Weekly Market Update – 12 February 2018 BMO

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Week in Review: A Wild Ride

The equity market dropped sharply this week, with the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite losing around 5.0% apiece in volatile trading. Sizable gains on Tuesday and Friday helped keep losses somewhat in check, but they couldn’t keep the major indices positive for the year.  The three averages are down between 0.4% and 2.1% year to date.

This week’s selling was related to fears about rising interest rates, and the realization that stocks have gone too far, too fast, but it was a collective de-risking effort following the implosion of short volatility ETFs that acted as the expedient for broad-based and indiscriminate selling activity.  The S&P 500 soared 7.5% in the first four weeks of 2018 on top of last year’s 19.4% rally.

Technical, mechanical, and psychological forces all came together to knock back the market in an abrupt fashion.

The S&P 500 breached its 50-day simple moving average for the first time in five months. Weak-handed investors were consistently shaken out of “buy-the-dip” trades this week, sending stocks, and investor sentiment, even lower.

Congress missed a midnight spending deadline on Thursday–forcing a partial government shutdown–but passed a two-year budget deal a few hours later. The bill will boost spending by approximately $300 billion over the next two years, provide an additional $90 billion for disaster aid, and extend the debt ceiling until 2019.

The increase in spending prompted concerns about fiscal discipline, especially considering debt issuance was already expected to rise due to changes to the U.S. tax code. These concerns kept Treasuries in check and yields at multi-year highs.

However, outflows from the stock market ultimately edged out fiscal concerns, leaving Treasuries modestly higher–and thereby Treasury yields modestly lower–for the week.  The benchmark 10-yr yield finished one basis point below the four-year high it touched last Friday at 2.83%.

Meanwhile, the CBOE Volatility Index (VIX), often referred to as the “investor fear gauge,” ended the week higher by 66.7% at 28.86.

All 11 S&P 500 sectors finished the week in the red, with losses ranging between 2.8% (utilities) and 8.5% (energy). In general, cyclical sectors–including the heavily-weighted financial sector (-5.8%)–underperformed their countercyclical peers.

The energy sector struggled as West Texas Intermediate crude futures dropped 9.5% to $59.23 per barrel–their lowest level since the end of December.

Overseas, equity markets in Asia and Europe finished the week solidly lower, following Wall Street’s lead. China’s Shanghai Composite and Hong Kong’s Hang Seng led the retreat in Asia, dropping 9.5% apiece, while Germany’s DAX and France’s CAC set the pace in Europe with losses of 5.3% apiece.

The market still anticipates that the next rate hike will occur at the March FOMC meeting as Fed officials minimized this week’s sell off, continuing to emphasize a path of gradual rate increases. The CME FedWatch Tool places the chances of a March rate hike at 71.9%, virtually unchanged from last week’s 76.1%.

(Excerpts from Briefing.com)

Friday Update: Ending On a Positive Note

U.S. equities reclaimed a nice chunk of their losses for the week on Friday in another volatile trading session. The S&P 500 gained 1.5%, while the Dow Jones Industrial Average and the Nasdaq Composite advanced 1.4% apiece. The small-cap Russell 2000 also rallied, climbing 1.0%.

The S&P 500 covered a wide range of about 105 points–up 2.2% at its high and down 1.9% at its low.

Stocks opened in positive territory, but began moving lower shortly thereafter. The market hit negative territory in the late morning, but the retreat came to a halt as the S&P 500 approached its 200-day simple moving average (2539), which it had not tested since right before the 2016 presidential election.

The S&P 500 dipped slightly below that key technical level, which served as a springboard for renewed buying efforts which culminated in a late rally that left equities at their session highs.

The defense of the 200-day simple moving average proved to be a silver lining for investors, who endured an otherwise terrible week.  The S&P 500, the Dow, and the Nasdaq lost a little more than 5.0% apiece this week and now trade roughly 9% below the record highs they hit on January 26.

10 of 11 sectors finished Friday in the green as advancing issues outnumbered declining issues 1.4 to 1 at the New York Stock Exchange.

Market Internals – Friday 09 Feb – AMC

Dollar: Rebound Extended

The U.S. Dollar Index was up 0.3% at 90.51, for its second consecutive weekly gain. With the advance, the Dollar Index has climbed 2.0% since hitting a three-year low at the end of January. The ongoing bounce in the greenback might be put to a test, considering the sentiment surrounding the greenback is unlikely to improve significantly after Moody’s warned that a downgrade could be in the cards due to the deteriorating fiscal discipline of the U.S. government. This warning followed the early-morning passage of a spending plan that will increase spending on military and domestic programs by $300 billion over two years, leading to increased debt issuance.

Bonds: Mixed Week Ends on Higher Note

U.S. Treasuries ended a mixed week on a mostly higher note. The day’s biggest headline came from Moody’s, as the ratings agency warned about a potential credit downgrade due to the deteriorating fiscal discipline of the U.S. government. The warning followed an early-morning passage of a budget that will increase spending on military and domestic programs by $300 billion over two years, leading to increased debt issuance at a time where there are growing concerns about the market’s ability to handle the incoming supply. Longer-dated Treasuries showed some weakness in the early going of the Friday session, but that hint of selling spooked the stock market once again. The shaky ground on the equity side lured some money into fixed income, allowing Treasuries to bounce. The 30-yr bond continued this week’s underperformance, lifting its yield (3.14%) four basis points for the week. For its part, the 10-yr note ended the week with a modest gain, pressuring its yield (2.83%) two basis points. High-yield debt remained under pressure with the iShares iBoxx $ High Yield ETF (84.92, -0.27) extending this week’s loss to 1.5%, though it did recover from its intraday low.

