Weekly Market Update – 30 April 2018 BMO

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April is historically the most bullish month of the year. However, with one more session left to go, April of 2018 is looking anything but.

The DOW and the S&P500 are still holding above their critical supports of 23,500 and 2,580 respectively while still making lower highs since January this year. It can be argued that the benchmarks are still in a confirmed downtrend.

Now comes May – famous for the most vicious sell-off of any month.

Before barely closing out March above the 2017 December Low, Q1 of 2018 was already warning us about trouble ahead. Given that the second year of the Presidential term is usually the most bearish of the four-year term, the divergence between the January Barometer and the December Low made it increasingly clear that the year would turn out to be troublesome … and it has been rather troublesome for the bulls year to date. To add more Self-Fulfilling Prophecies to that mix, the lack of a convincing sell-off in May last year and a rather dubious last-minute Santa Claus Rally has not given the bulls any confidence that this market can or should go higher.

April’s macros started revealing chinks in the bulls’ armour as the various economic numbers faltered, stalled or contracted. The yield curve flattened to is flattest since 2007 in the last week of April, sending more doubt and confusion into the risk markets.

While the economy is still buoyant and not showing serious signs of early recession, albeit with weaker numbers, one cannot discount the possibility of a market correction so severe that it will drag the economy down instead of the other way round. But for that to happen, the market will need a major catalyst, for which the immediate horizon is not showing … yet.

On the lighter side of analyses, how about this for a leading indicator …

WEEK IN REVIEW – 23 to 27 April 2018: Little Changed Following Busy Week

The S&P 500 was up and down this week, but ended little changed, closing a tick below its flat line. The Nasdaq Composite and the Dow Jones Industrial Average, meanwhile, finished the week with losses of 0.4% and 0.6%, respectively, and the small-cap Russell 2000 lost 0.5%. Earnings were the focal point, but rising Treasury yields, policy decisions from the European Central Bank and the Bank of Japan, and a historic meeting between the leaders of North and South Korea also received some attention.

This week was the busiest week of the first quarter earnings season, with more than a third of S&P 500 companies reporting their results – which largely came in better than expected. However, the market’s reaction didn’t always correlate with the upbeat headlines.

For instance, in the industrial sector, 3M (MMM), Caterpillar (CAT), Lockheed Martin (LMT), and United Tech (UTX) all dropped on Tuesday after reporting their first quarter results, which, headline-wise, came in above-consensus. Caterpillar initially shot higher, but reversed sharply, taking the broader market with it, after saying in its post-earnings conference call that margins in the first quarter will be the “high water mark” for the year. The industrial sector finished the week at the bottom of the sector standings, losing 3.2%.

Conversely, the consumer discretionary sector finished with a solid gain of 1.1%, boosted by a blowout quarter from Amazon (AMZN) — which easily topped both earnings and revenue estimates for the first quarter. Chipotle Mexican Grill (CMG) also rallied on its better-than-expected results, surging nearly 25% on Thursday to close at its highest level in nearly a year.

A number of technology heavyweights reported their first quarter earnings this week, including Alphabet (GOOG), Facebook (FB), Microsoft (MSFT), and Intel (INTC). Facebook soared after handily beating consensus estimates, Microsoft climbed after also beating on the top and bottom lines, Intel slid despite an upbeat report, and Alphabet tumbled after its weaker-than-expected operating margins overshadowed its much better-than-expected earnings and revenues. The top-weighted technology sector finished the week lower by 0.6%.

Outside of earnings, investors kept a close eye on Treasury yields, which touched new multi-year highs on Wednesday before slipping in the final two sessions. The benchmark 10-yr yield crossed the psychologically important 3.0% mark for the first time in over four years, going as high as 3.03%, before settling the week at 2.96%.

The preliminary reading of first quarter GDP crossed the wires on Friday, showing an annualized increase of 2.3% – which was better than the consensus of +2.1%, but a deceleration from the fourth quarter growth rate of 2.9%. The key takeaway from the report is that consumer spending was weak in the first quarter, increasing just 1.1% after increasing 4.0% in the fourth quarter. Real final sales, which exclude the change in inventories and are often viewed as the better gauge of growth, were up only 1.9% versus the prior ten quarter average of 2.2%.

Across the pond, the European Central Bank released its latest policy directive on Thursday morning, which – as expected – left interest rates unchanged and confirmed that net asset purchases will remain at the current monthly pace of EUR30 billion until the end of September 2018, or beyond, if necessary. The euro declined 0.5% against the U.S. dollar to 1.2105 – its lowest level since early January – following the release and a dovish-sounding press conference from ECB President Mario Draghi.

In Asia, the Bank of Japan also left interest rates unchanged, as expected, but removed from its policy statement a reference to reaching its 2.0% inflation target in fiscal year 2019/2020. However, the biggest story of the week in Asia came from the Korean Peninsula, where the leaders of North and South Korea came together for a historic summit. The two leaders signed a pact that seeks permanent and solid peace and stated an aim to work towards a complete denuclearization of the Korean Peninsula.

