan which I will keep for the next two weeks at least. Let’s not forget that we’re coming into the busiest and most volatile weeks of earnings season in the coming two weeks.

The S&P500 closed a single point below its critical 200DSMA on Friday while the DOW narrowly avoided testing its own 200DSMA. The NASDAQ is two sessions below its 200DSMA but the Transports have it worse – eight sessions below is 200DSMA and looking like confirming its second Death Cross below the 200DSMA next week – the 10DSMA crossed below the 200DSMA on Wednesday and next week is likely to see the 20DSMA flow suit.

With a huge batch of big-hitters announcing their earnings in the coming week, I can’t see any reason for this technically bearish signal to be sustained. If we do get a few surprises that shock the market into lower lows, I will be ready as I have not changed my stance from the last two weeks. I am still not a buyer and will stay heavily hedged or short with tight stops.

Happy Hunting!

~~~~~~~~~~~~~~~~~~~~~~~~~~~

For more than 12 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive environment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

If you’re looking to make a huge difference in your financial life and get the most value our of your education investment, there’s no better choice than the time-tested and well reputed Pattern Trader™ Tutorial

Download our promo slides here:
The Pattern Trader™ Tutorial 2019

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The schedule for the FEBRUARY 2019 Batch is here:
Pattern Trader™ Tutorial – February 2019

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Screen Shot 2017-10-01 at 1.38.39 PM

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Comments Off on Weekly Market Analysis – 15 October 2018 BMO

Weekly Market Analysis – 15 October 2018 BMO

WEEK IN REVIEW – 08 to 12 OCTOBER 2018 :
An Ugly Week on Wall Street

Stocks sold off sharply this week, sending the S&P 500 lower by 4.1%. Fears over potentially weakening economic and earnings growth helped fuel the selling, which left stocks at three-month lows going into the third quarter earnings season. The Dow Jones Industrial Average lost 4.2% this week, and the tech-heavy Nasdaq Composite fell 3.7%.

The International Monetary Fund (IMF) cut its 2018 and 2019 global growth outlook to 3.7% from 3.9% on Tuesday, citing trade uncertainties that include tariffs between the U.S. and China, a pending Brexit deal, and the new trilateral agreement between the U.S., Canada, and Mexico that’s supposed to replace NAFTA.

On a related note, President Trump and Chinese leader Xi Jinping have reportedly agreed to meet at next month’s G-20 summit with hopes of resolving their trade conflict.

A third quarter earnings warning from specialty chemicals company PPG Industries (PPG) weighed on sentiment this week, dampening hopes of another strong quarter. Financial giants JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) kicked off the Q3 earnings season on Friday with mixed results; JPM and C beat bottom-line estimates, but WFC missed. The financial sector initially had a positive reaction to the earnings results on Friday, but later rolled over to close the week with a total loss of 5.6%. A curve-flattening trade in the bond market didn’t bode well for lenders, which depend on the interest-rate differential between what they pay for deposits and what they make on loans.

The yield on the benchmark 10-yr Treasury note, which spiked to a seven-year high last week, hovered between 3.12% and 3.26% before eventually settling Friday at 3.14% – nine basis points below last Friday’s close. Meanwhile, the yield on the more Fed-sensitive 2-yr Treasury note fell four basis points to 2.84%, leaving the 2-10 spread with a five bps point loss for the week.

President Trump blamed this week’s selling on the Federal Reserve, which he says has “gone crazy” with its rate hikes. The Fed has raised rates three times this year with the most recent hike coming in September, and it appears to be on track to raise rates again at its December meeting. The CME FedWatch Tool places the chances of a December rate hike at 79.7%; that’s down slightly from 80.0% last Friday.

The S&P 500 got into technical trouble this week, breaching its 50-day moving average on Wednesday and then its 200-day moving average on Thursday. The benchmark index tried to reclaim its 200-day moving average on Friday, but closed right at the key technical mark. The Dow Jones Industrial Average and the Nasdaq Composite breached their 200-day moving averages as well; the Dow eventually reclaimed the key technical level, but the Nasdaq did not.

Also of note, the CBOE Volatility Index (VIX), often referred to as the “investor fear gauge,” touched its highest level since late March (28.64) before pulling back a bit on Friday. Still, the VIX finished the week roughly 40% higher.

In other news, Hurricane Michael made landfall in the Florida Panhandle on Thursday as a Category 4 storm. The storm has devastated the region, causing billions of dollars in damages and killing at least 13 people. Many oil producers in the Gulf of Mexico halted operations in anticipation of the storm, but WTI crude fell this week nonetheless, dropping 3.9% to $71.41/bbl, and the S&P 500’s energy sector lost 5.4%.

Looking ahead, earnings season will ramp up next week with Bank of America (BAC), Charles Schwab (SCHW), UnitedHealth (UNH), Johnson & Johnson (JNJ), Morgan Stanley (MS), Goldman Sachs (GS), IBM (IBM), Netflix (NFLX), Travelers (TRV), American Express (AXP), PayPal (PYPL), Procter & Gamble (PG), and a host of others scheduled to report their quarterly results.

(Economic Excerpts from Briefing.com)

Wednesday 10 October: PPI in line with expectations; Wholesale inventories above expectations

Producer Price Index Rebounds in September

The Producer Price Index for final demand increased 0.2%, as did the final demand index less food and energy (core PPI). The 0.2% month-over-month increases were in-line with the consensus estimates and followed 0.1% declines in August.

The key takeaway from the report is that producer prices climbed in September without a contribution from prices for final demand energy, which fell 0.8%. Furthermore, there is nothing in the report to suggest the Fed is likely to deviate from another rate hike at its December FOMC meeting.

Wholesale Inventories Up Sharply in August

Wholesale inventories increased 1.0% in August (consensus 0.8%) – the largest monthly increase since October 2013 – on top of a 0.6% increase in July. Wholesale sales were up 0.8% following a 0.2% increase in July.

The key takeaway from the report is that the build in wholesale inventories will be accounted for as a positive input for Q3 GDP forecasts.

Thursday 11 October – Initial Claims Up Slightly, but Still Low

Initial Jobless Claims 214K vs. 205K Consensus; prior 207K :

Initial claims for the week ending October 6 increased by 7,000 to 214,000 (consensus 205,000) while continuing claims for the week ending September 29 increased by 4,000 to 1.66 million.

The key takeaway from that report is that it remains reflective of a tight labor market, which will catch the Fed’s eye as a contributing factor for why it can validate the continuation of gradual rate hikes.

September CPI Pleasing to Headline Eye 

Total CPI and core CPI, which excludes food and energy, increased 0.1%. Both were expected to increase 0.2%, according to the consensus estimate.

Those monthly increases left total CPI up 2.3% year-over-year, versus 2.7% in August, and core CPI up 2.2%, unchanged from August.

The key takeaway from the report is that it helped temper concerns about rising inflation for the time being, yet with total CPI and core CPI running above the Fed’s longer-run inflation target of 2.0%, it still left little reason to think the Fed is going to back away from a rate hike in December.

Friday 12 October

Consumer Sentiment Slips in October, but Still Strong

The preliminary University of Michigan Index of Consumer Sentiment for October checked in at 99.0 (consensus 100.0) versus the final reading of 100.1 for September.  The October reading is higher than the average reading (98.5) for 2018.

The key takeaway from the report is that it revealed some budding concerns about inflation crimping real income expectations, which is something to be watched closely considering spending is driven more by income growth than consumer confidence.

Fuel Prices Drive Up Import Prices in September

Export prices were flat in September after declining 0.2% in August and import prices were up 0.5% after being down 0.4% in August. Excluding agricultural exports, export prices increased 0.2% after declining 0.2% in August. Excluding fuel, import prices were unchanged after declining 0.2% in August.

The key takeaway from the report is rooted in the understanding that nonfuel import prices are being held in check, which is helpful in terms of easing some of the market’s inflation angst.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Friday 12 October
Stocks Rebound, But Still Finish Solidly Lower for the Week

Stocks rebounded on Friday, recouping a good chunk of their weekly losses in a volatile day of trading. The S&P 500 added as much as 1.7% at the start of the session, but nearly wiped it all out intraday before rallying to finish higher by 1.4%.

The Dow Jones Industrial Average advanced 1.2%, and the tech-heavy Nasdaq Composite outperformed, finishing higher by 2.3%. Small caps underperformed, though, leaving the Russell 2000 with a slim gain of 0.1%. For the week, the four indices lost between 3.7% and 5.2%.

This week’s sharp sell-off propagated a belief that the major indices had gotten oversold on a short-term basis and were due for a rebound. Friday’s upward movement also found some technical support from the S&P 500’s 200-day moving average (2766.17), which the index closed just slightly above at 2767.13.

The third quarter earnings season began on a mixed note on Friday morning when big banks JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) reported before the opening bell. JPMorgan and Citigroup both beat earnings estimates, but Wells Fargo came up short. In the company’s conference call, JPMorgan CEO Jamie Dimon expressed optimism in the global economy, although he did note that trade tensions present some risks going forward.

On a related note, PNC (PNC) tumbled 5.6% despite beating bottom-line estimates.

The financials sector added as much as 1.6% following bank earnings, but eventually rolled over, bringing the broader market with it. The group did rebound in the final stretch though, closing higher by 0.1%. 10 of 11 sectors finished in the green, and information technology was the top performer with a gain of 3.2%.

Within the tech sector, giants Apple (AAPL) and Microsoft (MSFT) outperformed, as did chipmakers, evidenced by a 2.0% jump in the Philadelphia Semiconductor Index. Meanwhile, in the communication services sector (+2.1%), Netflix (NFLX) rallied 5.8% after Citigroup said its recent tumble represents a buying opportunity.

Away from equities, U.S. Treasuries finished roughly flat on Friday, with the benchmark 10-yr yield ticking up one basis point to 2.14%. Meanwhile, the U.S. Dollar Index rebounded from a more than two-week low, climbing 0.3% to 94.96, and WTI crude climbed 0.6% to $71.41/bbl. Crude finished solidly lower for the week though, dropping 3.9%.

Also of note, the CBOE Volatility Index (VIX) fell 14.3% on Friday, retreating from its highest level since February.

Market Internals – Friday 12 October 2018

Dollar: Dollar Index Reclaims 50-Day Moving Average

The U.S. Dollar Index closed at 95.23 to finish the week just above its 50-day moving average (95.22). The greenback followed three days of selling with a modest rally on Friday, which began taking shape during the early portion of the European session. The Dollar Index climbed in the Friday morning trade, hitting a session high around 10:00 ET. The Index backed off its high during the early part of the U.S. session, but it has remained above its 50-day moving average. Friday’s gain has helped the Index trim this week’s loss to 0.4%.

Bonds: Longer Tenors Settle Slightly Lower, but Secure Weekly Gains

Longer-dated U.S. Treasuries ended the week on a modestly lower note, but intraday action saw a steady push off opening lows, which brought shorter tenors back to little changed while 10s and 30s stopped a bit short of their flat lines. The trading day started with modest losses, resulting from overnight selling in the futures market. The overnight weakness coincided with a rebound in Asian and European equity markets while U.S. indices also started the day on a firmly higher note. However, stocks succumbed to selling pressure in late-morning trade and surrendered a good chunk of their gains into the afternoon. The pullback in equities took place as Treasuries clawed back the majority of their losses, though longer tenors found resistance just beneath their flat lines. The slope of the yield curve faced flattening pressure this week, as the 2s10s spread compressed to 30 bps from last Friday’s 35 bps. For its part, the 2s30s spread tightened to 48 bps from 52 bps at the end of last week. The 30-yr bond, 10-yr note, and 5-yr note recorded only their second week of gains over the past seven weeks while the 2-yr note saw its first weekly advance in nine weeks.

The yield curve flattened as the longer maturities’ yields fell more than the 2yr yield. The spread between the 5s10s narrowed to 15bps from 16bps the previous week while the 10s30s widened to 18bps from 17bps the previous week. The spread between the 2yr and 30yr yields is not only 48bps. 

Commodities 

The Bloomberg Commodity Index settled at 86.24, lower than 86.90 the previous week.

WTI oil broke above 76.00 on Wednesday and settled the week at $74.34. The spread between WTI and Brent narrowed to $9.09 from $9.82 the previous week.

EIA petroleum data for the week ended October 05

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 6.0 million barrels from the previous week. At 410.0 million barrels, U.S. crude oil inventories are at the five year average for this time of year. Total motor gasoline inventories increased by 1.0 million barrels last week and are about 7% above the five year average for this time of year. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories decreased by 2.7 million barrels last week and are about 4% below the five year average for this time of year. Propane/propylene inventories increased by 1.5 million barrels last week and are about 7% below the five year average for this time of year. Total commercial petroleum inventories increased last week by 11.3 million barrels last week.

Natural gas inventory showed a build of 90 bcf vs a build of 98 bcf in the prior week : Working gas in storage was 2,956 Bcf as of Friday, October 5, 2018, according to EIA estimates. This represents a net increase of 90 Bcf from the previous week. Stocks were 627 Bcf less than last year at this time and 607 Bcf below the five-year average of 3,563 Bcf. At 2,956 Bcf, total working gas is below the five-year historical range.

IEA says that global oil demand and supply are now close to new, historically significant peaks at 100 mb/d

Both global oil demand and supply are now close to new, historically significant peaks at 100 mb/d, and neither show signs of ceasing to grow any time soon. Fifteen years ago, forecasts of peak supply were all the rage, with production from non-OPEC countries supposed to have started declining by now. In fact, production has surged, led by the US shale revolution, and supported by big increases in Brazil, Canada and elsewhere. In future, a lot of potential supply could come to the market from places like Iran, Iraq, Libya, Nigeria and Venezuela, if their various challenges can be overcome.

Full IEA Release

Baker Hughes total U.S. rig count increased by +11 to 1063 following last week’s decrease of 2.

Metals: 

Agriculture:

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD
Week 42 (October 15 to 19)

According to our 5, 10 and 15 year seasonal models;

Benchmarks Indices (21 year average) for wk42:

Week 42 Key Economic Dates

In the coming week, US will receive September Retail Sales, Industrial Production and Capacity Utilization, Housing Starts and Building Permits, Existing Home Sales, and the minutes from the September FOMC meeting.

In addition, China GDP growth; Japan inflation and trade data; and UK unemployment, earnings, inflation and retail sales will also be in the spotlight.

Mon 15 October

Tue 16 October

Wed 17 October

Thu 18 October

Fri 19 October

Earnings 

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

COMMENTARY

The coming week will be the start of Earnings Season with C, WFC and JPM getting the party started on Friday. This is going to add yet another dimension to the volatility of the current market sentiment which always makes October’s Earnings Season an exciting roller coaster ride.

The DOW and S&P500 broke below their 50DSMA on Wednesday and then broke below their 200DSMA on Thursday. The NASDAQ, already below its 50DSMA from the previous week, broke below its 200DSMA on Wednesday. The VIX spiked above 28.84 points on Thursday before closing the week out at 21.31. In the two sessions on Wednesday and Thursday, the DOW lost 1,294 points (-5.15%) while the S&P500 lost 139 (-5.1%).

Looks like things are getting hot and heavy early this October. In a matter of two weeks, the DOW and S&P are down to 2.5% and 3.5% respectively above their 2018 opening price, having wiped off double figure gains from September. Last week, I mentioned that, “Ideally, I’d like to have a healthy correction … buying the high is not something I am comfortable doing in spite of the bullish promise of higher highs with higher rates.” 

Despite the recent drop, I am still not a buyer yet. For now, I prefer to stay heavily hedged on any long position or just stay short (with tight stops) for the possibility of a further drop given October’s reputation.

Happy Hunting!

