Weekly Market Update – 19 February 2018 BMO

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Week in Review: Bouncing Back

The equity market rallied this week, reclaiming about half of the losses it registered over the previous two weeks. The tech-heavy Nasdaq Composite climbed 5.3% as technology shares outperformed, while the S&P 500 and the Dow Jones Industrial Average added 4.3% apiece. The S&P 500 and the Dow ended Friday on a six-session winning streak.

This week’s gains put the S&P 500, the Nasdaq, and the Dow back into the green for the year and back above their respective 50-day simple moving averages. They’re still a ways below record territory, however, settling Friday about 5.0% beneath the record highs they posted on January 26.

11 of 11 S&P 500 sectors finished the week in positive territory, with gains ranging between 1.8% and 5.8%. The top-weighted technology group (+5.8%) was the strongest sector, while the energy (+1.9%), utilities (+2.9%), telecom services (+2.4%), and real estate (+1.8%) groups were the weakest.

In general, cyclical sectors, which tend to do well when the economic outlook is favorable, outperformed their countercyclical peers.

Within the tech group, Apple (AAPL), surged 10.2% this week, reclaiming most of the 13.5% it lost between January 18 and February 8, and Cisco Systems (CSCO) rallied 4.7% on Thursday–hitting its best level in nearly 20 years–after reporting better-than-expected profits for the quarter ending in January and raising its earnings and revenue guidance.

Investors received a big batch of economic data this week, highlighted by a hotter-than-expected CPI reading: the Consumer Price Index increased 0.5% month over month in January (consensus +0.4%) and the core CPI, which excludes food and energy, rose by 0.3% (consensus +0.2%). The headline month-over-month figures sparked a knee-jerk reaction from the market, which has been fighting fears of inflation – and, in turn, fears of a more hawkish Fed – in recent weeks.

However, the year-over-year figures helped restore order and keep the week’s upward trajectory intact, showing that both the CPI and the core CPI are still within a range they’ve held to for some time; the total CPI is up 2.1% year over year and has been between 2.0% and 2.2% for five months, while the core CPI is up 1.8% year over year and has been between 1.7% and 1.9% for ten months.

The yield on the benchmark 10-yr Treasury note climbed to a four-year high on Wednesday following the CPI release, closing at 2.91%, but gave up some ground on Thursday and Friday to finish the week little changed at 2.88%. Meanwhile, the 2-yr yield climbed 12 basis points this week, closing at 2.19%–its highest level in nearly a decade.

Meanwhile, in the currency market, the U.S. Dollar Index returned to a three-year low on Thursday (88.50), but bounced back a bit on Friday to finish the week with a loss of 1.4%. The greenback showed particular weakness against the Japanese yen, dropping 2.4% to 106.22, which is its lowest level since November 2016.

In Washington, the White House released its infrastructure plan on Monday, which is designed to stimulate $1.5 trillion in spending over a decade. (See “Observation” below)

U.S. markets will be closed on Monday in observance of Presidents’ Day.

(Excerpts from Briefing.com)

Friday Update: Flat on Friday

Stocks kept their weekly gains intact ahead of the extended Presidents’ day weekend, finishing Friday’s session little changed.

The S&P 500 (unch) and the Dow Jones Industrial Average (+0.1%) eked out their sixth consecutive victories, while the Nasdaq Composite underperformed, finishing lower by 0.2%. For the week, the three major stock indices settled with gains between 4.3% and 5.3%.

Equities rose steadily throughout the morning, but reversed course in the early afternoon following news that a federal grand jury has indicted 13 Russian nationals and three Russian entities on accusations of interference in the 2016 presidential election. Some of those defendants allegedly communicated with unwitting individuals associated with the Trump campaign.

Trading was choppy following the headline, which, more than anything, gave investors a convenient excuse to pull back following five straight days of gains.

Six of eleven S&P 500 sectors finished Friday in the green, with the heavily-weighted health care group (+0.7%) being among the top performers. In general, countercyclical sectors outperformed their cyclical peers on Friday after trailing them throughout the week. The consumer discretionary (-0.4%), energy (-0.3%), and technology (-0.2%) sectors were among the worst-performing groups.