(Excerpts from Briefing.com)

Friday Update: Earnings Fail to Nudge the Market Higher

The major averages ended Friday little changed despite strong earnings reports from Amazon (AMZN), Microsoft (MSFT), and Intel (INTC) – three high-profile names that helped pace last year’s rally. The S&P 500 finished a tick higher (+0.1%), the Nasdaq settled flat, and the Dow closed a tick lower (-0.1%).

Amazon shares soared at the opening bell, adding nearly 8.0%, after the internet retail giant reported blowout first quarter results – easily beating both top and bottom line estimates – and raised its profit guidance for the second quarter. However, the bullish sentiment soon dampened; AMZN shares quickly slashed their gains in half, eventually closing higher by 3.6%.

Microsoft and Intel shares went through a similar experience after both companies reported better-than-expected quarterly results; Microsoft trimmed its opening gain of 4.0% to 1.7% by the closing bell, while Intel gave back all of its opening gain of 5.0% and then some, finishing lower by 0.6%.

The dialed back buying of these once invincible-looking stocks helped strengthen the narrative that earnings are at, or near, a peak for this growth cycle.

In other earnings news, energy heavyweight Chevron (CVX) beat earnings estimates for the first quarter, but its peer Exxon Mobil (XOM) missed the mark; Chevron shares ended higher by 1.9%, while Exxon shares settled lower by 3.8%. Meanwhile, shares of Starbucks (SBUX) lost 1.7% after the coffee giant’s earnings came in as expected.

Seven S&P 500 sectors finished Friday in positive territory, while four groups finished in the red. Energy (-1.2%) was by far the weakest group, suffering from Exxon’s disappointing earnings, while telecom services (+1.8%) led to the upside following a Reuters report that a merger deal between Sprint (S) and T-Mobile (TMUS) could be struck in the next three days.

U.S. Treasuries rallied for the second day in a row on Friday, sending the benchmark 10-yr yield three basis points lower to 2.96%.

In geopolitics, the leaders of North and South Korea held historic talks on Friday, agreeing to sign a pact that seeks permanent and solid peace and stating an aim to work towards a complete denuclearization of the Korean Peninsula. Separately, German Chancellor Angela Merkel met with U.S. President Donald Trump at the White House to discuss the Iran nuclear deal, trade, and other issues.

The Bank of Japan kept interest rates unchanged, as expected, but removed from its policy statement a reference to reaching its 2.0% inflation target in fiscal year 2019/2020.

Reviewing Friday’s economic data, which most notably included the preliminary reading of first quarter GDP; investors also received the first quarter Employment Cost Index and the final reading of the University of Michigan Consumer Sentiment Index for April:

Market Internals

Dollar: Dollar Index Eyes 200-Day Average

The U.S. Dollar Index was up 0.2% at 91.70, seeking its tenth gain in the past twelve days on Friday. The Index notched a session high immediately after the release of a slightly better than expected advance GDP report for the first quarter (actual 2.3%; consensus 2.1%). The post-data rally produced a session high (91.986) just shy of the descending 200-day moving average (91.988), which hasn’t been breached in a year. The ensuing pullback returned the Index to yesterday’s session high, narrowing this week’s gain to 1.5%.

Bonds: Long Bond Leads Treasuries Higher; Curve Flattens

U.S. Treasuries ended the week on a higher note with the long bond pacing Friday’s advance. Treasury futures climbed in overnight action, leading to a higher open. Shorter tenors briefly surrendered their early gains in response to a slightly better than expected advance reading of first quarter GDP (actual 2.3%; consensus 2.1%), but the long end was not impressed. The report showed that personal consumption expenditures (+1.1%) increased at the slowest rate since the second quarter of 2013 with the entirety of that increase driven by services spending. Longer tenors remained ahead until the close, which pressured the yield curve. The 2s10s spread narrowed two basis points to 48 bps while the 2s30s spread tightened four basis points to 65 bps. On a side note, the 10s30s spread tightened to a cycle low of 17 bps.

It is worth noting that first quarter GDP reports from France (0.3% quarter-over-quarter; 0.7% prior) and the UK (0.1% quarter-over-quarter; 0.4% prior) also showed decelerating growth, turning the “synchronized global growth” narrative that was alive at the beginning of the year into a less-marketable “synchronized global growth slowdown” story.

The entire yield curve FLATTENED over the week with the 5-year maturity rising quicker against the longer maturities while the 30-year yield dropped 1 basis point. The spread between the 5s10s remained at 16bps from 16bps the previous week. The 10s30s tightened to 17bps from 20bps the previous week. 

The historical significance of the 2-year yield at 2.5% is much more than the 10-year’s 3%.