~~~~~~~~~~~~~~~~~~~~~~~~~~~

For more than 12 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive environment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

If you’re looking to make a huge difference in your financial life and get the most value our of your education investment, there’s no better choice than the time-tested and well reputed Pattern Trader™ Tutorial

Download our promo slides here:
The Pattern Trader™ Tutorial 2019

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The schedule for the FEBRUARY 2019 Batch is here:
Pattern Trader™ Tutorial – February 2019

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Screen Shot 2017-10-01 at 1.38.39 PM

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Comments Off on Weekly Market Analysis – 08 October 2018 BMO

Weekly Market Analysis – 08 October 2018 BMO

WEEK IN REVIEW – 01 to 05 OCTOBER 2018 :
Stocks Fall As Yields Surge

The S&P 500 fell 1.0% this week, weighed down by a surge in bond yields, which rose to multi-year highs in front of Friday’s release of the Employment Situation report for September. The tech-heavy Nasdaq and the small-cap Russell 2000 underperformed, losing 3.2% and 3.7%, respectively, but the blue-chip Dow finished flat.

Stocks began the week on a positive note, boosted by Canada joining Mexico and the United States in a trade agreement. On Sunday night, Canada agreed to allow greater dairy market access to the U.S., while also capping its automobile exports to the States. The deal, also known as the United States-Mexico-Canada Agreement (USMCA) replaces the 24-year-old NAFTA deal between the countries. However, Congress still has to approve the deal, which likely won’t be easy.

Investors awoke to continued Italian drama on Tuesday, when Italy’s anti-establishment government defended its plan to increase the country’s budget-deficit target despite pushback from the EU. In addition, Claudio Borghi, who leads the economic policy of the ruling Lega party, claimed that most of Italy’s problems could be solved if the country had its own currency – although that idea was dismissed by Italy Deputy Prime Minister Di Maio.

However, on Wednesday, Italy’s government decided to cede to some of the EU’s budget demands. Italy’s budget-deficit target will be reduced from 2.4% of GDP in 2019 to 2.2% in 2020 and then to 2.0% in 2021.

