Weekly Market Update – 02 April 2018 BMO

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QUARTER ONE 2018 IN REVIEW

Quarter One of 2018 was one major roller-coaster ride when everything we’re used to went out of whack. I’ve not seen divergence like this since 2007 and the number of >1% sessions were more than I have ever seen in such a condensed period of time. I don’t remember 2008 being this violent except in the month of October that year. Even then, the frequency of >1% gyrations weren’t as many. In Q1 of 2018 alone, the total sessions that exceeded 1% was more than double that of the entire year of 2017.

January went smoothly up to give the market hope of a bullish year ahead when the month closed healthily in bullish fashion, triggering the ever-reliable January barometer. Earnings season kicked off in very bullish style giving the bulls more reason to cheer. Unemployment hit a decade low record and even the VIX fell to a decades’ low record of 8.94, levels not seen since December 1993.

Then it all fell apart in February.

Dow Jones Q1; 2 Jan to 29 March 2018

So much happened in the last two months including tax reforms, major political shifts in the Trump administration, a new Fed chief whose first act was to hike rates up to 1.75% from 1.50%, government shutdown (again), investigations against Facebook (Cambridge Analytica), Trump’s metals tariffs, more sanctions against North Korea, the threat of Trade Wars, China’s launch of its own oil futures contracts in Yuan which threatens the Petro-Dollar, the Aramco deal, Trump’s blockade of Broadcom’s acquisition of Qualcomm, increasing tensions between the US and Russia, Kim’s visit to China, Parkland shooting, Stormy Daniels’ revelation … nuts, just nuts.

Even Cryptocurrency’s hype went out the window and out of mind in a hurry. Seems an eternity ago that crypto was all the rave that got everyone talking. Not strangely, it’s fallen silent, leaving a lot of carnage in its wake.

Bitcoin fell from a high of 19,783 in 17 December 2017 to 7,151 by 5 February 2018 for a -63.8% loss – a record capitulation that even exceeds the Tulip Mania – in only a matter of ten weeks!

Friday 29 March’s close of 7,115 registered its lowest close (since its parabolic rise) for a loss of -64% in 16 weeks – also a record capitulation by any stretch.

What a quarter … what a ride. And we still have three more quarters left to run.

WEEK IN REVIEW – 26 to 29 March 2018: Market Rebounds

Equities rebounded this week, ending a two-week skid; the Nasdaq Composite climbed 1.0%, the S&P 500 jumped 2.0%, and the Dow Jones Industrial Average rallied 2.4%. Trading was volatile at times, but smoothed out on Thursday as investors wrapped up the abbreviated week on a positive note. Markets will be closed on March 30 for Good Friday.

Investors kicked off the week with a rally on Monday, pushing the major indices up between 2.7% and 3.3% apiece, following a Wall Street Journal report that the U.S. and China have started negotiating to improve American access to Chinese markets. The news helped ease fears of a trade war, which were elevated after the White House announced tariffs on Chinese imports last week — prompting Beijing to retaliate with tariffs of its own. Microsoft (MSFT) was particularly strong on Monday, spiking around 7.5%, after Morgan Stanley raised its target price from $110 to $130 – a new Street high.

The market reversed course on Tuesday, however, with FAANG names – Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOG) – leading the retreat. Market darling NVIDIA (NVDA) tumbled nearly 8.0% after announcing that it has temporarily suspended autonomous driving tests in order to learn more about last week’s fatal collision involving a self-driving Uber car. Tesla (TSLA), which is a leader in autonomous driving technology, also dropped around 8.0%.

Stocks struggled for direction on Wednesday, but then rallied on Thursday ahead of the extended Easter weekend. However, unlike many of its FAANG peers, Amazon (AMZN) continued tumbling after an Axios report on Wednesday that President Trump would like to change Amazon’s tax treatment, as he believes the company has gotten a free ride from taxpayers. The White House initially responded by saying there aren’t any policy changes regarding Amazon at the moment, but the president reiterated his concerns about the company in a tweet on Thursday. AMZN shares lost 3.2% this week in total.

11 of 11 S&P 500 sectors finished the week with gains. Less-risky countercyclical groups like consumer staples (+3.5%), utilities (+3.0%), and telecom services (+3.1%) were the top performers, while the heavily-weighted financial sector (+2.7%) also showed relative strength. The top-weighted technology space lagged with a gain of 1.7%, while the consumer discretionary sector was among the worst performers, thanks largely to Amazon, adding 1.1%.

Investors received the Personal Income and Spending report for February on Thursday, and, for the second month in a row, it was in line with expectations. The PCE Price Index increased 1.8% year-over-year after being up 1.7% year-over-year in January, while the core PCE Price Index rose 1.6% year-over-year after three consecutive months of 1.5% year-over-year growth. The key takeaway from the report is that it won’t influence Fed officials to significantly alter the course of monetary policy.

