Weekly Market Update – 02 January 2018 BMO

This is going to be a really lengthy read …
so sit back, get comfortable and get ready to be informed!

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Week in Review: Finishing 2017 with a Whimper

After four days and 26 total hours of trading, the S&P 500 settled the holiday-shortened week down 0.4% — and only because of a sell-off in the last 30 minutes of trading on Friday.

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The remarkable thing is that there was a 19-point variance between the high and low for the week, both of which were logged on Friday.  In other words, it was an extremely range-bound market that lacked conviction on the part of buyers and sellers — until the last 30 minutes on Friday.

That lack of conviction was plain to see in the volume totals at the NYSE, which were among the lightest all year.

It was no surprise as this is a popular vacation week, and with the stock market having done so well already in 2017, many participants undoubtedly felt comfortable following pursuits that didn’t include buying or selling stocks.

It is fair to say they didn’t miss much.

The corporate news was very limited. The headline item for the week in that respect included Apple (AAPL), which declined 3.3% and closed just below its 50-day simple moving average during a week when many other stocks didn’t move much.

Apple’s difficulties stemmed from press reports on Tuesday which highlighted some analysts’ concerns about iPhone X demand possibly being weaker than expected in the company’s fiscal first quarter. Separately, Apple had some PR issues to deal with, which subsequently led to an apology from the company pertaining to the battery performance of its older iPhone models.

It would be remiss not to add that AAPL had a great 2017, increasing 46%, so it isn’t unreasonable to think it might have been subjected to some profit taking at year end anyway. The aforementioned headlines, though, helped in that regard.

The livelier trading action took place outside the stock market.

Bitcoin was the picture of volatility; the 10-yr Treasury yield came in eight basis points to 2.41%; oil prices increased 3.1% to $60.27 per barrel, marking their highest close since 2015; gold prices jumped 2.4% to $1309.20/troy oz.; and the U.S. Dollar Index slumped 1.1% to 92.30.

Economic data was limited and on the mixed side, yet the Chicago Purchasing Managers Index for December created some fanfare on Thursday with its best print (67.6) since March 2011, led by a three-and-a-half year high for the New Orders Index and a 34-year high for the Production Index.

Within the stock market, the lightly-weighted real estate sector topped the list of winners with a 1.3% gain for the week. Price returns for the remaining ten sectors ranged from -1.0% (information technology) to 0.3% (utilities).

As a reminder, the stock and bond markets will be closed on Monday for the New Year’s Day holiday and will re-open on Tuesday.

(Excerpts from Briefing.com)

Mega-cap tech posts massive year

Mega-cap technology stocks had an incredible year. Facebook (FB +55% year-to-date), Amazon (AMZN +58%), Apple (AAPL +47%), Netflix (NFLX +56%), Microsoft (MSFT +38%) and Alphabet (GOOGL +33%) all outperformed the Nasdaq 100 (QQQ +32%) and the S&P 500 (SPY +20%).

The strength in these stocks can be justified by the dominant market positions in their respective fields. It seems that fundamental drivers for these stocks will largely remain intact next year amid the secular growth in mobile, video, cloud computing and artificial intelligence. Still, it seems unrealistic to expect a repeat performance in these stocks next year.

Dollar: Dollar Index Ends 2017 on Lower Note

The U.S. Dollar Index declined 0.5% at 92.18, extending its losses for a 4th session to trade at the lowest level since mid-September on Friday. So far this year, the greenback lost more than 9 percent and is on track to book its first decline in 5 years and the biggest since 2003.

 The index gave up 1.2% this week. The bulk of today’s selling took place in overnight action as the euro—and other majors—continued capitalizing on the dollar’s weakness. The single currency has climbed above the 1.2000 mark for the first time since September 20, showing little concern for political storm clouds gathering over Italy.

Bonds: 2017 Ends on Higher Note

U.S. Treasuries ended the week—and the year—on a broadly higher note. The final trading day of 2017 was expected to be very quiet, and it did not disappoint. After starting the cash session near their flat lines, Treasuries commenced a slow ascent that continued until the close. This week’s buying helped 10s and 30s erase the bulk of their losses from last week while the rebound in 2s and 5s was more modest.

That dynamic helped undo nearly all of the yield curve steepening that took place during the week leading up to Christmas. The 2s10s spread compressed seven basis points to 53 bps this week while the 2s30s spread contracted eight basis points to 86 bps. For the year, the 2s10s spread narrowed 72 bps while the 2s30s spread compressed 100 bps. The bulk of the move took part at the front of the curve as the Federal Reserve hiked rates and signaled intentions for remaining on the rate-hike path in 2018. The bond market will be closed on Monday.

The yield curve flattening trend continued with the longer maturities falling faster against the shorter maturities. The 5s10s spread is now only 20bps.