That news helped push bond yields higher overnight. Yields then extended those gains significantly after the September ADP Employment Change report – a prelude to Friday’s nonfarm payrolls reading – showed an estimated 230K positions were added to private sector payrolls – well above the Briefing.com consensus estimate of 184K. The ISM Services Index for September also came in better-than-expected on Wednesday, hitting a record high of 61.6% (consensus 58.2%), clearly indicating that business activity in the service-providing sector of the economy is strong.

Yields continued to advance on Thursday and then again on Friday following the release of the Employment Situation report for September. The report showed a smaller-than-expected increase in nonfarm payrolls (134K actual vs 184K consensus), but the August increase underwent a notable upward revision (to 270K from 201K). As for the rest of the report, average hourly earnings increased 0.3% (consensus +0.3%), the average workweek was reported at 34.5 (consensus 34.5), and the unemployment rate dropped to 3.7% from 3.9%.

The key takeaway from the September jobs report is that the labor market is solid and still simmering with the prospect of pent-up wage pressures being unleashed at any point as employers encounter difficulty in finding qualified workers.

Looking at this week’s S&P sector standings, most groups finished in negative territory. The consumer discretionary sector led the retreat with a loss of 4.2%, and information technology (-2.0%) and communication services (-2.0%) also showed relative weakness. On a positive note, the influential financial sector advanced 1.7%, benefiting from rising yields and, more specifically, a steepening of the yield curve. The benchmark 10-yr yield jumped 16 basis points in total, closing Friday at 3.23% – which marks its highest level since 2011 – while the 2-yr yield jumped five basis points to 2.88%.

In corporate news, General Electric (GE) replaced CEO John Flannery with former Danaher CEO Larry Culp; Tesla’s (TSLA) CEO, Elon Musk, agreed to settle charges with the SEC, in which Mr. Musk and Tesla are to pay $20 million each, and Mr. Musk is to step down as chairman for three years; Amazon (AMZN) announced that it will be raising its minimum wage to $15 an hour for all U.S. employees, pressuring other retailers to do the same; and General Motors (GM) announced that it will be partnering with Honda Motor (HMC) to build autonomous vehicles.

(Economic Excerpts from Briefing.com)

Monday 01 October

ISM Manufacturing Index Pulls Back in September

The ISM Manufacturing Index for September declined to 59.8% (consensus 60.4%) from 61.3% in August. The dividing line between expansion and contraction is 50.0; and September marked the 24th consecutive month of expansion.

The key takeaway from the report is that even with the September pullback, the Index remains near multi-year highs with continued growth in most sub-indices.

Construction Spending Growth Shy of August Estimates 

Total construction spending increased 0.2% in August (consensus 0.4%) following a downwardly revised 0.2% increase (from 0.1%) in July.

The key takeaway from the report is that public construction spending has continued driving the overall growth rate while private construction spending growth has moderated.

Wednesday 03 October

September ADP Employment Change 230K vs 184K consensus; August revised to 168K from 163K :

ISM Non-Manufacturing Index Hits Record High in September

The ISM Non-Manufacturing Index checked in at 61.6% for September (consensus 58.2%), up from 58.5% in August.  According to the Institute for Supply Management, that is the highest reading for the Non-Manufacturing Index since the inception of the composite index in 2008. The dividing line between expansion and contraction is 50.0%.

The key takeaway from the report is that it clearly indicates business activity is strong for the service-providing sector of the economy, which accounts for a much larger slice of economic activity than the manufacturing sector does.

Thursday 04 October

Initial Claims Dip amid Tight Labor Market Conditions

Initial claims for the week ending September 29 decreased by 7,000 from the prior week to 207,000 (consensus 210,000) while continuing claims for the week ending September 22 decreased by 13,000 to 1.650 million.

The key takeaway from the report is that it shows the labor market remains tight and conducive to an increase in wage growth.

Friday 05 October

September Jobs Report Mixed, but Message Still the Same, Unemployment drops to lowest level since 1969

September nonfarm and private sector payrolls were much weaker than expected. That will be attributed by some sources to the effects of Hurricane Florence, but the overriding point is that upward revisions to August nonfarm and private sector payrolls more than compensated for the headline misses for September.

The key takeaway from the report is that the labor market is solid and still simmering with the prospect of pent-up wage pressures being unleashed at any point as employers encounter difficulty in finding qualified workers.

Trade Deficit Widens in August

The Trade Balance Report for August showed a widening in the trade deficit to $53.2 billion from an upwardly revised $50.0 billion (from -$50.1 billion) in July.

The key takeaway from the report is that it has yet to confirm the tariff actions are succeeding in cutting the trade deficit in a big way; moreover, with the third quarter real average trade deficit 8.9% higher than the second quarter average, trade will be accounted for as a negative input in Q3 GDP forecasts.

Consumer Credit Expands in August

Total outstanding consumer credit increased by $20.1 billion in August after increasing an unrevised $16.6 billion in July.

The key takeaway from the report is that it reflects a pickup in credit demand that should be construed as an offshoot of a strengthening economy led by a solid labor market.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Friday 05 October
Rising Rates Drive Falling Stock Prices

The stock market fell on Friday as bond yields continued to climb following the release of the Employment Situation report for September. The S&P 500 and the Dow lost 0.6% and 0.7%, respectively. The tech-heavy Nasdaq dropped 1.1%.

At its session low, the S&P 500 was down 1.1%, falling below its 50-day moving average for the first time since July. The market eventually gathered its footing though, closing near the middle of the day’s trading range.

The Employment Situation report for September was mixed from a headline standpoint, as nonfarm payrolls showed a below-consensus increase of 134,000 (consensus 184K), but the August increase was revised upward to 270,000 (from 201K). Average hourly earnings rose 0.3%, as expected, and the unemployment rate fell to from 3.9% to 3.7%, marking its lowest level since 1969.

U.S. Treasuries extended their weekly losses following the release of the jobs report, pushing yields higher across the curve. The 2-yr yield advanced one basis point to 2.88%, and the benchmark 10-yr yield jumped three basis points to 3.23%, extending its weekly gain to 16 basis points and marking its highest close since 2011.

In corporate news, Costco (COST) lost 5.6% despite reporting above-consensus earnings, and Tesla (TSLA) dropped 7.1% after CEO Elon Musk seemingly mocked the SEC in a late Thursday tweet, just days after agreeing to a settlement with the agency over securities fraud allegations stemming from his failed bid to take the company private.

Market Internals – Friday 05 October 2018

Dollar: Gains for the week

The U.S. Dollar Index closed higher for the week +0.5% but down on Friday -0.1% at 95.60, tracking its first decline since last Tuesday. The Dollar Index spent the Thursday overnight session near its flat line and rallied briefly in immediate response to the Employment Situation report for September, which missed headline expectations, but contained an upward revision to the August reading. The post-data rally did not last, as the Index slipped to a session low in mid-morning trade, but recovered a portion of its loss before the afternoon. The Dollar Index remains on course for its second consecutive weekly advance, having climbed 0.5% since last Friday.

Bonds: 10yr Yield breaks to its highest since 2011

U.S. Treasuries ended a down week on a lower note. Treasury futures saw limited movement in overnight trade, putting the cash market on track for a flat start. The flat open preceded the release of the Employment Situation report for September, which was a mixed bag. Granted, the headline reading missed expectations (actual 134K; consensus 184K), but the August reading was revised up by 69,000 while the Unemployment Rate (3.7%) fell to its lowest level since 1969. Treasuries saw some impulse buying immediately after the report crossed the wires, but the gains were erased in short order, opening the door to another slow, but steady retreat that continued into the afternoon. Atlanta Fed President Raphael Bostic, who is a voter on this year’s FOMC, made some hawkish comments during a midday speech. Mr. Bostic said he materially underestimated the underlying momentum in the economy, which means that a higher rate path may be required. The slope of the Treasury yield curve saw some steepening this week, as the 2s10s spread widened to 35 bps from last Friday’s 25 bps while the 2s30s spread ended the week 13 basis points wider at 52 bps. Keep in mind that the bond market will be closed for Columbus Day on Monday, but the equity market will be open.

The yield curve steepened as the longer maturities’ yields made double figure gains for the week while the 2yr yield only gained 7bps. The spread between the 5s10s widened to 16bps from 11bps the previous week while the 10s30s widened to 17bps from 14bps the previous week.

Commodities 

The Bloomberg Commodity Index settled at 86.90, (+1.70 +2.0%) higher than 85.20 the previous week as Energy, Agriculture and Gold all made handsome gains.

WTI oil broke above 76.00 on Wednesday and settled the week at $74.34. The spread between WTI and Brent widened to $9.82 from $9.47 the previous week.

EIA petroleum data for the week ended September 28

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 8.0 mln barrels from the previous week. At 404.0 mln barrels, U.S. crude oil inventories are at the five year average for this time of year. Total motor gasoline inventories decreased by 0.5 mln barrels last week and are about 7% above the five year average for this time of year. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories decreased by 1.8 mln barrels last week and are about 3% below the five year average for this time of year. Propane/propylene inventories increased by 2.4 mln barrels last week and are about 8% below the five year average for this time of year. Total commercial petroleum inventories increased last week by 8.0 mln barrels last week.

