Weekly Market Update – 16 October 2017 BMO

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Stocks Tick Up As Earnings Season Gets Under Way

The stock market moved modestly higher this week, touching new record highs yet again. The Dow led the advance, adding 0.4%, while the Nasdaq and the S&P 500 each settled with gains of 0.2% apiece. The small-cap Russell 2000 struggled, however, ending the week with a loss of 0.5%.

Financials kicked off the third quarter earnings season on a mostly higher note; JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) all reported better-than-expected earnings. However, Wells Fargo (WFC) missed both top and bottom line estimates. Despite the largely positive showing, the S&P 500’s financial sector moved lower, dropping 0.9%.

The retreat wasn’t all that surprising as the financial sector did ride a four-week rally into earnings season–climbing 10.6% from September 7 to October 6–and, therefore, was likely overdue for a pull back. A decline in Treasury yields also worked against the sector, which typically benefits from an increase in interest rates. The benchmark 10-yr yield dropped eight basis points to 2.28%.

Softer-than-expected consumer prices had a hand in pushing Treasury yields lower, but did little to dial back the market’s rate-hike expectations. The Consumer Price Index increased less than expected in September (0.5% actual vs 0.6% Briefing.com consensus), as did the core Consumer Price Index, which excludes food and energy (0.1% actual vs 0.2% Briefing.com consensus).

The minutes from the September FOMC meeting were also released this week, but contained little to no new information. In short, the minutes showed that the Fed favors staying on a path of gradual rate hikes, although there was growing concern that the factors keeping a lid on inflation may not be transitory after all.

Following this week’s events, the CME FedWatch Tool places the chances of a December rate hike at 82.9%, down modestly from 93.1% last week.

Industrial heavyweight General Electric (GE) had a rough showing this week, dropping 5.8%, after announcing that several of its top executives will be leaving the company. JPMorgan lowered its target price for the company to $20 from $22, which weighed on GE shares as well.

AT&T (T) was another notable laggard this week after announcing that its video subscribers declined for the third quarter in a row; the wireless giant finished with a loss of 7.5%.

On a positive note, the world’s largest retailer–Wal-Mart (WMT)–jumped 9.7% this week after announcing a new return service that will allow its customers to return items they purchased online or in the store in under 30 seconds. Wal-Mart’s brick-and-mortar locations potentially give the company an advantage over internet-based names like Amazon (AMZN) in the area of returns.

Wal-Mart’s positive performance helped the S&P 500’s consumer staples sector (+1.5%) settle alongside the technology (+1.3%), utilities (+1.3%), and real estate (+1.8%) groups at the top of the sector standings. On the flip side, the telecom services sector was by far the weakest performer–thanks mostly to AT&T–finishing with a loss of 4.6%.

Stocks finished near the bottom of their narrow trading ranges on Friday, but still managed to eke out a narrow victory. The Nasdaq (+0.2%) finished at a new record high while S&P 500 (+0.1%) and the Dow (+0.1%) settled just a tick below their record marks. Small caps underperformed, sending the Russell 2000 lower by 0.2%. For the week, the S&P 500 added 0.1%.

(Excerpts from Briefing.com)

Reviewing Friday’s big batch of economic data, which included the Consumer Price Index for September, Retail Sales for September, the preliminary October reading for the University of Michigan Consumer Sentiment Index, and Business Inventories for August:

Currencies: Dollar Edges Higher

The U.S. Dollar Index was little changed on Friday at 93.07, surrendering 0.8% for the week after recording four consecutive weekly gains. The greenback held a modest gain in Friday’s pre-market action, but dropped from a session high to a low after the release of cooler than expected September CPI (actual: +0.5%; consensus: 0.6%) and core CPI (actual: +0.1%; consensus 0.2%). The index spent the rest of the morning in a climb off its session low, pausing near the unchanged level.

Bonds Yields: Rebound Extended

U.S. Treasuries ended an abbreviated week on a higher note, with longer-dated issues recording their fourth consecutive advance. This week’s rally helped the Treasury complex snap its four-week losing streak. The market saw slim losses in early morning action, but surged in response to a cooler than expected September CPI report. The 10-yr note charged above its 200-day moving average and continued climbing into the close. The long bond also climbed into the late afternoon while 2s and 5s settled near their post-CPI highs. The yield curve flattened for the second consecutive day with the 2s10s spread contracting to 78 bps from 82 bps on Thursday. The 2s30s spread compressed to 131 from Thursday’s 135 bps.

The yield curve fell across the board with the longer maturities falling the most, once again tightening the spreads to flatten the curve.

Commodities: Silver, Copper strengthens for another week, Gold bounces, Crude gets a bounce

Crude closed the week above $50/barrel after a brief drop the previous week. Baker Hughes total U.S. rig count decreased by 8 to 928 following last week’s decrease of 4Gold closed above $1300 and Silver rebounded above $17. 

Agriculture: Corn recovers, Wheat continues to slide, Soy strengthens more. 

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THE WEEK AHEAD

Week 42 is October Expiration Week. It is also the second week of earnings season with no less than a third of the DOW components announcing their results.

Monday 16 to Friday 20 October (Week 42)

The forty-second week of 2017 (wk42) is  bearish over the last 15 years and extremely bullish over the last 5 years for the DIA and SPY. On the 10 year average, the DIA is very bullish while the SPY is unreliably bearish.

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The 2017 Stock Trader’s Almanac’s averages for the benchmark indices (based on 21 years) for week 42;

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Key Economic Dates

In the US, housing data will take center stage with existing home sales, building permits and housing starts likely showing the impact from recent hurricanes. In China, the focus will be on China’s National Party Congress and GDP growth, inflation, industrial production and retail trade figures. Investors will also be waiting for: UK retail sales, inflation, unemployment and wages; Eurozone inflation and trade balance; and Australia employment data.

Mon 16 October

Tue 17 October

Wed 18 October

Thu 19 October

Friday 20 October

Earnings Calendar for the week of October 16th

SUMMARY

It was good to see my spiritual home’s index finally topping 21,000 for the first time since 1996.

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It was also good to know that Singapore’s economy is looking better even if unemployment is stuck at 2.2% for the last three quarters, the highest levels since 2010. The economy expanded 4.6 percent year-on-year in the third quarter of 2017, up from 2.9 percent in the prior quarter and stronger than market expectations of a 3.8 percent expansion, led by a sharp acceleration in manufacturing. On a quarterly basis, the advanced estimate showed that the GDP grew an annualized 6.3 percent in Q3, sharply surpassing the 2.4 percent growth of the previous quarter and the 3.2 percent expansion expected by consensus.

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Now we get into the hot and heavy part of earnings season and I am expecting things to get exciting. This is going to indicate if we’re ready for that long awaited correction yet or whether we’re going to the moon.

Happy Hunting!

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