In the bond market, the yield curve flattened notably this week, with the 2s10s spread dropping seven basis points to 48 bps – its lowest level since 2007. The yield on the benchmark 10-yr note declined seven basis points to 2.74%, while the 2-yr yield held steady at 2.26%. Most of the bond buying took place amid the equity sell off on Tuesday.

(Excerpts from Briefing.com)

Friday Update: Wall Street Ends Abbreviated Week on Positive Note

Technology shares rebounded on Thursday, leading a broad rally on Wall Street, as investors kicked off the extended Easter weekend on a positive note.

The tech-heavy Nasdaq Composite jumped 1.6% to 7063.44, the S&P 500 climbed 1.4% to 2640.87, and the Dow Jones Industrial Average advanced 1.1% to 24103.11. The three major indices finished Thursday with weekly gains between 1.0% and 2.4%, but finished March with monthly losses between 2.7% and 3.7%.

Technology giants Microsoft (MSFT 91.27, +1.88), Facebook (FB 159.79, +6.76), and Alphabet (GOOG 1031.79, +27.23) added between 2.1% and 4.4% on Thursday, while other notable tech names like Intel (INTC 52.08, +2.48), Netflix (NFLX 295.35, +9.58), and NVIDIA (NVDA 231.59, +10.24) advanced between 3.4% and 5.0%. Apple (AAPL 167.78, +1.30) also finished in the green, adding 0.8%, but a late bout of selling pulled the company, and the broader market, from its session high.

Needless to say, the S&P’s most influential sector – information technology – finished at the top of the sector standings, adding 2.2%. Thursday’s positive performance for the tech sector was preceded by disappointing outings on Tuesday and Wednesday, during which the group declined by a total of 4.3%. The sector had a poor month, losing 4.0%, but still remains at the top of the 2018 sector standings with a year-to-date gain of 3.2%; for comparison, the S&P 500 is down 1.2% for the year.

As for the 10 remaining sectors, nine finished Thursday in positive territory, with energy (+2.2%) and materials (+1.9%) showing particular strength. The telecom services (unch) and real estate (-0.1%) sectors were the worst performers, but they didn’t have much of an impact; the two groups represent just 5.0% of the broader market combined. The heavily-weighted financial group finished a step behind the benchmark index, adding 1.3%, as yields declined across the curve; the benchmark 10-yr yield dropped four basis points to 2.74%.

In the consumer discretionary sector (+1.4%), Amazon (AMZN 1447.34, +15.92) fell as much as 4.6% before rebounding to finish with a gain of 1.1%. The early weakness was attributed to a tweet from President Trump, in which he reiterated his concerns about the company, condemning it for paying “little to no taxes to state and local government” and using the U.S. Postal System as its “delivery boy.” The tweet followed a Wednesday report from Axios that said Mr. Trump is looking for ways to regulate the internet giant.

Overseas, the major stock indices in Asia finished Thursday on a higher note, with Japan’s Nikkei adding 0.6%, and the major bourses in Europe also advanced, adding between 0.2% and 1.3% apiece. Russia announced that it will expel 60 U.S. diplomats and order the closure of the U.S. Consulate in St. Petersburg in retaliation to similar measures taken by the U.S. and other countries following the poisoning of a former Russian double agent in England.

Markets in the U.S. and Europe were closed on Friday 30 March for Good Friday.

Reviewing Thursday’s big batch of economic data, which included February Personal Income, Personal Spending, PCE Prices, and core PCE Prices, the weekly Initial Claims report, the Chicago PMI for March, and the final reading of the University of Michigan Consumer Sentiment Index for March:

Dollar: Dollar Index Holds at One-Week High

The U.S. Dollar Index was up 0.1% at 90.15, for its third consecutive advance. The Index ended the week with a gain of 0.8% after reclaiming its decline from Monday. The Thursday session saw limited movement, which made sense, considering most markets will be closed the next day for Good Friday while European markets will remain closed through Easter Monday.

Bonds: Abbreviated Week Ends With Solid Gains

U.S. Treasuries ended the abbreviated week on a higher note with the long bond pacing the day’s advance. The 30-yr bond opened in the green and continued pushing steadily higher into the afternoon. Meanwhile 5s and 10s surrendered their opening gains during the first hour of trade, but support was found just below yesterday’s closing levels, allowing shorter tenors to follow in the footsteps of the long bond. Today’s advance pressured the 10-yr yield to its lowest level since early February while the 2s10s spread tightened by another basis point, dipping to a fresh cycle low of 48 bps.

The entire yield curve flattened over the week with the 2-year yield staying rooted while the longer maturities’ yields fell. The spread between the 5s10s fell to 18bps from 22bps the previous week as did the 10s30s at 23bps from 25bps the previous week. The spread between the 2s30s is now only 71bps.

The last time the yield curve pivoted to flatten along the higher end of the yields was back in December 2006 till January of 2007. It would seems like it is doing it again at a painfully slower pace than eleven years ago. But it is happening nonetheless.