Natural gas inventory showed a build of 98 bcf vs a build of 46 bcf in the prior week. Working gas in storage was 2,866 Bcf as of Friday, September 28, 2018, according to EIA estimates. This represents a net increase of 98 Bcf from the previous week. Stocks were 636 Bcf less than last year at this time and 607 Bcf below the five-year average of 3,473 Bcf. At 2,866 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count decreased by -2 to 1052 following last week’s increase of 1.

Metals: 

Agriculture:

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD
Week 41 (October 8 to 12)

According to our 5, 10 and 15 year seasonal models, the DIA and SPY should be bullish all week especially towards the end of the week.

Benchmarks Indices (21 year average) for wk41:

Week 41 Key Economic Dates

For the week, important releases for the US include inflation rate, Michigan consumer sentiment and Federal monthly budget statement. Elsewhere: China trade, Caixin Services PMI and monetary indicators; UK monthly GDP figures and industrial production; and India inflation rate will also be in the spotlight.

Mon 08 October

Tue 09 October

Wed 10 October

Thu 11 October

Fri 12 October

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

COMMENTARY

“With the rising CPI and higher inflation rate, there is little to hold the Fed back from yet another promised hike. The question is whether it will be  the October or December meeting that the hike happens.”

So we got another hike to 2.0% to 2.25%. And the week after, DOW and S&P break to new highs, further lending credence to my bullish opinion that when rates go higher, so does the market.

In the three years that the FFR rose from 0% in October 2015 to 2.25% in September 2018, the DOW rose by more than 60% while the S&P gained more than 50%. As long as the spread between the 10yr Yield and the FFR stay apart, I stay bullish.

If you want to read the full paper on the relation between the FFR, the 10yr and the benchmarks, check out this link: 
The Fed Fund Rate & The Market 2016

Another rate hike has been promised before the end of the year and it could either happen at the end of this month or in December. Ideally, I’d like to have a healthy correction before that otherwise, buying the high is not something I am comfortable doing in spite of the bullish promise of higher highs with higher rates.

The coming week will be the start of Earnings Season with C, WFC and JPM getting the party started on Friday. This is going to add yet another dimension to the volatility of the current market sentiment which always makes October’s Earnings Season an exciting roller coaster ride.

