Weekly Market Update – 22 January 2018 BMO

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Week in Review: Bulls Dominate Another Week

It was another good week on Wall Street; the Dow Jones Industrial Average jumped 1.0%, the Nasdaq Composite climbed 1.0%, and the S&P 500 added 0.9%. However, the bulls looked somewhat fatigued, at least in comparison to the first two weeks of the year; the S&P 500 rose 2.6% in the first week of 2018 and 1.6% in the second. This week, the S&P 500 posted losses in two of four sessions (markets were closed on Monday for Martin Luther King Jr. Day).

Maybe it’s the beginning of the end for the new year rally. Maybe not.

What is certain is that 2018 has been a great year for the stock market thus far. The Dow, the Nasdaq, and the S&P 500 have advanced between 5.1% and 6.3% year to date and have notched a handful of new records along the way. And that’s to say nothing of the stock market’s 2017 campaign, during which the major averages climbed between 19.4% and 28.2%.

Financials dominated the earnings front this week with Citigroup (C), Bank of America (BAC), Goldman Sachs (GS), U.S. Bancorp (USB), Charles Schwab (SCHW), Morgan Stanley (MS), and American Express (AXP) reporting their fourth quarter results. All seven companies beat earnings estimates, but revenues came in mixed; Goldman Sachs, Morgan Stanley, and American Express reported above-consensus revenues, while Bank of America missed estimates. The S&P 500’s financial sector (+1.0%) finished roughly in line with the broader market.

Meanwhile, the health care sector (+1.9%) was among the top-performing groups this week. Within the space, UnitedHealth (UNH) rose 6.4% after reporting better-than-expected earnings for the fourth quarter, and Merck (MRK) jumped 4.5% after announcing that its drug Keytruda was successful, in combination with two chemotherapy drugs, as a first line treatment for lung cancer.

The consumer staples (+2.4%) and technology (+1.5%) sectors finished alongside health care at the top of the sector standings. The tech group’s largest component by market cap – Apple(AAPL) – announced that it will make a one-time tax payment of $38 billion to repatriate cash holdings overseas and will invest over $30 billion in the U.S. over the next five years, creating 20,000 new jobs. Apple said its decision was the result of recent changes to the U.S. tax law.

Meanwhile, IBM (IBM) slipped 0.5% despite reporting year-over-year revenue growth for the first time in 23 quarters.

The industrial sector (-0.9%) slid this week with General Electric (GE) pacing the retreat. GE shares tumbled 13.3%, hitting a six-year low, after the industrial giant said its legacy reinsurance business will take a larger-than-expected charge of $6.2 billion for the fourth quarter. In addition, the company was reported to be considering a major breakup.

The energy sector (-1.3%) also underperformed as crude oil retreated from a three-year high; West Texas Intermediate crude futures dropped 1.6% to $63.30 per barrel.

In Washington, the House of Representatives passed a one-month spending measure on Thursday evening, but that bill doesn’t appear to have enough support to pass in the Senate, where it needs Democratic votes to reach the 60-vote threshold. If an agreement cannot be reached by 12:01 AM ET Saturday morning, the government will start closing nonessential operations.

Investors didn’t appear to be shaken though, pushing the S&P 500 and the Nasdaq to new records on Friday.

(Excerpts from Briefing.com)

Dollar: Dollar Index Trims Weekly Loss

The U.S. Dollar Index was up 0.2% at 90.63, narrowing the week’s loss to 0.4%. While the dollar index traded modestly higher, the uptick came after yet another slip in overnight action. The Index returned above its flat line around the start of the U.S. session on Friday, but was not able to extend its gain. Despite the lack of follow-through from the Index, the greenback has displayed underlying strength against some minor and exotic currencies.

Bonds: 10-yr Yield Overtakes 2016 High

U.S. Treasuries ended the week on a lower note, though intraday action was very limited. The market began the day with modest losses that lifted the benchmark 10-yr yield to its highest level since the middle of 2014. The opening retreat was followed by a dip to fresh session lows, which gave way to sideways action until the close. With the deadline to fund the government fast approaching, the focus was on Washington throughout the day, but reports coming out of the capital suggested that negotiations will go down to the wire, boosting the likelihood that lawmakers will not meet the deadline. The yield curve steepened a bit this week, as the 2s10s spread expanded to 59 bps from 55 bps. The 2s30s spread, however, expanded by just one basis point to 86 bps.

For the week, the yield curve rose with the belly of the curve gaining the most. The  10s30s spread tightened to 27bps from 30bps the previous week. The 5s10s spread widened by 1bps.

Crude: WTI Pulls Back Below $64.00

Crude

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 6.9 million barrels from the previous week. At 412.7 million barrels, U.S. crude oil inventories are in the middle of the average range for this time of year. Total motor gasoline inventories increased by 3.6 million barrels last week, and are in the middle of the average range. Both finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories decreased by 3.9 million barrels last week and are in the lower half of the average range for this time of year. Propane/propylene inventories decreased by 3.7 million barrels last week, and are in the lower half of the average range. Total commercial petroleum inventories decreased by 13.8 million barrels last week.

Baker Hughes total U.S. rig count decreased by 3 to 936 following last week’s increase of 15

Metals: Gold, Silver and Copper slide further

Agriculture: Grains recover

Commodities, as measured by the Bloomberg Commodity Index, are currently down 0.2% at 88.5425.

THE WEEK AHEAD

The coming week is the third week of Q4 Earnings Season the first of two of the busiest weeks of earnings season.

Tuesday 22 to 26 January (Week 04)

The third week of 2018 (wk04) is unreliably bullish over the 10 and 15 year averages while modestly bearish over the last five years on the SPY and DIA according to our seasonal models.

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The 2018 Stock Trader’s Almanac’s averages for the benchmark indices (based on 21 years) for week 04;

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Key Economic Dates

Next week, the most important data for the US include the advance estimate of Q4 GDP growth, durable goods orders, new and existing home sales, and flash Markit PMIs. Elsewhere, the ECB and the BoJ will provide an update on their monetary policy. Investors will also be looking for the UK GDP growth and unemployment; the Eurozone flash PMIs; and Japan inflation.

Mon 22 January

Tue 23 January

Wed 24 January

Thu 25 January

Fri 26 January

Earnings Calendar for Week of January 22

Monday (January 22)

Tuesday (January 23)

Wednesday (January 24)

Thursday (January 25)

Friday (January 26)

SUMMARY

The bulls look like they’re losing steam … or is it purely the volatile nature of earnings season? The coming week will further test the bulls’ resilience as earnings season heats up with no less than eight DOW components on the line and plenty of big hitters from the defense, metals and airline industries.

I remain cautiously bullish but will increase my risk in the coming weeks if the market continues to give us regular dips to buy into. Positions will be quick and moderately leveraged over a week and I am keeping nothing over the weekends.

Happy Hunting!

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