Crude: Brent & WTI close lower in shortened week

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.6 mln barrels from the previous week. At 429.9 mln barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories decreased by 3.5 mln barrels last week, but are in the upper half of the average range. Finished gasoline inventories remained unchanged while blending components inventories decreased last week. Distillate fuel inventories decreased by 2.1 mln barrels last week and are in the lower half of the average range for this time of year. Propane/propylene inventories decreased by 1.2 mln barrels last week, and are in the lower half of the average range. Total commercial petroleum inventories decreased by 1.6 mln barrels last week.

Baker Hughes total U.S. rig count declined by 2 to 993 following last week’s increase of 5.

Metals: Precious fall back, Copper gains

Agriculture: USDA released two key grain/oilseed reports on Thursday to send corn and soybean prices higher :

Prospective planting report: (Click to download pdf report)

Grain stock report: (Click to download pdf report)

Commodities measured by the Bloomberg Commodity Index closed at 87.4729, higher than 87.4415 the previous week.

THE MONTH AHEAD

April 2018 has twenty-one (21) trading sessions and no public holidays. April is the most bullish month on the DOW since 1950 with an average gain on 1.90%. It is the third best month for S&P500 and fourth best for NASDAQ since 1971. April is the last month of DOW’s and S&P500’s “Best Six Months” and the first month of Quarter Two.

April Trivia

THE WEEK AHEAD

The fourteenth week of 2018 (wk14) tends to be very bullish on Monday and Tuesday, then moderately bullish on Wednesday and Thursday. Friday becomes quite bearish.

Key Economic Dates

The highlight for the coming week will be the US Non-Farm Payroll on Friday, preceded by the ADP employment report on Wednesday. A host of manufacturing data from China (Sunday), US (Monday and Wednesday) and UK (Tuesday) along with Australia’s RBA Rate Statement on Tuesday should make the first week of April rather eventful.

Sun 01 April

Mon 02 April

Tue 03 April

Wed 04 April

Thu 05 April

Fri 06 April

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TEN YEARS AGO IN QUARTER ONE 2008 …

Strange that after ten years, nothing seems to have changed … senseless shootings, plunging markets from record highs after a parabolic bull run, tax cuts, financial shenanigans from the government and Central Bank, espionage (read: selling data) …

Humans, by nature, never change
~ Jesse Livermore

TECHNICALS

The DOW and S&P500 closed out Quarter One YTD in the red and below the low of December 2017’s low. With the January Barometer indicating a bullish year ahead conflicting with the bearish December Low indicator, this usually translates into a year that will either be extremely volatile or very flat. However …

The NASDAQ barely eked out a small 56.5 point (+0.8%) gain to close Q1 in the black to marry well to its bullish January Barometer. This could imply that the tech sector could do well for the rest of the year … technically speaking. This is very divergent from what the other two benchmarks’ are implying.

The real worrying divergence comes from the Transports; 

It is like a summary of what the main benchmarks are also suggesting – tech will be okay but the broader market may not.

The S&P had been flirting with the 200DSMA for the last five sessions of March and for now, is barely staying above that critical technical level and above its 2,600 support. The DOW, likewise is also just above its 200DSMA and above its 23,500 support. The broader market is going to depend on these benchmarks to hold the line and not fall below their critical technical supports nor their respective 200DSMAs. If April performs the way it usually does by being the most bullish month of the year, staying up should not be an issue. 

However, I mentioned in a recent Facebook posting that;

There’s much too much disruptive factors happening to have any confidence that April will perform as it has in the past. Earnings Season begins in a little under two weeks from now and the common consensus is that companies will be hawkish going forward.

Then we have the third FOMC Monetary Policy Meeting for the year. With Powell eager to get rates up, expect more volatility in April as investors and traders grapple with the confusion the Fed has laid down with its higher-rates policies in an environment lacking any inflation.

It would seem like the DOW broke out of its Symmetrical Triangle in March and is finding support on my 38.2% PhiB-Fan. That also happens to be a touch above my upside COP at 23,250. One of two things are expected to happen thereafter …

If the COP holds, then April should see some upside to the OP level of 26.590 where it will encounter the possibility of a Double Top. If that happens, May is going to get real interesting.

Or …

If the break out of the Symmetrical Triangle holds true, then we should see a break below the critical support of 23,500 and a further break below the COP level of 23,250 . If that happens, we’re looking at a 12.5% correction but not yet an officially bear market. The fear level for that classification is at 21,288 (-20%), the support level from June/July 2017.

SUMMARY

The spread between the 10-year yield and the Federal Funds Rate has tightened to 99bps from 113bps since January this year. This is one spread I will be watching closely from now on. The tighter the spreads get, the closer we get to a major economic downturn … well, at least that’s how it has panned out in the past. Every time the FFR crossed over and above the 10-year yield, the market went down and the economy went into recession as was the case in 1997, 2000 and 2006.

Quarter Two beckons! Bring it on and bring on more fireworks!

This is an amazing market and one that I am loving! Let’s get it on!

Happy Hunting!

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