Happy Hunting!

~~~~~~~~~~~~~~~~~~~~~~~~~~~

HAPPENING THIS WEDNESDAY!

The Last Intro Session For The Last Batch Of 2018

For more than 12 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive environment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

If you’re looking to make a huge difference in your financial life and want to know more about the Tutorial, come for our three-hour Introductory Session. It will be the most educational preview you will ever attend.

Register here:

Pattern Trader™ Introductory Session

OR  download our promo slides here:
The Pattern Trader™ Tutorial 2018

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The schedule for the November 2018 batch is here:
Pattern Trader™ Tutorial – November 2018

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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Pattern Trader™ Tutorial Introductory Session

THE LAST SESSION FOR
THE LAST BATCH OF 2018

For more than 12 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class size and tutorial-styled approach gives the Tutorial a conducive environment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

“I have taken other financial and investment related courses before, but this course is so different from the others – it is so many notches above the other courses. This course, with Conrad the coach, genuinely aims to provide the specified education that the participants signed up for. The other course that I have attended are probably 20% teaching, 10% networking, and the rest redundant actions, sales talk and activities to fill up the whole session.

However, Conrad packed the participants with so much info, insights and advice giving us little space to breathe and relax. Every now and then during the course, I was hoping that this ‘crazy and super-on coach’ can take a longer smoke or toilet break so that participants can have a longer time to rest !!!

And the education does not stop there. I am grateful for the continuous education and support through the incessant updates of news, issues, video conferencing, and Conrad’s tutelege.

This course is not a shortcut to financial wealth – it however empowers, enriches and encourages the motivated participant to pursue on in this journey to seek knowledge, wisdom in trading and finance.

Conrad created the path and showed the road, the rest is up to the individual person how, and how much, he wishes to reach the goal.”

~ Yeo WP

If you’re looking to make a huge difference in your financial life, consider the Pattern Trader™ Tutorial.

If you want to know more about the Tutorial, come for our three-hour Introductory Session. It will be the most educational preview you will ever attend.

Register here:

Pattern Trader™ Introductory Session

OR  download our promo slides here:
The Pattern Trader™ Tutorial 2018

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The schedule for the November 2018 batch is here:
Pattern Trader™ Tutorial – November 2018

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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Comments Off on Weekly Market Analysis – 01 October 2018 BMO

Weekly Market Analysis – 01 October 2018 BMO

WEEK IN REVIEW – 24 to 28 September 2018 :
Raising Rates and Playing Politics

The S&P 500 pulled away from record highs this week, losing 0.5% in total, as investors digested a flurry of political headlines and the latest policy statement from the Federal Reserve, which included another rate hike – the third one this year. The Dow also fell, losing 1.1%, but the tech-heavy Nasdaq outperformed, rallying 0.7%.

The week began with the U.S. implementing tariffs on $200 billion worth of Chinese goods, which triggered Beijing to impose retaliatory tariffs on $60 billion worth of American products. Chinese officials also canceled mid-level trade talks that had been scheduled for later in the week, dashing hopes for a near-term resolution.

OPEC was also in focus on Monday after it and several non-OPEC nations ended a weekend meeting without an agreement to increase output in order to counter falling supply from Iran due to U.S. sanctions. President Trump criticized OPEC in front of the UN General Assembly on Tuesday, saying the oil cartel is “ripping off the rest of the world” by colluding to limit supply and prop up prices.

In the same address, the U.S. president also criticized Iran, which is currently the target of U.S. economic sanctions, calling its government a “corrupt dictatorship” and saying its leaders “sow chaos, death, and destruction.” President Trump also spoke regarding North Korea, ISIS, and Syria, and reiterated his administration’s hard stance on fair trade.

The Federal Reserve increased short-term interest rates on Wednesday, as expected, raising the fed funds target range by 25 basis points to 2.00-2.25%. In its policy statement, the Fed removed the word ‘accommodative’, which led some to believe that officials could be moving towards slowing monetary tightening. However, Fed Chairman Jerome Powell said during his post-decision press conference that the language change didn’t signal a change in the Fed’s path for rate hikes.

As for rate-hike projections, the Fed still appears to be on track to raise rates another 25 basis points in December, with the CME FedWatch Tool putting the chances at 75.8%. Beyond 2018, the Fed’s dot plot showed expectations for three rate hikes in 2019 (unchanged from June) and one in 2020 (also unchanged from June).

On Capitol Hill, political drama unfolded on Thursday as Supreme Court nominee Brett Kavanaugh and his accuser, Christine Ford, who has accused Mr. Kavanaugh of sexually assaulting her back in high school, testified before the Senate Judiciary Committee. The Committee advanced Mr. Kavanaugh’s nomination on Friday, but a final Senate vote will be delayed for a one-week FBI investigation.

Overseas, two populist parties governing Italy widened the country’s budget-deficit target for next year to 2.4% of GDP on Friday, likely putting the country at odds with the European Union. The major European stock indices sold off in reaction to the news, with Italy’s MIB leading the retreat.

In U.S. corporate news, Comcast (CMCSA) paid $40 billion to win a bid for European broadcaster Sky, ending a two-year battle with 21st Century Fox (FOXA); Nike (NKE) reported above-consensus earnings for its fiscal first quarter; and Facebook (FB) fell on Friday after disclosing a “security issue” impacting 50 million users.

However, perhaps the week’s biggest corporate story revolved around Tesla’s (TSLA) CEO, Elon Musk, who was sued by the SEC on Thursday evening over his tweet about taking the electric automaker private. Mr. Musk and the SEC were reportedly close to reaching a no-guilt settlement that would have barred him from being chairman for two years, but Mr. Musk backed out at the last minute.

As for the sector standings, they were pretty mixed between red and green. The heavily-weighted financials sector was the second-worst performer, losing 4.1% in total, with materials (-4.5%) being the only group with a more substantial loss. Conversely, the newly-added communications services sector was the top performer with a weekly gain of 1.1%.

(Economic Excerpts from Briefing.com)

Wednesday 26 September

New Home Sales in August Okay, Not Great

New home sales in August increased 3.5% to a seasonally adjusted annual rate of 629,000 (consensus 630,000) versus a downwardly revised 608,000 (from 627,000) for July.

The key takeaway from the report is that it reflects the affordability constraints that are increasing on the back of high prices and rising mortgage rates.  To wit, the median sales price was up 1.9% year/year to $320,200 and the supply of new homes for sale stood at a 6.1-months’ supply at the August sales pace versus 6.0 months a year ago.

Thursday 27 September

FOMC raises federal funds rate 25 basis points to 2.0-2.25%, as expected; drops accommodative language

Information received since the Federal Open Market Committee met in August indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2 to 2-1/4 percent.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Click here for FOMC release

Third Estimate of Q2 GDP Little Changed from Second Look

The third estimate for Q2 GDP was unchanged from the second read, coming in at 4.2% (consensus 4.3%). The Q2 GDP Deflator came in at 3.0% (consensus 3.0%).

The key takeaway from the report is that it showed no change in personal spending growth (3.8%) from the second estimate.

Transportation Orders Lift August Durable Goods Orders Above Headline Expectations

Durable Goods orders for August increased 4.5% (consensus 1.8%) after a revised 1.2% decline (from -1.7%) in July. Excluding transportation, durable goods orders increased 0.1% (consensus 0.4%) after an unrevised 0.2% increase in July.

The key takeaway from the report is that the headline increase was driven by a jump in nondefense aircraft and parts orders while growth in other areas was shy of expectations.

Initial Claims Increase from Multi-Decade Lows 

Initial jobless claims for the week ending September 22, increased by 12,000 to 214,000 (consensus 209,000) while continuing claims for the week ending September 15 increased by 16,000 to 1.661 million.

The key takeaway from the report is that even with the increase in initial and continuing claims, both series remain near their lowest levels in almost 50 years.

Friday 28 September

Personal Income and Spending Growth Remain True to Trend 

Personal income for August increased 0.3% (consensus 0.4%), personal spending rose 0.3% (consensus 0.3%), the PCE Price Index increased 0.1% for the third consecutive month, and the core PCE Price Index, which excludes food and energy, was unchanged (Briefing.com consensus 0.1%).

The key takeaway from the report is that the year-over-year increase in the PCE Price Index (+2.2% vs. +2.3% prior) and the core PCE Price Index (+2.0% vs. +2.0% prior) will keep the Federal Reserve on its tightening path.

Michigan Consumer Sentiment Pulls Back from Preliminary Reading, but Remains Elevated

The final University of Michigan Consumer Sentiment Index hit 100.1 in September (consensus 100.5), pulling back slightly from the preliminary reading of 100.8.

The key takeaway from the report is that even with the pullback, the Sentiment Index remains above 100.0 for the third time since the start of 2004.

Chicago PMI Declines Again in September

The MNI Chicago Business Barometer, otherwise known as the Chicago PMI, declined to 60.4 in September from 63.6 in August. The dividing line between expansion and contraction is 50.0.

The key takeaway from the report is that the September dip represents the second consecutive decline, returning the Index into the lower half of the range from the past 12 months.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Friday 28 September
S&P Closes Friday Flat, Securing 7.2% Gain for Q3

Wall Street finished Friday little changed, securing big gains for the third quarter. The S&P 500 kept near its flat line throughout the session, closing just a tick below its unchanged mark. The Nasdaq and the Dow added 0.1% apiece. For the quarter, the S&P 500 added 7.2%, the Dow added 9.0%, and the Nasdaq added 7.1%.

Friday began with news from across the pond, where Italy’s anti-establishment government widened the country’s budget-deficit target for next year to 2.4% of GDP. That could raise problems with the EU, which has pushed Italy to lower its public debt. European stocks fell in reaction, with Italy’s MIB (-3.7%) leading the retreat.

The headlines weighed on the U.S. futures market as well, but Wall Street quickly pared losses after the opening bell.

Financial shares fell once again on Friday (-1.1%), extending the heavily-weighted financial sector’s weekly loss to 4.1%. On the flip side, the lightly-weighted real estate (+1.3%) and utilities (+1.5%) sectors rallied, closing atop the sector standings. Most other groups finished within 0.4% of their unchanged marks.

Tesla (TSLA) tumbled 13.9% after its CEO, Elon Musk, was sued by the SEC over his tweet about taking the electric automaker private. Mr. Musk and the SEC were reportedly close to reaching a no-guilt settlement that would have barred him from being chairman for two years, but Mr. Musk backed out at the last minute.

In other corporate news, Facebook (FB) dropped 2.6% after announcing that it’s discovered a “very serious” security issue that could affect around 50 million accounts; NVIDIA (NVDA) climbed 5.1% after Evercore ISI raised its target price to a new Street high of $400 per share; and Intel (INTC) advanced 3.1% after announcing that it’s making progress with 10nm chips, but Intel competitor Advanced Micro (AMD) lost 5.2%.

On Capitol Hill, the Senate Judiciary Committee advanced President Trump’s Supreme Court nomination of Brett Kavanaugh on Friday, but a final Senate vote will be delayed after Senator Jeff Flake (R-AZ) unexpectedly called for a one-week FBI investigation into sexual misconduct allegations against the judge.

Market Internals – Friday 28 September 2018

Dollar: Dollar Index Reclaims 50-Day Moving Average

The U.S. Dollar Index closed +0.15% at 95.13, ending the session at its best level in more than two weeks after climbing 0.9% since last Friday. The Dollar Index built on yesterday’s solid advance during the overnight session, as the euro retreated amid renewed focus on Italy’s budget discipline. Italian officials agreed to target a 2019 deficit that will amount to 2.4% of GDP, which was on the high end of estimates. The euro recovered the bulk of its decline during the U.S. session, which pressured the Dollar Index from its high, but the Index remains on track to finish above its 50-day moving average (95.05) for the first time since September 10.

Bonds: Belly Outperforms as Focus Returns to Italy

U.S. Treasuries ended the week on a mixed note. The trading day started with modest gains across the curve, which resulted from a flight to quality after the focus returned to Italy and the country’s fiscal targets. Italian officials confirmed that the target for next year’s deficit will be set at 2.4% of GDP, which was on the high end of expectations, meaning the European Commission is likely to express concern with Italy’s fiscal discipline. Today’s news weighed on BTPs, lifting Italy’s 10-yr yield from 2.907% to a session high of 3.263%, just 13 basis points shy of the post-election high from May (3.388%). The weakness in Italian debt translated into opening strength for U.S. Treasuries, but Treasuries backed off their morning highs as BTPs climbed off their lows, pressuring Italy’s 10-yr yield to 3.149%. The pullback in Treasuries unfolded over the course of the session, with the 10-yr note returning to unchanged by the close while shorter tenors trimmed their gains, but still finished in the green. For its part, the 30-yr bond settled with a modest loss. Coupled with the relative strength in shorter tenors, today’s underperformance in the long bond undid the bulk of this week’s flattening in the yield curve. The 2s10s spread ended the week one basis point tighter at 25 bps while the 2s30s spread also compressed by a basis point, finishing the week at 39 bps.

The yield curve flattened as the longer maturities’ yields made lost ground while the shorter maturities’ yields remained unchanged. The spread between the 5s10s narrowed to 11bps from 12bps the previous week while the 10s30s remained unchanged at 14bps from 14bps the previous week.

Commodities 

The Bloomberg Commodity Index settled at 85.20, higher than 84.40 the previous week as Energy and Silver made great gains while Gold and Grains fell slightly.

WTI oil broke up above 73.00 and settled the week at $73.25. The spread between WTI and Brent widened to $9.47 from $8.02 the previous week.

EIA petroleum data for the week ended September 21

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.9 mln barrels from the previous week. At 396.0 mln barrels, U.S. crude oil inventories are about 2% below the five year average for this time of year. Total motor gasoline inventories increased by 1.5 mln barrels last week and are about 8% above the five year average for this time of year. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories decreased by 2.2 mln barrels last week and are about 3% below the five year average for this time of year. Propane/propylene inventories increased by 1.6 mln barrels last week and are about 10% below the five year average for this time of year. Total commercial petroleum inventories increased last week by 4.5 mln barrels last week.

Natural gas inventory showed a build of 46 bcf vs a build of 86 bcf in the prior week. Working gas in storage was 2,768 Bcf as of Friday, September 21, 2018, according to EIA estimates. This represents a net increase of 46 Bcf from the previous week. Stocks were 690 Bcf less than last year at this time and 621 Bcf below the five-year average of 3,389 Bcf. At 2,768 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count increased by 1 to 1054 following last week’s decrease of 2.

Metals: 

Agriculture: Grains lose ground after USDA report

Click here for USDA Report

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE MONTH AHEAD

October is the first month of Quarter Four and the start of Earnings Season for Q3 results. It is renown for almost all the major market corrections in history. During October, the market gets very nervous because the dates of some large historical market crashes occurred during this month. Black Monday, Tuesday and Thursday all occurred in October 1929, after which came the Great Depression. The crash of 1987 occurred on October 19 saw the Dow tank 22.6% in a single day. Today, the October effect is considered mainly to be a psychological expectation rather than an actual phenomenon. While statistical evidence does not support the phenomenon that stocks trade lower in October, the psychological expectations of the October effect still exist. And because most Octobers didn’t go down, it has the reputation of being a “Bear Killer” month.

October 2018 has twenty-two (22) trading sessions and one public holiday. October tends to start bullish in the first week, becomes bearish in the second week before turning bullish again in the third week. October ends the month in volatile fashion, often making fierce corrections in the final week.

October Trivia

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD
Week 40 (October 01 to 05)

According to our 5, 10 and 15 year seasonal models;

Benchmarks (21 year average) for wk40:

Week 40 Key Economic Dates

In the coming week important releases include US jobs report, trade balance, ISM PMIs, factory orders and construction spending; UK monetary indicators and Markit PMIs; Eurozone retail trade; Japan business and consumer morale; Australia trade balance and retail sales; and interest rate decisions from India and Australia.

Mon 01 October

Tue 02 October

Wed 03 October

Thu 04 October

Fri 05 October

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

COMMENTARY

The DOW is now looking like a giant Double Top if it doesn’t break and hold above 26,750. After eight months below the January high, investors will be looking to cash out on this rally ahead of the famed October Effect. The September Portfolio Dumping session was held off as investors mulled over the longer term effects of the Fed’s latest rate hike, higher crude prices and a resurgent dollar. 

Since the end of July, volumes have been on the lower average for the year. This will be a critical statistic as we begin Earnings Season for Q3 Results in a week’s time. I will be expecting volumes to drop off further in the coming two week as investors hold back in anticipation of the first batch of earnings starting with the first DOW components and mega caps including WBA (11 Oct), C, JPM and WFC (12 Oct) and BAC (15 Oct).

Earnings results and crude prices are going to be keenly watch as an indication to the month-end Fed Decision. With the rising CPI and higher inflation rate, there is little to hold the Fed back from yet another promised hike. The question is whether it will be  the October or December meeting that the hike happens.

Happy Hunting!

