Weekly Market Update – 05 February 2018 BMO

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Monday 29 January to Friday, 2 February, 2018

Week in Review: Pulling Back

Stocks tumbled this week, denting their impressive 2018 gains; the Dow Jones Industrial Average dropped 4.1%, the S&P 500 slid 3.9%, and the Nasdaq lost 3.5%.

While investors had a lot of news to digest, including President Trump’s first State of the Union address, a tech-heavy batch of fourth quarter earnings, and the Employment Situation report for January, the selling was more so a natural response to a market that’s moved too far too fast–although, a spike in Treasury yields did help strengthen a case for the bears.

Technology names dominated this week’s batch of earnings, with Apple (AAPL), Microsoft (MSFT), Facebook (FB), and Alphabet (GOOGL) reporting their fourth quarter results, which were mostly better-than-expected. However, the companies’ shares settled the week mostly lower; MSFT, GOOGL, and AAPL shares lost 2.4%, 5.8%, and 6.4% for the week, respectively, while FB shares advanced 0.2%, touching a new all-time high.

Apple reported above-consensus earnings on in-line revenues, but iPhone sales for the holiday season came in weaker than expected, and the company lowered its sales forecast for the first three months of 2018. Meanwhile, Facebook beat earnings and revenue estimates and reassured investors that its ad business would remain highly profitable despite changes to its news feed, which have prompted users to spend less time on the site–about 50 million hours less per day (in aggregate).

As for the others, Microsoft reported above-consensus earnings and revenues on the back of its rapidly-growing cloud computing business, while Alphabet, the parent company of Google, missed earnings estimates–despite beating revenue forecasts–largely due to rising costs.

Outside the technology space, Amazon (AMZN) and Boeing (BA) also reported their quarterly results this week. Amazon ended with a weekly gain of 2.0% after blowing past earnings estimates–thanks in part to changes in the U.S. tax code–while Boeing jumped 1.7% after also soundly beating earnings estimates, beating revenue estimates, and issuing much better-than-expected guidance for fiscal year 2018.

In other corporate news, the health care sector struggled this week, losing 5.1%, after Amazon (AMZN),Berkshire Hathaway (BRK.A), and JPMorgan Chase (JPM) announced on Tuesday that they will be partnering to form a company focused on reducing health care costs for hundreds of thousands of their U.S. employees.

In Washington, President Trump delivered his first State of the Union address on Tuesday evening. The president stayed on script, calling for a $1.5 trillion infrastructure plan and a compromise on immigration that would allow a path to citizenship for “Dreamers” in exchange for his promised barrier along the Mexico border and added border security. Mr. Trump also noted that lowering prescription drug prices is a top priority of his administration and took a firm, but relatively calm, stance against North Korea.

Meanwhile, Fed Chair Janet Yellen wrapped up her time at the Federal Reserve on a rather uneventful note as the Federal Open Market Committee unanimously voted on Wednesday to leave the fed funds target range unchanged at 1.25%-1.50%, as expected. In its statement, the central bank said near-term risks to the economic outlook appear roughly balanced, but added that officials are keeping an eye on inflation, which has been slow to pick up despite a tightening of the labor market.

The policy directive did little to change the market’s rate-hike expectations; the CME FedWatch Tool still points to the March FOMC meeting as the most likely time for the next rate-hike announcement, with an implied probability of 77.5% (up from 74.7% last week), and calls for an additional two hikes before the end of the year.

On the data front, investors received the Employment Situation report for January on Friday: Nonfarm payrolls came in better-than-expected (+200,000 actual vs +180,000 consensus), average hourly earnings hit estimates (+0.3% MoM), and the unemployment rate stayed at 4.1% as expected. U.S. Treasuries were lower for the week ahead of the report’s release, but extend their losses in the aftermath, sending yields to multi-year highs.

The yield on the benchmark 10-yr Treasury note spiked 19 basis points to 2.85% this week, its best level since January 2014, while the 2-yr yield climbed two basis points to 2.14%, its best level in nearly a decade–dating back to the financial crisis. The recent rise in Treasury yields–the 10-yr yield has climbed 50 basis points in seven weeks–is seen by some as a positive sign for economic growth, but it could also be a headwind for equities, which are trading at very high valuations.

