Weekly Market Update – 5 March 2018 BMO

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Week in Review: Selling Resumes

Stocks tumbled this week, with the S&P 500 dropping 2.0%. The Nasdaq Composite did a little better, and the Dow Jones Industrial Average did a little worse, losing 1.1% and 3.1%, respectively. The small-cap Russell 2000 showed relative strength, but still finished lower by 1.0%.

The week actually began on a positive note, with the S&P 500 jumping 1.2% on Monday, but took a turn for the worst on Tuesday when new Fed Chairman Jerome Powell testified before the House Financial Services Committee. Mr. Powell’s prepared remarks didn’t contain any surprises, calling for a continued path of gradual rate hikes. However, in the Q&A session, Mr. Powell noted that his economic projections have increased since the December FOMC meeting, prompting a negative reaction on Wall Street due to concerns that the Fed may hike rates more than expected.

The Fed forecasted three rate hikes for 2018 at its December meeting, but, in light of Mr. Powell’s upwardly revised growth projections, investors have increased their expectations for a fourth hike. The CME FedWatch Tool places the chances of a fourth rate hike at 30.7%, up from 24.4% last week. The chances of a March rate hike are at 83.1%.

Fast-forwarding to Thursday, the equity market was dealt another blow, this time from President Trump, who announced that he’ll be imposing tariffs on steel and aluminum imports–25% for steel and 10% for aluminum. Mr. Trump’s decision prompted concerns about higher prices and retaliation from China and other trading partners.

However, outside of fundamental factors affecting this week’s sell off, it’s also important to note that the S&P 500 broke below its 50-day moving average, a key technical level that’s provided the market with support since the 2016 presidential election. The benchmark index dropped below its 50-day moving average for the first time in five months during the big sell off at the beginning of February and has ticked back above it a few times since–most notably on Monday, when the S&P 500 hit a three-week high.

The S&P 500 initially found support at its 50-day moving average on Wednesday, but selling accelerated after the index broke through the level on its second attempt. If this week’s selling continues, investors will be looking for other potential areas of support, including the S&P 500’s February low (2581) and its 200-day moving average (2561).

11 of 11 S&P 500 sectors finished the week in negative territory, with industrials (-3.3%) and materials (-4.0%) being the weakest performers. The technology (-0.8%), consumer staples (-1.3%), and telecom services (-0.7%) groups exhibited relative strength, but the remaining sectors lost between 2.0% and 2.9%.

A slew of retailers reported earnings this week. TJX (TJX) rallied 7.0% on Wednesday after reporting better-than-expected earnings and revenues for the fourth quarter and raising its profit guidance. Conversely, Lowe’s (LOW) dropped 6.5% in the same session after missing Q4 earnings estimates and lowering its profit guidance for fiscal year 2019. The SPDR S&P Retail ETF(XRT) finished the week lower, but ahead of the broader market, losing 1.4%.

In other corporate news, Comcast (CMCSA) dropped 7.4% on Tuesday after upping a bid from 21st Century Fox (FOXA) for a large stake in British broadcaster Sky.

(Excerpts from Briefing.com)

Friday Update: Ending the Week on a Positive Note

Wall Street finished a disappointing week with a mostly positive outing on Friday. The S&P 500 and the Nasdaq finished with gains of 0.5% and 1.1%, respectively, largely thanks to a late rally that left the two indices at their best marks of the day. Meanwhile, the Dow lost 0.3%, and the small-cap Russell 2000 jumped 1.7%.

President Trump’s decision to impose tariffs on steel and aluminum imports, which was announced on Thursday, prompted threats of retaliation from leaders around the globe and sent stocks lower in Asia and Europe overnight. Wall Street joined the global sell off at the opening bell, with the S&P 500 quickly dropping 1.0%, but the market started to regain its footing about an hour into the session. By midday, the S&P 500 had climbed all the way back to its unchanged mark.

The outperformance of the heavily-weighted health care (+1.0%) and technology (+1.0%) sectors, which represent around 40.0% of the broader market combined, helped lift the benchmark index. Within the health care group, biotechnology shares showed particular strength, evidenced by the 2.4% increase in the iShares Nasdaq Biotechnology ETF (IBB 109.65, +2.61). Meanwhile, chipmakers were among the top performers in the tech space, pushing the PHLX Semiconductor Index higher by 1.8%.

In total, seven of eleven S&P 500 sectors finished in the green. Health care and technology were the best performers, while real estate (-0.4%) was the worst.

The latest batch of fourth quarter earnings included several retail names, including Gap (GPS 34.18, +2.48, +7.8%), Nordstrom (JWN 53.04, +2.93, +5.9%), Foot Locker (FL 40.04, -5.84, -12.7%), and J.C. Penney (JCP 3.71, -0.21, -5.4%). The results were mostly better than expected (GPS, FL, and JCP all beat earnings estimates, while JWN missed).