~~~~~~~~~~~~~~~~~~~~~~~~~~~

For more than 12 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive environment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

If you’re looking to make a huge difference in your financial life and want to know more about the Tutorial, come for our three-hour Introductory Session. It will be the most educational preview you will ever attend.

Register here:

Pattern Trader™ Introductory Session

OR  download our promo slides here:
The Pattern Trader™ Tutorial 2018

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The schedule for the November 2018 batch is here:
Pattern Trader™ Tutorial – November 2018

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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Weekly Market Analysis – 24 September 2018 BMO

WEEK IN REVIEW – 17 to 21 September 2018 :
Dow Shrugs Off Tariffs, Returns to Record Territory

Wall Street rallied this week with investors shrugging off another tranche of U.S. tariffs on Chinese goods. The S&P 500 and the Dow touched new records — the first time that’s happened for the Dow since January 26 – and finished the week with respective gains of 0.9% and 2.3%. The Nasdaq lagged though, slipping 0.3%.

President Trump announced on Monday evening that the U.S. will be slapping tariffs on $200 billion worth of Chinese goods starting on September 24. The tariff rate will start at 10%, but will increase to 25% on January 1. The president also said he will impose additional tariffs on $267 billion worth of Chinese goods if Beijing retaliates — which it vowed to do with 5-10% tariffs on $60 billion worth of U.S. goods.

Stocks unexpectedly took off on Tuesday following the tariff announcement, with some analysts pointing to the fact that the initial 10% tariff rate by the U.S. was not as harsh as expected – thereby reflecting a willingness to negotiate. Others said the rally reflected the market’s belief that the U.S.-China trade dispute will eventually die down. Short-covering activity likely helped as well.

The heavily-weighted financial sector was among the top-performing groups this week with a gain of 2.3%, benefiting from a steepening of the yield curve. The yield on the benchmark 10-yr Treasury note climbed seven basis points to end Friday at 3.07%, while the Fed-sensitive 2-yr yield jumped two basis points to 2.81%.

Conversely, the top-weighted information technology sector (-0.1%) underperformed this week, getting surpassed by consumer discretionary (+0.4%) for the top spot in the 2018 sector standings. The two groups hold year-to-date gains of 18.5% and 18.7%, respectively. For comparison, the S&P 500 is up 9.6%.

In total, eight of the eleven S&P sectors finished in the green, with cyclical sectors showing relative strength. A new sector, communication services, will be born after Friday’s close, and it will involve reclassifying several widely-held technology, telecom, and media stocks into the new sector — including Facebook (FB), Alphabet (GOOG), Verizon (VZ), Netflix (NFLX), and Walt Disney (DIS).

In individual stocks, cannabis names were in focus this week, with Tilray (TLRY) going on a wild ride after its CEO suggested that his business would be a “smart hedge” for major pharmaceutical companies. TLRY shares traded as high as $299.46/share – 175% above last Friday’s close – before ending the week at $123.00/share (+13%).

On the oil front, WTI crude climbed 2.6% this week to $70.77/bbl even though President Trump criticized OPEC on Thursday morning, saying the “OPEC monopoly must get [oil] prices down now!” Reuters then reported on Friday that OPEC and non-OPEC countries are discussing the possibility of raising output by 500,000 barrels a day to counter falling supply from Iran due to U.S. sanctions.

Looking ahead, the Federal Reserve will release its latest policy directive on Wednesday. The market is all but certain that the central bank will hike rates – with the CME FedWatch Tool placing the chances at 100% – so investors will be more focused on the Fed’s rate forecast, especially for 2019.

(Economic Excerpts from Briefing.com)

Wednesday 19 September

Housing Starts Up, Building Permits Down in August

Privately-owned housing starts increased 9.2% month-over-month in August to a seasonally adjusted annual rate of 1.282 million (Briefing.com consensus 1.229 mln) while building permits declined 5.7% month-over-month to a seasonally adjusted annual rate of 1.229 million (consensus 1.310 mln).

The key takeaway from the report is that permits (a leading indicator) for single-family homes fell 6.1% month-over-month to 820,000, driven by declines across all four geographic regions.

Thursday 20 September

Initial and Continuing Claims at Multi-Decade Lows

Initial jobless claims for the week ending September 15 decreased by 3,000 to 201,000 (consensus 209,000), the lowest level since November 15, 1969, and continuing claims for the week ending September 8 dropped by 55,000 to 1.645 million, the lowest level since August 4, 1973.

The key takeaway from the report is that it reflects a reluctance on the part of employers to reduce staff, which goes hand-in-hand with a strong economy and tight labor market.

Philadelphia Fed Index Points to Acceleration in September

The Philadelphia Fed Manufacturing Business Outlook Survey for September increased to 22.9 (consensus 15.3) from 11.9 in August, driven by an uptick in the New Orders Index to 21.4 from 9.9.

A number above zero is indicative of growth, so the key takeaway from the report is that it reflects the idea that manufacturing activity in the Philadelphia Fed region accelerated in September.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Friday 21 September
Mixed Ending to Largely Positive Week

Wall Street had a mixed outing on Friday, with the underperformance of financial and technology shares balancing gains most elsewhere. The Dow Jones Industrial Average climbed 0.3%, closing at a new all-time high for the second day in a row. The S&P 500 finished slightly below its flat line, and the tech-heavy Nasdaq lost 0.5%.

For the week, the S&P 500 and the Dow added 0.9% and 2.3%, respectively, while the Nasdaq lost 0.3%.

The top-weighted information technology sector lost 0.3% on Friday, capping an unimpressive week overall. Within the group, Micron (MU) was among the worst performers, falling 2.9% after its above-consensus earnings report was overshadowed by disappointing guidance for the current quarter — due in part to tariffs.

Meanwhile, the influential financial sector ended a positive week on a disappointing note. The group lost 0.4% on Friday, trimming its weekly gain to 2.3%, as Treasuries ticked higher, pushing yields slightly lower. The benchmark 10-yr yield, for instance, slipped one basis point to 3.07%, but remained near a four-month high.

On a positive note, the lightly-weighted telecom services group finished atop the sector standings with a gain of 1.0%. Within the group, AT&T (T) advanced 1.0% after being upgraded to ‘Buy’ from ‘Neutral’ at UBS. However, shares gave back some gains in the late afternoon following reports that President Trump is pressing the Department of Justice to breakup the wireless giant.

There was some volatility during the final stretch of Friday’s session due to a major sector rebalancing, which will result in a new ‘Communication Services’ sector.

Several widely-held technology, telecom, and media stocks will be reclassified into this group, including Facebook (FB), Alphabet (GOOG), Verizon (VZ), Netflix (NFLX), and Walt Disney (DIS).

Also adding to the volatility, Friday was a quadruple witching day – when futures and options on both indices and individual stocks expire.

In the crude oil market, WTI crude futures finished up 0.8% at $70.77/bbl, but were volatile after Reuters reported that OPEC and non-OPEC producers are discussing the possibility of raising output by 500,000 barrels a day to counter falling supply from Iran due to U.S. sanctions. OPEC and non-OPEC nations are scheduled to meet in Algeria on Sunday.

Dollar: Dollar Index Rebounds

The U.S. Dollar Index closed at 0.4% at 94.22, bouncing off a ten-week low. The greenback followed Thursday’s retreat with a bit more selling during the overnight session, but the Index notched a low at 93.81, finding support just above its low from July 9 (93.71). The dollar began climbing during Friday’s European session, accelerating its advance during U.S. trade. The greenback has had a particularly good showing against the pound after the market received another reminder that EU and British officials have not gotten any closer to securing a Brexit deal. Today’s advance helped the Dollar Index narrow this week’s loss to 0.7%.