Friday Update: Wall Street Gives Back Good Chunk of Yearly Advance

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Friday, 2 February, 2018

The sky fell on Friday. Just kidding. The stock market just had a bad day–which has kind of felt as impossible as the prospect of a falling sky since the start of the year.

The Dow Jones Industrial Average tumbled 2.5%, and the S&P 500 and the Nasdaq Composite lost 2.1% and 2.0%, respectively, but the three major indices still hold year-to-date gains between 3.2% and 4.9%. Equities opened Friday with sizable losses and extended those losses throughout the session, finishing at session lows.

Declining issues outnumbered advancing issues 9 to 1 at the New York Stock Exchange. In terms of S&P 500 sectors, 11 of 11 finished in negative territory, with the energy space (-4.1%) pacing the retreat following fourth quarter earnings from Chevron (CVX) and Exxon Mobil (XOM). Both companies missed revenues estimates; Exxon missed profit estimates as well. In addition, a decline in the price of crude oil also weighed on the sector; West Texas Intermediate crude futures slid 0.8% to $65.30 per barrel.

The top-weighted technology sector (-3.0%) also had a rough outing, with Apple (AAPL), Alphabet (GOOGL), and Visa (V) losing between 3.8% and 5.3% after releasing their Q4 results. Apple and Visa beat earnings estimates, but Alphabet came up short despite reporting better-than-expected revenues. Apple’s iPhone sales were disappointing, and the company lowered its sales forecast for the first quarter.

Dow component Merck (MRK) also reported Q4 results, beating bottom-line estimates, but slid 2.2% nonetheless.

On a positive note, Amazon (AMZN) jumped 2.9%, touching a new intraday record, after soundly beating earnings estimates for the fourth quarter, thanks in large part to changes in the U.S. tax code. The consumer discretionary sector (-0.9%), which houses Amazon, was among the top-performing groups.

It’s also worth pointing out that the CBOE Volatility Index, often referred to as the “investor fear gauge,” spiked about four points, or 29.0%, on Friday to 17.40–its highest level since the U.S. presidential election on November 8, 2016.

(Excerpts from Briefing.com)

Fed Leaves Rates Unchanged at 1.25-1.50%

Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures 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, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/4 to 1-1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

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 objectives of maximum employment and 2 percent inflation. 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. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Voting for the FOMC monetary policy action were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Jerome H. Powell; Randal K. Quarles; and John C. Williams.

January Job Growth and Wages on the Rise

Job growth was solid again in January, but the focal point was the 0.3% jump in average hourly earnings. That was in-line with the consensus estimate, but after taking revisions into account, it left average hourly earnings up 2.9% year-over-year — the highest growth rate since May 2009.

There has been a burgeoning assumption that the strengthening economy and the tight labor market are going to invite higher wages and wage-based inflation pressures that have been dormant for years. The key takeaway, then, is that the January report has given some data-based life to that assumption and has offered a reasonable basis for the Federal Reserve to move ahead with a rate hike at its March meeting.

The notable headlines from the Employment Situation Report are as follows:

  • January nonfarm payrolls increased by 200,000 (consensus 180,000). Over the past three months, job gains have averaged 192,000 per month
    • December nonfarm payrolls revised to 160,000 from 148,000
    • November nonfarm payrolls revised to 216,000 from 252,000
  • January private sector payrolls increased by 196,000 (consensus 175,000)
    • December private sector payrolls revised to 166,000 from 146,000
    • November private sector payrolls revised to 217,000 from 239,000
  • January unemployment rate was 4.1% (consensus 4.1%) versus 4.1% in December
    • Persons unemployed for 27 weeks or more accounted for 21.5% of the unemployed versus 22.9% in December
  • January average hourly earnings were up 0.3% (consensus 0.3%) after increasing an upwardly revised 0.4% (from 0.3%) in December
    • Over the last 12 months, average hourly earnings have risen 2.9%, versus 2.7% for the 12 months ending in December
  • The average workweek in January was 34.3 hours (consensus 34.5) versus 34.5 hours in December
    • January manufacturing workweek ticked down to 40.6 hours from 40.8 hours in December
    • Factory overtime was unchanged at 3.5 hours
  • The labor force participation rate was 62.7% in January, versus 62.7% in December