The 2yr and 5yr yields fell during the week to steepen the curve as the 30yr yield rose. The spreads between the 10s30s and the 5s10s have now widened to 31bps from 25bps last week.

Crude: WTI falls further, closes below $60.00

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U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.9 million barrels from the previous week. At 420.3 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 3.4 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 increased by 3.9 million barrels last week and are in the middle of the average range for this time of year. Propane/propylene inventories decreased by 4.1 million barrels last week, but are in the middle of the average range. Total commercial petroleum inventories increased by 4.4 million barrels last week.

Baker Hughes total U.S. rig count increased by 29 to 975 following last week’s decrease of 1

Metals: Gold, Silver and Copper continue falling

Agriculture: Corn continues strength, Wheat Corrects, Soy bounces

Commodities measured by the Bloomberg Commodity Index were up 1.6% at 85.6442.

THE WEEK AHEAD

The coming week07 is February Expiration Week. Wednesday is Valentine’s Day (watch for the VD Indicator).

Monday 12 to 16 February (Week 07)

Before getting carried away with the weekly statistics below, please note that the month of February is a tricky month for our models as it is a short month and one or two days’ deviation can make the week look very different. If the days of the week fell differently, these stats can look very bearish because February’s Expiration Friday is one of the most bearish Expiration Fridays on the trading calendar that can turn the whole week bear.

The seventh week of 2018 (wk07) supposed to be bullish over 5, 10 and 15 year averages on the SPY and DIA according to our seasonal models.

The daily averages for the benchmark indices (based on 21 years) for week 07;

Key Economic Dates

In the US, the most important releases will be inflation rate, retail trade, industrial production and the preliminary reading of Michigan consumer sentiment. The UK will also publish inflation and retail sales, while Germany, Italy, Japan and Malaysia will report preliminary figures of GDP growth for Q4. Australia employment figures will be also in the spotlight.

Mon 12 February

Tue 13 February

Wed 14 February

Thu 15 February

Fri 16 February

Earnings Calendar for Week of February 12

Earnings Season winds down with only 2 DOW representatives in the week.

Monday (February 12)

Tuesday (February 13)

Wednesday (February 14)

Thursday (February 15)

Friday (February 16)

OBSERVATION

In an interesting conversation with my graduates regarding the future of Cryptocurrencies, it was mentioned that; “That is what makes bitcoin so appealing in the first place, its decentralisation that takes power away from potential brokers and consolidators.

Indeed, it is a valid point. However, that point alone tells you that it won’t ever happen as long as Central Banks and the IMF have something to say about it.

There already is, in current existence, an instrument that serves the purpose of free trade (without limitations to a great extent) where monies can be moved by the billions from nation to nation, corporation to corporation, individual to individual without the violent fluctuations that crypto poses nor the uncertainly of its value … its called the financial markets.

The Dark Pools have been doing it for more than a century and they are not likely to stand by idly while crypto takes away their century-old rice bowl.

We’ve had plenty of alternative currency channels in the past when the world thought it would become the next phase of currency exchange such as Traveller’s, Diners and AMEX. They all evolved to become part of the existing system rather than become a new norm.

The same can be said for commodities. There was a time just within the last decade when everyone believed that Rare Earth would replace Gold as the precious metal of choice. It never happened. History showed that there were other occasions when Titanium, Platinum and Palladium were thought to be the next big thing to replace Gold … never happened. They all evolved to become part of the existing system.

So, you still think crypto will become an independent system, with a clean disconnect from the current system? Let’s take in one simple fact that obviously answers all questions; Crypto is still valued against major currencies … that means, it is already part of the current system.

Thus, with all the banks and many nations pulling out and banning crypto, I reckon the time will be soon that this form of trading and currency takes the effort to regulate and administer proper governance if they want their product to be taken seriously in the current system.

Something to think about while we watch the drama unfold.

SUMMARY

The markets have begun to look very shaky with little doubt that this is that long-awaited correction that is way over-due. I am tempted to think that this is nothing more than the usual seasonal gyration that has been typical of February in the past. The month has always been known as “the weakest link” in the DOW’s and S&P500’s “best six months between November and April.

What makes it so spectacular is that majority of the players in the market now (outside of the seasoned pros) have never experienced such a gyration or have not seen anything like this since 2012 and to an extent, 2015. So the reactions were to be expected.

The question now is whether this correction is done and dusted or if we’ve only just begun to shake the unsteady pillars of this nine-year rally.

I am still holding to the analyses that the US economy is still holding strong and that there is no reason for it to fall into recession. Thus, the market should not capitulate like it did in 2008 or 2002.

But keep watching the skies because if it starts falling too far too irrationally, its capitulation will surely hurt corporate America and thus send it into recession. It has happened before.

Happy Hunting!

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