In the bond market, U.S. Treasuries ended the week on a flat note. The yield on the benchmark 10-yr Treasury note slipped one basis point to 2.88%, while the 2-yr yield ticked up one basis point to 2.19%. For the week, the 10-yr yield added two basis points, and the 2-yr yield jumped 12 basis points.

Reviewing Friday’s batch of economic data, which included Housing Starts and Building Permits for January, Import and Export Prices for January, and the preliminary reading of the University of Michigan Consumer Sentiment Index for February:

Market Internals – Friday 16 Feb – AMC

Dollar: Strengthening

The U.S. Dollar Index was up on Friday  at 0.6% at 89.14, to snap a four-day skid. The Index dipped to a new cycle low in overnight action, but rebounded swiftly, embarking on a steady advance that paused before the Index could reach last week’s low. A recent wave of dollar buying has lifted the Index to a fresh session high, but it has yet to overtake last week’s low. Friday’s advance was extended after the day’s first batch of data showed that import prices excluding oil increased 0.4% in January, which adds to inflationary pressures. The Dollar Index has trimmed this week’s loss to 1.4%.

Bonds: Morning Gains Surrendered Amid Trade Policy Concerns

U.S. Treasuries ended the week on a flat note after surrendering the bulk of their Friday morning gains. Longer-dated Treasuries began the Friday session on a modestly higher note and continued their climb until the late morning, but the 10-yr note found resistance near levels from Tuesday while the long bond reversed after nearing its opening high from Wednesday. At its best level of the day, the long bond was on track to erase last week’s loss, but the early-afternoon pullback left the 30-yr bond little changed for the week. The pullback accelerated after news from the Commerce Department fueled the argument that the administration’s policies could spark a trade war. Specifically, the Commerce Department recommends (1) a global tariff of 24.0% on all steel imports, (2) a 53.0% tariff on steel imports from 12 countries (including China) and a quota on imports from elsewhere, or (3) a quota on all steel imports. The Department made similar recommendations regarding aluminum, proposing (1) a 7.7% tariff on all aluminum imports, (2) a 23.6% tariff on aluminum products exported from China, Hong Kong, Russia, Venezuela, and Vietnam, or (3) a quota on all aluminum imports. President Trump has until April to accept or reject the recommendations.

The yield curve flattened as the shorter maturities’ yields rose while the 30yr yield stayed rooted. The spread between the 5s10s remained unchanged at 25bps from last week while the 10s30s spread is at 26bps from 31bps the previous week.

Crude: WTI recovers, closes above $61.00

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.8 million barrels from the previous week. At 422.1 million barrels, U.S. crude oil inventories are in the lower half 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 upper half of the average range. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories decreased by 0.5 million barrels last week and are in the middle of the average range for this time of year. Propane/propylene inventories decreased by 3.3 million barrels last week, and are in the middle of the average range. Total commercial petroleum inventories decreased by 2.7 million barrels last week.

Baker Hughes total U.S. rig count was flat following last week’s increase of 29.

Metals: Gold, Silver and Copper bounce back impressively

Agriculture: Corn continues strength, Wheat bounces, Soy gains momentum

Commodities measured by the Bloomberg Commodity Index closed higher at 88.2043 from 86.3257 the previous week.


The coming week08 is a shortened week as Monday is a holiday. It is the most bearish week of the month of February that often carries its bearishness into the end of the month.

Tuesday 20 to 23 February (Week 08)

Like I said last week, let’s not get carried away with the weekly statistics below because the month of February is a tricky month for our models. It is a short month and one or two days’ deviation can make the week look very different. If the first day of the week was Monday or Tuesday instead of Thursday, everything would look very different.

The eighth week of 2018 (wk08) is supposed to be bullish over the 5 and 10 year averages but is unreliably bearish on the 15 year average on the SPY and DIA according to our seasonal models.