Dollar: Skid Snapped

The U.S. Dollar Index was up 0.5% at 89.09, seeking to reclaim Thursday’s loss. The greenback bounced against most other currencies on Friday, but the move comes after an extended wave of selling. Going into Friday’s session, the index was down 4.0% in 2018 and down 6.2% over the past three months. Friday’s move received a boost from a better than expected Employment Situation report for January (actual 200K; consensus 180K), which showed the strongest average hourly earnings growth since 2009 (+2.9% year-over-year). With this advance, the Index looks to record its first weekly gain in seven weeks.

Bonds: Down Week Ends on Weak Note

U.S. Treasuries ended a down week on a lower note with longer durations bearing the brunt of today’s weakness. The trading day began with modest losses, but the selling picked up after the release of a better than expected Employment Situation report for January (actual 200K; consensus 180K), which showed that average hourly earnings increased 2.9% year-over-year, marking the sharpest growth rate since 2009. That figure received a boost from a decline in the average workweek (actual 34.3; consensus 34.5), but capital markets have shown increased sensitivity to signs of inflation as of late, and today’s report has invited chatter about the Fed stepping up the pace of rate hikes. Dallas Fed President Robert Kaplan, who is not an FOMC voter this year, said that while the base case calls for three rate hikes in 2018, more hikes could take place. The continued ascent in yields coupled with chatter about a more aggressive Fed weighed on the stock market after a torrid start to the year. The S&P 500 (-2.0%) is on track to surrender 3.8% for the week, narrowing its 2018 gain to 3.4%. Typically, a trend-down day in the stock market would lead to some buying in the Treasury market, but stocks and Treasuries retreated throughout the day, suggesting risk parity funds were forced to conduct some deleveraging and raise cash.

While the 2yr made modest gains, the 5yr, 10yr and 30yr yields spiked during the week to steepen the curve. The spreads between the 10s30s and the 5s10s are 25bps after tightening last week.

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Crude: WTI falls back, closes above $65.00

Crude

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 6.8 million barrels from the previous week. At 418.4 million barrels, U.S. crude oil inventories are in the middle of the average range for this time of year. Total motor gasoline inventories decreased by 2.0 million barrels last week, and are near the top of the average range. Both blending components and finished gasoline inventories decreased last week. Distillate fuel inventories decreased by 1.9 million barrels last week and are in the middle of the average range for this time of year. Propane/propylene inventories decreased by 0.9 million barrels last week, but are in the middle of the average range. Total commercial petroleum inventories increased by 2.1 million barrels last week.

Baker Hughes total U.S. rig count decreased by 1 to 946 following last week’s increase of 11.

Metals: Gold, Silver and Copper drop

Agriculture: Corn, Wheat continues strength, Soy corrects

Commodities measured by the Bloomberg Commodity Index, are down 0.83% at 89.1213.

Comms

(Top down, left )Brent, WTI, Nat Gas, (Centre) Gold, Silver, Copper, (Right) Corn, Wheat, Soy

THE WEEK AHEAD

The coming week06 is the penultimate week of Q4 Earnings Season.

Monday 05 to 09 February (Week 06)

The sixth week of 2018 (wk06) is bullish over 5, 10 and 15 year averages 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 06;

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Key Economic Dates

Next week, the most important data for the US include trade balance, ISM non-manufacturing PMI, JOLTs job openings and consumer credit change. Elsewhere, the BoE, the RBA and the RBI will provide an update on their monetary policy. Investors will also be looking for the UK industrial output and China trade balance, inflation and producer prices.

Sun 04 February

Mon 05 February

Tue 06 February

Wed 07 February

Thu 08 February

Fri 09 February

Earnings Calendar for Week of January 29

Earnings Season begins winding down with fewer big hitters and DIS as the only DOW representative in the coming week.