Bonds: Down Week Ends on Modestly Higher Note

U.S. Treasuries ended the week on a mostly higher note, but today’s uptick did little to prevent 5s, 10s, and 30s from posting their fourth consecutive week of losses. For its part, the 2-yr note recorded its sixth consecutive weekly decline. Intraday action saw some volatility, but most tenors finished essentially where they started. Morning trade saw Treasuries slip from their opening levels, but the losses were reclaimed in short order. However, the ensuing rebound was short-lived, as Treasuries found resistance near session highs from Thursday. The trading range narrowed into the afternoon, as Treasuries hovered near their opening levels until the close. The slope of the yield curve flattened a touch today, but steepened over the course of the week. Most notably, the 2s30s spread expanded by five basis points to 40 bps while the 2s10s spread ended the week two basis points wider at 27 bps.

The yield curve steepened as the longer maturities’ yields made greater gains. The spread between the 5s10s widened to 12bps from 9bps the previous week while the 10s30s remained unchanged at 14bps from 14bps the previous week.

Commodities 

The Bloomberg Commodity Index settled at 84.40, higher than 82.46 the previous week.

WTI oil broke up above 71.00 and settled the week at $70.78. The spread between WTI and Brent narrowed after six weeks to $8.02 from $9.10 the previous week.

EIA petroleum data for the week ended September 14

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 2.1 mln barrels from the previous week. At 394.1 mln barrels, U.S. crude oil inventories are about 3% below the five year average for this time of year. Total motor gasoline inventories decreased by 1.7 mln barrels last week and are about 8% above the five year average for this time of year. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories increased by 0.8 mln barrels last week and are about 2% below the five year average for this time of year. Propane/propylene inventories increased by 0.1 mln barrels last week and are about 12% below the five year average for this time of year. Total commercial petroleum inventories decreased last week by 0.4 mln barrels last week.

Natural gas inventory showed a build of 86 bcf vs a build of 69 bcf in the prior week- nat gas prices initially drops following this data. Working gas in storage was 2,722 Bcf as of Friday, September 14, 2018, according to EIA estimates. This represents a net increase of 86 Bcf from the previous week. Stocks were 672 Bcf less than last year at this time and 586 Bcf below the five-year average of 3,308 Bcf. At 2,722 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count decreased -2 to 1053 following last week’s increase of 7.

Metals: All gains

Agriculture: Gains across all grains

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD
Week 39 (September 24 to 28)

According to our 5, 10 and 15 year seasonal models;

Benchmarks (21 year average) for wk39:

Week 39 Key Economic Dates

In the coming week the most important event will be the Fed monetary policy decision. Key economic data include: US final Q2 GDP growth, personal spending and income, PCE prices, durable goods orders and new home sales; UK final Q2 GDP growth; and China NBS PMIs and Caixin Manufacturing PMI.

Sunday 23 September

Mon 24 September

Tue 25 September

Wed 26 September

Thu 27 September

Fri 28 September

Sat 29 Sentiment

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

COMMENTARY

Expect a volatile week ahead. If this market is as resilient as I think it is, we should se e moderate gains this time next week. But I won’t count out the start of the September correction closer to expiration Friday.”

One week left for Q3 and the last week of September is known for portfolio dumping. With the way the market has been so resilient, I am almost afraid to assume that it will happen this year. Then again …