Crude: WTI closes 2017 above $60p/b

Baker Hughes total U.S. rig count decreased by 2 to 929 following last week’s increase of 1

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Metals: Precious strengthen on seasonal run, Copper closes at 4-year high

Agriculture: Corn consolidates, Wheat and Soy strengthen

Commodity Year in Review

How have commodities performed this year? Using the Thomson Reuters/Core Commodity CRB Commodity Index (aka the CRB Index), the short answer is not so great.

The CRB Index is up just 0.6% for the year, yet that limited gain belies some big gains for some commodities. On a related note, a big move in copper prices and oil prices at the end of the year has at least helped the CRB Index close 2017 with a flourish.

The CRB is made up of 19 commodities. Here is the performance of each one YTD:

Looking ahead, the World Bank is forecasting that commodity prices are likely to rise in 2018. From here, let’s focus on some key commodities.

HG

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JANUARY PREVIEW

January 2018 has 21 trading sessions and two holidays. January is usually a bullish month and is famous for its January Barometer prophecy – “As goes January, so goes the year”. This implies that if January closes with a gain, so should the rest of the year. But if January closes with a loss, we’re in for a tough year (although last year wasn’t). The January Barometer has an amazing 90% accuracy since 1950. Exceptions were broadly due to government or central bank interventions such as stimulus and bail outs in bearish years.

Also watch for the “First Five Days” indicator that is as reliable as the January Barometer – if the first five sessions of the year finishes with a gain, the year is often bullish. If they lose, the year has a more than 50% chance of being bearish.

January is the last month in the “Best Three Consecutive Months” in a trading year – November, December and January – that has seen the DOW make gains 16 of the last 23 years. However, 2014, 2015 and 2016 has seen January go down viciously while 2017’s January was flat/unchanged.

JANUARY TRIVIA

THE WEEK AHEAD

Reminder: U.S. markets will be closed Monday, January 1st in observance of New Years Day. 

Tuesday 02 to 05 January (Week 01)

The first week of 2018 (wk01) is bearish across all time-frames on the SPY and DIA.

Seas

The 2018 Stock Trader’s Almanac’s averages for the benchmark indices (based on 21 years) for week 01;

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Key Economic Dates

The shortened week ahead is light on economic data with the most significant events being the Fed Beige Book Meeting on Wednesday and the US Non-Farm Employment Change and Unemployment Rate on Friday.

Mon 01 January

Tue 02 January

Wed 03 January

Thu 04 January

Fri 05 January

2017 IN RETROSPECT …

It has been a fabulous year in the markets. By bullish standards, this was a year to crow about;

2017 by the Numbers

From an economic standpoint, most of it was good, which drove the outperformance of the cyclical sectors:

At the start of 2017, I mentioned that rising Interest Rates would push the US market higher … and it did. Now at 1.50%, there is still has room for more hikes. The Federal Reserve, and other major central banks, will play a key role in the market’s behavior in 2018.  The Federal Reserve will have anew boss, Jerome Powell who will take over from Janet Yellen in February as Fed Chairman. Powell is broadly expected to continue Yellen’s rate hike and tightening program. Should that happen, the market will continue to rise, albeit in a volatile fashion … so watch out for those volatile corrections – I am expecting quite a few especially in the first half of 2018.

The Yield Curve will be my #1 concern as spread continue to tighten with the shorter maturities’ yields rising against the longer maturities.

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The yield on the 10-yr note dropped seven basis points in 2017 to 2.41%, which led to the narrowest spread between the 2-yr note and the 10-yr note (53 basis points) since October 2007. (A flattening spread is often viewed as a harbinger of slower economic growth.)

I will also be watching the spread between the 10yr yield and the Fed Funds Rate. For now, it’s pointing to more upside, albeit in parabolic fashion – thus my worry about severe/volatile swings in Q1 and Q2 of 2018.

I will also closely be watching Japan’s new-found renaissance.

NKK

It has been a stellar year for the Land Of The Rising Sun. Even the Yen held out against the Dollar. I suspect that Japan will be the story for 2018 as it rediscovers its potential to be a world beater again.

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SUMMARY

As we bring in the new year, let’s remember a few interesting statistics;

On a personal note, I am looking forward to the coming year as my expansion plans slowly manifests. I will be slowing on my Tutorial intakes to make time for other ventures and growth plans. But rest assured, my penchant and passion for teaching is still burning bright and I will be taking that flame to the next level in 2018. There are three batches planned for 2018 with an average of 20 new students per batch. A fourth batch will depend on demand coming from my expansion plans. We are also introducing new support classes for our graduates to look forward to in their continuing journey to improve and grow in the financial markets.

If you’re interested in a serious financial education, one that has outlasted almost all other financial workshops over the last 12 years, join me on Wednesday 10 January at 7pm to find out how a complete and holistic finance and economics program has helped so many graduates over the last one dozen years.

Register here: Pattern Trader Introductory Session, 10 January 2018.

It is going to be an exciting year ahead and I am anxious to get it started. So to all my readers, I wish you all a truly profitable 2018 and may the markets be merciful to you if you’re not!

Happy Hunting!

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