Meanwhile, Dow component McDonald’s (MCD 148.27, -7.43) dropped 4.8%, hitting its lowest level in more than nine months, after RBC Capital Markets trimmed its target price for MCD shares to $170 from $190, citing a disappointing launch for the fast food giant’s $1, $2, $3 menu.

Elsewhere, U.S. Treasuries gave back most of their Thursday advance on Friday, pushing yields higher across the curve; the benchmark 10-yr yield jumped five basis points to 2.86%. The 10-yr yield finished the week lower by one basis point and nine basis points below the four-year high it hit on February 21.

In currencies, the yen advanced 0.5% against the U.S. dollar to 105.72, which is its best level since November 2016, after Bank of Japan Governor Haruhiko Kuroda said the BoJ would consider exiting from its aggressive monetary easing as early as 2019. Meanwhile, the euro jumped 0.5% against the greenback to 1.2329.

Friday’s economic data was limited to the final reading of the University of Michigan Consumer Sentiment Index for February:

Market Internals – Friday 23 Feb – AMC

Dollar: Pressured Again

The U.S. Dollar Index finished down 0.4% at 89.99, trimming this week’s gain to just 0.1%. On Friday, the Dollar Index failed to hold above its 50-day moving average (90.56), spending the afternoon in a steady retreat. The greenback saw a bit more selling overnight and it has struggled to put together a rebound, spending U.S. trade in the lower half of the day’s range.

Bonds: Selling Resumes

U.S. Treasuries finished the week on a lower note with the long bond reversing yesterday’s entire advance. Treasuries started the day with modest losses and continued sliding until the 10-yr note reached its closing level from Wednesday around 11:20 ET. After finding support at that level, the 10-yr note edged up off its low during afternoon action. Meanwhile, the long bond reached Wednesday’s intraday low in late-morning action, but modest afternoon buying lifted it back near Wednesday’s closing level. The volatile week ended with slim gains for 10s and 30s while 2s and 5s ended the week in negative territory.

The long end of the yield curve flattened a little. The spread between the 5s10s narrowed to 24bps from 25bps the previous week while the 10s30s spread narrowed to 27bps from 29bps the previous week.

Crude: Falling Back

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 3.0 million barrels from the previous week. At 423.5 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 2.5 million barrels last week, and are in the upper half of the average range. Finished gasoline and blending components inventories both increased last week. Distillate fuel inventories decreased by 1.0 million barrels last week and are in the middle of the average range for this time of year. Propane/propylene inventories decreased by 0.4 million barrels last week, and are in the lower half of the average range. Total commercial petroleum inventories increased by 3.7 million barrels last week.

Baker Hughes total U.S. rig count increased by 3 to 981 following last week’s increase of 3.

Metals: Downtrend continues

Agriculture: Higher for the week

Commodities measured by the Bloomberg Commodity Index closed at 88.1477, lower than 88.6922 the previous week.

THE WEEK AHEAD

Monday 05 to 09 March (Week 10)

The tenth week of 2018 (wk10) is supposed to be bullish over the 5, 10 and 15 year averages on the SPY and DIA according to our seasonal models.

Key Economic Dates

For week 10, the most important release will be the US jobs report. Other indicators include the ISM non-manufacturing PMI, factory orders and trade balance. Elsewhere, China inflation and trade balance; GDP growth for Japan and Australia and monetary policy decisions from the ECB, the BoJ, the RBA and the RBC will also be in the spotlight.

Sun 04 March

Mon 05 March

Tue 06 March

Wed 07 March

Thu 08 March

Fri 09 March

TECHNICALS

On weekly candles, the DOW and S&P500 are wearing Bearish Engulfing patterns while the NASDAQ sports an ugly Dark Cloud implying that the coming week could see more downside action before and recovery bounce can be expected.

Looking at the DSMAs on the DOW and S&P500, it would seem that the benchmarks could struggle against their respective 50DSMAs in the coming week when they break upwards. S&P on daily candles has a Thrusting Pattern that should continue to the downside at the open of the coming week. Both the DOW and S&P remain below their 20/50DSMA Death Crosses for the second week. 

SUMMARY

Statistically, the coming week is supposed to be bullish. Technically, the signs are pointing to some downside before any reversal can happen. Seasonally, we in a bullish window. However, the yield curve is signalling warnings as it flattens again. To add to the confusion, rhetorically, Trump and Powell have kept the market down and given it more reason to be fearful.

This gives us more reason to be cautious if we’re anticipating the return of the Bulls in March and April. Concerns about inflation and the Federal Reserve agreeing to four rate hikes this year will be a major concern going forward and could present the resistance that stops the market from rallying further. Chances of more volatility in the coming months is definitely on the cards. It would take a brave man to bet that this correction is all done and dusted.

Happy Hunting!

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