Happy Hunting!

~~~~~~~~~~~~~~~~~~~~~~~~~~~

For more than 12 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive enviroment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

If you’re looking to make a huge difference in your financial life, consider the Pattern Trader™ Tutorial.

If you want to know more about the Tutorial, come for our three-hour Introductory Session. It will be the most educational preview you will ever attend.

Register here:

Pattern Trader™ Introductory Session

OR  download our promo slides here:
The Pattern Trader™ Tutorial 2018

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The schedule for the November 2018 batch is here:
Pattern Trader™ Tutorial – November 2018

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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Comments Off on Weekly Market Analysis – 17 September 2018 BMO

Weekly Market Analysis – 17 September 2018 BMO

WEEK IN REVIEW – 10 to 14 September 2018 :
Wind in the Sails

Wall Street returned to its winning ways this week, powering through trade-related headlines and Hurricane Florence, one of the strongest storms to hit the Carolinas in decades. The S&P 500 advanced 1.2%, the tech-heavy Nasdaq Composite rose 1.4%, and the blue-chip Dow Jones Industrial Average climbed 0.9%.

Hurricane Florence was largely the talk of the week, forcing residents near the Carolina coast to either pack their bags or hunker down. The storm weakened to a Category 1 from a Category 4 before it made landfall on Friday though, which helped the market keep a positive bias. WTI crude futures were once up nearly 4.0% on the week, but gave the majority of that back as the storm weakened.

Meanwhile, on the trade front,the White House confirmed reports that it has proposed a new round of trade talks with China – a proposition that was welcomed by Beijing. However, President Trump muddied the waters a bit with a tweet on Thursday, saying the U.S. isn’t under pressure to make a deal with China; rather, China is under pressure to make a deal with the United States.

China’s major stock index, the Shanghai Composite, fell 0.8% this week, touching its lowest level since January 2016.

Separately, President Trump is reportedly considering a second meeting with North Korean leader Kim Jong-un ahead of the November midterm elections. The two leaders held a historic summit in June, but relations have cooled since, due to North Korea’s unsatisfactory progress towards denuclearization.

In U.S. corporate news, Apple (AAPL) unveiled a trio of new iPhones – iPhone Xs ($999), iPhone Xs Max ($1099), and iPhone Xr ($749) – at its annual product event on Wednesday, extending last year’s high-end iPhone X line, which was created in celebration of the iPhone’s 10th anniversary. Apple shares added 1.2% on the week.

The top-weighted technology sector was among the top-performing groups this week, rebounding from last week’s disappointing performance, with a gain of 1.8%. In total, ten of eleven groups finished in positive territory. Cyclical sectors generally outperformed, although the heavily-weighted financial space did not, finishing lower by 0.4%.

On the data front, investors received some influential inflation data this week, including the core Producer Price Index for August and the core Consumer Price Index for August. The core PPI declined 0.1%, while the consensus expected an increase of 0.2%, and the core CPI showed a less-than-expected increase of 0.1% (consensus +0.2%).

Those readings helped to ease fears that the Fed might have to be more aggressive in raising rates in order to keep the economy from overheating.

In monetary policy, a trio of central banks released their latest policy decisions this week, including the European Central Bank, the Bank of England, and the Central Bank of Turkey. Both the ECB and the Bank of England kept interest rates unchanged, as expected, but Turkey’s central bank increased its benchmark rate to 24.00% from 17.75%, attempting to stabilize the beleaguered Turkish lira.

The Fed is expected to raise rates by 25 basis points at its September 25-26 policy meeting, with the market placing the chances of a rate hike at 100%.

(Economic Excerpts from Briefing.com)

Wednesday 12 September

Fed releases Beige Book: Fed sees economy expanding at a moderate pace in recent weeks. Most districts note concern on trade.

August Core PPI M/M -0.1% vs +0.2%: Producer Price Index Rolled Back in August

The Producer Price Index for final demand declined 0.1% in August (consensus +0.2%) and so did the index for final demand, less food and energy (consensus +0.2%).

The decline in the final demand index was attributed to a 0.1% decrease in prices for final demand services, which was led by a 0.9% decline in the index for final demand trade services, which measures changes in margins received by wholesalers and retailers. The index for final demand goods was unchanged.

The key takeaway from the report is that it will soothe some burgeoning inflation concerns, as the monthly declines led to a moderation in producer price inflation on a year/year basis. The latter point notwithstanding, the market is apt to maintain its view that the Federal Reserve remains on course to raise rates two more times this year.

Thursday 13 September

Initial Claims and Continuing Claims Still Running Low (Very Low). 

Initial jobless claims for the week ending September 8 decreased by 1,000 to 204,000 (consensus 210,000).  Continuing claims for the week ending September 1 decreased by 15,000 to 1.696 million.

The key takeaway from the report is that the four-week moving averages for initial claims and continuing claims are at their lowest level since 1969 and 1973, respectively.

August Headline CPI M/M +0.2% vs +0.2% consensus. August Core CPI M/M +0.1% vs +0.2% consensus.

Total CPI increased 0.2%, as expected, while core CPI, which excludes food and energy, increased 0.1% (consensus +0.2%).

The key takeaway for the market is that there was a moderation in the year-over-year growth rates for total CPI and core CPI. That won’t alter the prevailing view that the Federal Reserve is likely to raise rates two more times this year, yet the moderation is apt to be seen as a data point that could keep the Federal Reserve from tightening rates too rapidly.

Friday 14 September

Retail Sales in August Fail to Live Up to Expectations

Total retail sales rose just 0.1% (consensus +0.4%) on the heels of an upwardly revised 0.7% increase (from +0.5%) in July. Excluding autos, retail sales jumped 0.3% (consensus +0.5%) following an upwardly revised 0.9% increase (from +0.6%) in July.

The upward revisions to the prior month helped mitigate some of the headline disappointment for August, yet the key takeaway from the report is that consumer spending is up and will continue to support real GDP growth in the third quarter.

Industrial Production Rises for Third Straight Month in August

August Industrial Production +0.4% vs +0.4% consensus
August Capacity Utilization 78.1% vs 78.3% consensus

Industrial production increased 0.4% in August, as expected, following an upwardly revised 0.4% increase (from 0.1%) in July.  August marked the third straight month that industrial production has increased.  The capacity utilization rate increased to 78.1% (consensus 78.3%) from a downwardly revised 77.9% (from 78.1%) in July.

The key takeaway from the report is the understanding that factory output was unchanged, excluding the gain in motor vehicles and parts.

Business Inventories Rise in July, as Expected

Total business inventories increased 0.6% in July, as expected, after increasing 0.1% in June. Total business sales increased 0.2% after increasing 0.3% in June.

The key takeaway from the report is that business sales continued to outpace inventory growth year-over-year, which is a favorable trend that carries the potential to lead to a better pricing environment for businesses.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Friday 14 September
Upbeat Week Ends on Flat Note

The stock market saw limited movement on Friday, ending a positive week on a flat note. The S&P 500 (unch) settled just above its flat line, locking in a 1.2% gain for the week. The Dow (unch) and Nasdaq (-0.1%) also finished near their flat lines, ending the week with respective gains of 0.9% and 1.4%.

Equities started the day just above yesterday’s closing levels, but relative weakness in a handful of rate-sensitive sectors and a mixed showing from other groups kept the market near its unchanged level. The underperformance in groups like utilities (-0.5%), telecom services (-0.4%), and real estate (-0.9%) was owed to overnight and early-morning selling in Treasury futures, which lifted the 10-yr yield to a six-week high just below the 3.000% area.

The broader market treaded water during early trade, thanks to gains in cyclical sectors like financials (+0.7%), industrials (+0.5%), and energy (+0.6%). The S&P 500 was on the verge of climbing to a fresh high around noon, but a Bloomberg report, indicating that President Trump is seeking to impose tariffs on $200 billion worth of imports from China despite the recent efforts to revive trade talks, sent the broader market to a session low.

In addition to pressuring stocks, the news weighed on offshore yuan and helped the U.S. Dollar Index (94.94, +0.42) climb to a fresh high, trimming this week’s loss to 0.4%.

Afternoon trade saw a slow climb off session lows, but the S&P 500 was not able to revisit its high, as heavily-weighted groups like consumer discretionary (-0.3%) and health care (-0.3%) struggled. For its part, the top-weighted technology sector spent the session near its flat line, ending little changed.

The market received just two earnings reports between yesterday’s closing bell and today’s open. Adobe Systems (ADBE) climbed 2.3% to a fresh record after beating earnings and revenue expectations while Dave & Buster’s (PLAY) rose 7.9% to a 13-month high after beating quarterly expectations and initiating a quarterly dividend of $0.15 per share.

Treasuries ended the day with losses, though intraday action saw the complex climb off mid-morning lows. The 10-yr yield rose three basis points to 2.99% after approaching its August high (3.02%) in early trade.

Investor participation was fairly consistent with the past two sessions as 762 million shares changed hands at the floor of the New York Stock Exchange.

Market Internals – Friday 14 September

Dollar: Skid Snapped

The U.S. Dollar Index closed up 0.5% at 94.95, locking in its first advance since last Friday. The greenback saw some early-morning weakness, which pressured the Index to a level not seen since the end of July. The Index climbed off its low during the European session, accelerating to a fresh high after the release of a Retail Sales report for August (actual 0.1%; consensus 0.4%), which missed estimates, but included an upward revision to the July reading. The Index built on its advance during the Friday U.S. session, trimming this week’s loss to 0.4%.

Bonds: 10-Yr Yield Flirts With 3.00% Again

U.S. Treasuries ended the week with losses across the curve. Treasury futures faced some selling pressure during overnight trade, as Hong Kong’s Hang Seng continued climbing off this year’s low while equity markets in Europe also recorded gains. Treasuries followed their lower start with a slip to fresh lows after the release of an August Retail Sales report (actual 0.1%; consensus 0.4%), which was below estimates, but contained an upward revision to the July reading. A bit more selling in mid-morning trade briefly lifted the 10-yr yield to its highest level (3.003%) since the start of August, but midday action saw Treasuries edge up from their lows. The rebound accelerated after Bloomberg reported that President Trump is seeking to impose tariffs on another $200 billion worth of imports from China despite the recent efforts to revive trade talks. The midday bid returned Treasuries to their opening levels, where they remained until the close. The slope of the yield curve faced flattening pressure over the course of the just-completed week, as the 2s10s spread compressed to 21 bps from last Friday’s 25 bps while the 2s30s spread tightened by six basis points to 35 bps.

The yield curve flattened as the shorter maturities’ yields made greater gains. The spread between the 5s10s narrowed to 9bps from 12bps the previous week while the 10s30s narrowed to 14bps from 16bps the previous week.

Commodities 

The Bloomberg Commodity Index settled at 82.46, marginally lower than 82.59 the previous week.

WTI oil bottomed at 67.54 and settled the week at $68.99. The spread between WTI and Brent widened for a sixth week to $9.10 from $9.08 the previous week.

EIA petroleum data for the week ended September 07

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 5.3 mln barrels from the previous week. At 396.2 mln barrels, U.S. crude oil inventories are about 3% below the five year average for this time of year. Total motor gasoline inventories increased by 1.3 mln barrels last week and are about 8% above the five year average for this time of year. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories increased by 6.2 mln barrels last week and are about 3% below the five year average for this time of year. Propane/propylene inventories increased by 1.2 mln barrels last week and are about 11% below the five year average for this time of year. Total commercial petroleum inventories increased last week by 10.1 mln barrels last week.

Natural gas inventory showed a build of 69 bcf vs a build of 63 bcf in the prior week. Working gas in storage was 2,636 Bcf as of Friday, September 7, 2018, according to EIA estimates. This represents a net increase of 69 Bcf from the previous week. Stocks were 662 Bcf less than last year at this time and 596 Bcf below the five-year average of 3,232 Bcf. At 2,636 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count increased +7 to 1055 following last week’s status quo.

Metals: Gold, Copper fight back

Agriculture: September 2018 USDA WASDE report:

Corn and wheat prices drop, while soybeans are modestly higher following monthly WASDE report 0n Wednesday. Here are a few key highlights from the report:

Note: I know it looks like Wheat and Soy swapped prices but its not a mistake. At Friday’s settlement;

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD
Week 38 (September 17 to 21)

The DOW, NASDAQ and S&P500 are expecting a rock and roll week ahead.

According to our 5, 10 and 15 year seasonal models, the SPY and DIA should be divergent on Monday, bullish on Tuesday, bearish on Wednesday and moderately bullish on Thursday. The DIA should finish Friday slightly divergent while SPY should be bearish.

Benchmarks (21 year average) for wk38:

Key Economic Dates

Week 38

In the coming week, the most important releases for the US are building permits and housing starts, existing home sales and flash Markit PMIs. Elsewhere, the BoJ interest rate decision, Japan trade and inflation, UK and Euro Area consumer prices and flash Markit PMIs for the Eurozone, France and Germany will also be in the spotlight.

Mon 17 September

Tue 18 September

Wed 19 September

Thu 20 September

Fri 21 September

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

COMMENTARY

I am bullish for the coming week (hope I don’t regret it) especially after the past week’s drop. I won’t be hanging on to anything for too long and will be watching for signs that the September market sell-down might be imminent.

That wasn’t too wild and I didn’t live to regret it. America’s economy still looks solid. With two likely rate hikes between now and the end of the year, there’s little else that concerns me with regard to the economy’s state of health for now.

I am still expecting a September market correction, mostly because I suspect there’s more than enough reason for portfolio dumping in the second half of the month. Even though the benchmarks have been making gains, the broader market doesn’t seem to agree as seen in its internals. Volumes haven’t fallen off a cliff but are considerably lower than the first half of the year, as can be expected leading into the October Effect.

Expect a volatile week ahead. If this market is as resilient as I think it is, we should se e moderate gains this time next week. But I won’t count out the start of the September correction closer to expiration Friday.

Happy Hunting!

~~~~~~~~~~~~~~~~~~~~~~~~~~~

For more than 12 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive enviroment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

If you’re looking to make a huge difference in your financial life, consider the Pattern Trader™ Tutorial.

If you want to know more about the Tutorial, come for our three-hour Introductory Session. It will be the most educational preview you will ever attend.

Register here:

Pattern Trader™ Introductory Session

OR  download our promo slides here:
The Pattern Trader™ Tutorial 2018

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The schedule for the November 2018 batch is here:
Pattern Trader™ Tutorial – November 2018

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Screen Shot 2017-10-01 at 1.38.39 PM

Connect with me at LinkedIn

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