Monday (February 05)

Tuesday (February 06)

Wednesday (February 07)

Thursday (February 08)

Friday (February 09)

TECHNICALS

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After the biggest weekly drop since 2008, one of two scenarios will surely play out to reveal if this market is doomed for its long overdue correction or not;

Friday’s session revealed that the bears do indeed have the sustainable ability to continue this correction given that the week had been in their favour and they still had the strength to muster one of the most bearish sessions on Friday since 24 June 2016.

The bulls at lunchtime were only able to muster 60,000 ticks against the bears’ 330,000 downticks. That’s a ratio of 5.5:1 in favour of the bears. By the closing bell, the bulls retreated and the bears didn’t cover their shorts in spite of a very profitable week. The session finished 712,000 down-volumes to 48,000 up-volumes for a ratio of almost 15:1 in favour of the bears.

If the bears follow-up in the coming week (given its historically bullish tradition for week06), it will have to start on Monday to complete a Down-Friday-Down-Monday (DFDM), a phenomenon that often marks tops and bottoms on indices. The last DFDM was at the start of December last year, exactly 2 months ago.

Internals

TransThe leading indicator that brought my awareness to a possible correction amongst the major indices was the Transportation Index. Those who follow my postings closely, know that I closely track the Transports and rely on it’s signals more than any other index.

As you can clearly see, the Transports were falling for two weeks prior to any other index. It fell below the 20DSMA on Tuesday and is now threatening the 50DSMA by closing just 34 points above it on Friday. On Thursday, 1 Feb, the Transports became the first index to form a Death Cross on its 10 and 20 DSMAs.

The DOW, NASDAQ and S&P500 all crossed below the 20DSMA on Friday and are just two or three session from dropping below their critical 50DSMAs if the coming week continues to fall.

SUMMARY

Interesting times, these. As an observation, another interesting development was the fall of BitCoin and its counterparts.

BTC

That is the most impressive collapse I have ever witnessed after the October 1987 crash and the Shanghai Composite collapse in June 2015.

Falling from 19,783 on 17 December 2017 to 7,695 on Thursday 1 February 2018 meant that BTC has fallen by as much as 61% in only 47 sessions or one and a half months. Truly spectacular. Not my cup of tea but definitely entertaining.

However, it wasn’t at all peasant to recall hearing many a conversation about investors who had proudly claimed to have bought in at around 11,500 and 12,000 from two and three weeks ago. They must be hurting by now and I do feel sorry for them.

Do these people buy it because its a fad? Or is it greed? Or maybe even out of pride to prove the Crypto Nay-sayers and Doubters wrong?

Whatever the reason, regardless of who is right or wrong, whether or not you were greedy, never mind who taught it to you and even though you didn’t buy the high, the fact remains – you bought it and now its hurting you.

The signs were always there and this very forum was already screaming “bubble” at 15,000 and “danger” at 18,000 as it was rising. It was only a matter of time that this would happen. And for good and valid reasons too. Yet people bought into it then. Now that it has fallen, the bargain hunters are getting their hands cut up badly for Catching A Falling Knife.

I do wish that everyone takes the market seriously and stop treating it like a gambling den or some destination for your financial panaceas. If you don’t know enough about the business, you shouldn’t get involved. Don’t come into the markets half-assed and hope to take on the big boys in their own back yard. You’re seriously asking for trouble … if you don’t get lucky. And in the long term, the markets are never about luck, magic tricks, secret formulae or the best tips.

The markets are a professional place where people like myself, my graduates and many other well trained professional make a living or a secondary income from. It takes a lot of learning, months and months of practice, years of experience and gobs of passion.

Stop dreaming, get out before it’s too late or get yourself a PROPER mentor with the right stuff to teach it to you.

Happy Hunting!

By the way … we’re having our last Introductory Session to the Pattern Trader™ Tutorial on Wednesday, February 7th. The batch is confirmed to go ahead in March and there are only a few seats remaining. Miss this batch and it will be a long wait till the next one. So book that date early, bring a friend/relative and really do yourself a favour by knowing what you really need in order make it in this business.

After 12 years of educating professionals in the arts and sciences of Finance and Economics, I don’t need to bullshit you into knowing that this is the only financial education you should consider.

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Find out more about the Pattern Trader Tutorial here:
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Pattern Trader Tutorial Batch 93 March 2018

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