Weekly Market Update – 22 May 2017 BMO

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After posting its worst one-day loss in eight months on Wednesday (-1.8%), the stock market ended the week with two bounce-back performances that left the S&P 500 with just a modest loss for the week (-0.4%). The benchmark index challenged its flat line for the week at the peak of Friday’s slow and steady climb, but couldn’t hold its session high into the closing bell. The major averages settled in the middle of the day’s trading range with the S&P 500 and the Dow adding 0.7% apiece. The Nasdaq (+0.5%) settled just a tick below its peers.

Thursday’s positive sentiment lingered in the stock market on Friday morning, granting the major averages modest gains at the opening bell. From there, the industrials (+1.4%), energy (+1.2%), and financials (+0.8%) groups led the stock market in a slow and steady climb. The industrial sector rallied around Deere’s (DE 120.90, +8.23) stronger than expected earnings and upbeat guidance. DE shares jumped 7.3% while peer Caterpillar (CAT 102.43, +2.21) also profited from the positive sentiment, adding 2.2%.

Crude oil underpinned the energy sector’s positive performance, jumping 2.0% to $50.33/bbl, after reports that an OPEC panel is considering the possibility of not only extending its deal to cut oil production, which Russia and Saudi Arabia spoke in favor of earlier in the week, but also increasing the size of the production cut. For the week, the energy component added 5.2%.

After opening the week with a record-high close, equities took a hit in the midweek session after an article in the New York Times highlighted a potential obstruction of justice move by President Trump. However, the bulk of Wednesday’s loss was retraced in the second half of the week as a ‘buy the dip’ mentality set in. The S&P 500 ended the week lower by 0.4%.

Crude oil was a focal point on Monday, jumping 2.1% to $48.86/bbl, on news that the world’s top two oil producers–Saudi Arabia and Russia–are in favor of extending the original OPEC/non-OPEC supply cut agreement, which is currently scheduled to end in June, by another nine months. The commodity’s positive performance helped the benchmark index climb 0.5% to a fresh all-time high.

The major averages ended the second session of the week little changed, but a solid performance from mega-cap names like Microsoft (MSFT) and Amazon (AMZN) pushed the Nasdaq to another record high. Led by NVIDIA (NVDA), chipmakers also underpinned the tech-heavy Nasdaq with the PHLX Semiconductor Index adding 1.5% for the second day in a row.

On Wednesday, equities suffered their worst one-day decline since September following a New York Times article that claimed President Trump asked former FBI Director James Comey to shut down the Bureau’s investigation of former National Security adviser Michael Flynn. If true, some legal experts believe the alleged incident would qualify as obstruction of justice, which is an impeachable offense.

The allegation forced Wall Street to come to a quick realization that President Trump’s pro-growth agenda items (i.e. tax reform, deregulation, and infrastructure spending) might not come to fruition as quickly as envisioned or perhaps not at all. The S&P 500 settled Wednesday’s session with a loss of 1.8%. However, the bearish sentiment didn’t last long as investors ‘bought the dip’ on Thursday.

Underpinned by the semiconductor and biotechnology industries, the S&P 500 advanced 0.4% on Thursday in the face of a Reuters report that the Trump campaign might have had at least 18 undisclosed contacts with Russian officials and others with Kremlin ties leading up to, and after, the U.S. presidential election. The potentially concerning report helped keep the S&P 500 below its 50-day simple moving average, but the key technical level was no match for the bulls on Friday.

VIXThe major U.S. indices ended the week on a positive note with the S&P 500 adding 0.7%. The Friday session had a risk-on feel to it with cyclical sectors showing relative strength, Treasuries ticking down, and the CBOE Volatility Index (VIX) dropping over two points. Crude oil came back into focus once again, jumping 2.0% to $50.33/bbl, following reports that top oil producers will consider increasing the size of the OPEC/non-OPEC production cut when they meet on May 25.

The fed funds futures market still points to the June FOMC meeting as the most likely time for the next rate-hike announcement with an implied probability of 78.5%, unchanged from last week’s 78.5%.

Investors did not receive any economic data on Friday. Monday’s economic calendar is also blank.

(Excerpts from Briefing.com)

Dollar Falls to 6-Month Low, Again

Bonds yields: The belly of the curve took the biggest drop for the week with the 10year yield losing 10bps.

Commodities; WTI Crude closes the week above $50/bbl as the total U.S. rig count increased by 16 to 901 following last week’s increase of 8. Copper gains $0.05 for the week.

Agriculture: Soy continues to slump as grains gain.

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ScanTHE WEEK AHEAD

Monday 22 to Friday 26 May (Week 21)

The twenty-first week of 2017 (wk21) is mildly bullish for the DIA and SPY with averagely less than 60% over the 5, 10 and 15 year averages.

The 2017 Stock Trader’s Almanac’s averages (based on 21 years) for week 21;

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Key Economic Dates

Tue 23 May

Wed 24 May

Thu 25 May

Fri 26 May

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SUMMARY

For the coming week, the seasonal model is in conflict with the Almanac’s averages where one is mildly bullish based on 5, 10 and 15 year averages and the other is bearish based on a 21-year average. It is not uncommon given that the 21 year average takes in the Asian and Russian Financial Crises and the bearish years of 2000 to 2002.

I am sticking my my seasonal model given that its more recent and relevant to the current economic and market climates. However, I do so with caution as it is still May and the possibility of a Sell-Off should not be underestimated.

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