The daily averages for the benchmark indices (based on 21 years) for week 08;

Key Economic Dates

Next week, the Federal Reserve, the ECB and the RBA will be publishing the minutes of last monetary policy meetings. Other important releases include: US existing home sales; UK second estimate of GDP growth, unemployment and wages; Japan inflation and trade balance; Australia wages; and flash PMIs for the US, Eurozone and Japan.

Mon 19 February

Tue 20 February

Wed 21 February

Thu 22 February

Fri 23 February


$1.5 trillion in infrastructure spending over the next decade. That’s $150 billion annually. That’s a shitload of money that will sure stimulate the economy … if only I could believe it … and if the next president chooses to continue the program. There’s no denying that the initial euphoria of that news should spur the market to higher highs in the interim.

However, its continuity depends on how they disperse those monies into what kind of infrastructure spending. If, like the Sub-Prime stimulus, the monies go through Wall Street or to conglomerates that are expected to re-disperse the monies, then the rich are only going to get richer with the bulk of the payout while drips and draps actually trickle into the economy.

But read the full bill carefully and it appears to NOT be a $1.5 trillion stimulus at all …

Right now, I am not too blown away by that projection because Trump seems to be talking with a forked-tongue. How quickly we forget that his previous bill looked at cuts to Fast Starts, Amtrak, and the Highway Trust Fund, indicating a $40 to $75 billion net reduction over the next decade on infrastructure spending.

In its infrastructure bill released on Monday 12 February 2018, the White House proposed spending $200 billion in federal funds on a series of undefined programs. But in its fiscal year 2019 budget request, which was also released on Monday, Trump laid out a remarkably austere path for roads, bridges and especially transit systems, with as much as $275 billion in cuts to infrastructure programs.

Rebuilding Infrastructure in America” proposes taking some federal funds – $200 billion – and, over the next ten years, portioning out half of that amount in “infrastructure incentivegrants to states and localities that can show they have the means to pay for 80 percent of their project costs.

Thus, the actual plan is to leverage the $200 billion to stimulate a total of $1.5 trillion in infrastructure spending, the vast majority public and private investments.

Read it all here: https://www.nytimes.com/interactive/2018/02/12/business/infrastructure-spending.html


Interesting technicals to leave you something to think about;

Friday was interesting session to see the benchmarks get wedged between the 20 and 50DSMAs. If you’re wondering why the session was so constricted and flat, there’s your answer. The DOW refused to break below its 50DSMA while getting rejected at its 20DSMA.

The session closed in an ugly Shooting Star implying downside (or consolidation) when the market resumes trading on Tuesday. The real test will be breaking above the 20DSMA or below its 50DSMA.

The weekly perspective is also just as interesting. Having finished in a Bullish Harami last week, the candlestick formation is hinting at a sideways consolidation or an upside reversal in the coming week. The price, again, is trapped between its 10week and 20week MAs, prompting me to believe that it is likely to be a downside consolidation if the DOW is unable to break above or below those weekly averages.

Then comes the most interesting analysis; the Weekly MACD (12, 26, 9). The first red histogram has appeared in spite of the bullish bounce last week. It isn’t often that the MACD histograms turn red for just one week to become bullish the next. Just drag out a 10 or 20 year chart on weekly candles and you’ll see how significant the histograms are to indicate sentiment and strength in a longer timeframe.

One last exercise for you to drop your jaw … drag about the DOW for 50 or 60 or 80 years … whatever … put up the MACD (12,26,9) on daily, weekly and monthly charts. And in one jaw-dropping moment, you’re going to realise why I have become so conservatively bullish – the MACD has never been this high in history than in the last three months!

Despite my bullish outlook based on current macros, I am skeptical that the market can keep this up for longer. Let’s not forget that the market can crash without the economy going into recession. This has usually happened in bubble scenarios which inevitably dragged the economy into recession as a lagging effect. This is not likely to be like the Sub-Prime where the economy dragged the market down. I reckon the worst-case scenario will be a 70s style stagflation where the market becomes volatile and sideways until some revolutionary monetary policy balances everything out. In the mid-70s to mid-80s, it was Greenspan’s tightening and easing policies. Today, Blockchain perhaps?

Happy Hunting!


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