I mentioned this is my Trader’s Alumni Forum earlier this week. Here’s a key point that most yield watchers are missing; The 2 year cracked 2.5% (intraday) during the week and closed at 2.48%. The last time the 2 year gave a 2.5% return was on its way down in August 2008 when the market capitulated. But when did it break 2.5% going up?

That happened in May 2004. That was after two to three months in a downtrend. As the 2 year kept its 2.5% yield, the market began the rally that went all the way up to August of 2007. In that time, the 2 year yield kept rising till it inverted against the 5 year yield in December 2005. By the end of the year, the 2 year yield had also inverted against the 10 year.

Because the 30-year was discontinued on February 18, 2002 and reintroduced on February 9, 2006, we didn’t have a “complete” curve. But when the 30 year returns in February of 2006, it yielded 4.51% against the 2 year’s 4.66%.

While some argued that the curve had inverted, others maintained that is was flat because the spread between the 5, 10 and 30 was practically on par – the accepted old school “norm” for determining an inversion should be more than 10bps between all benchmarks – something that today’s market doesn’t observe anymore.

The curve continued this flat-to-inverted trend all the way into January of 2007.

Thus, watch the 2 year. That 2.5% is flying under the radar but it is a key indication for a possible inversion in about 6 months to a year.


The Bloomberg Commodity Index closed at 89.40, lower than 89.85 the previous week.

Crude: Touches $69 for the first time in more than four years

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 2.2 mln barrels from the previous week. At 429.7 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 increased by 0.8 mln barrels last week, and are in the upper half of the average range. Both finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories decreased by 2.6 mln barrels last week and are in the lower half of the average range for this time of year. Propane/propylene inventories decreased by 0.2 mln barrels last week, and are in the lower half of the average range. Total commercial petroleum inventories increased by 1.4 mln barrels last week.

Baker Hughes total U.S. rig count increased by 8 to 1021 following last week’s increase of 5.

Metals: Gold continues seasonal decline

Agriculture: Grains gain



May ends the “Best Six Months” on the DOW and S&P and begins the six volatile/worst months on the DOW and S&P till October. May has the ominous reputation for having the worst sell-off/correction of any month in the calendar year.

May 2018 has twenty-two (22) trading sessions and one public holiday on Monday 28th May – Memorial Day – markets will be closed. May starts well but immediately becomes bearish within the first week. The rest of the month is more bearish than bullish.

May Trivia


The eighteenth week of 2018 (wk18) tends to swing unpredictably. Over the last 21 years, the week starts out well, becomes very bullish on Tuesday then moderately bullish on Wednesday but turns very bearish on Thursday and Friday. The reliability average over the last 15, 10 and 5 years are not as high as 21 years but is directionally similar with a few slight divergences.

Key Economic Dates

The most important events for the coming week are the Fed Monetary Policy Decision and the US jobs report. Other key economic data for the US include: trade balance, ISM PMIs, PCE price index, personal income and spending and factory orders. Elsewhere: UK Markit PMIs and monetary indicators; Eurozone Q1 GDP growth, inflation and unemployment; Japan and China PMIs; and Australia interest rate decision.

Sun 29 April

Mon 30 April

Tue 01 May

Wed 02 May

Thu 03 May

Fri 04 May

Earnings Season

Next week marks the first of three very heavy weeks of earnings reports – roughly 1/3 of the S&P 500 and 12 of the 30 DOW components will report quarterly results.



The questions poured in during the week as to why rising yields would send fear through the market as the DOW fell as much as 500 points in intraday trading.

We know that valuations are through the roof right now in spite of the correction since February. Such valuations always make investors twitchy for a reason to run.

Corporate debt is also at record high thanks to a decade of cheap money. Any hint at higher rates will make borrowers twitchy too. Higher rates would magnify that debt. Plus the Fed has promised at least three more hikes for this year with five more rate meetings to go for 2018.

Thus, at 3% on the 10-year, this would imply that the Fed could be raising its benchmark rate to at least 3% within the year. The 10-year yield has always served as a reliable indication as to where the Fed Funds Rate would go.

Then throw in the mix of a rising inflation rate (target was 2%, currently at 2.4%), underwhelming corporate earnings (coupled with an over-zealous 17% growth expectation), declining Non-Farm Payrolls since October 2017 (barring that odd February spike), rising oil against a strengthening dollar, slowing growth and a host of other not-so-encouraging economic numbers, you get a market that is in doubt and confused as to where the money should be flowing to.

And when the players look at their charts, they see another looming threat to their money …

As of last Friday’s close, the DOW sits just 609 points (2.5%) above its 200DSMA and below its 20DSMA and 50DSMA. The S&P is less than 59 points (2.2%) above that crucial average and also below its 20DSMA and 50DSMA.

It will only take a couple of volatile sessions in the coming week to drop the benchmarks below their critical 200DSMAs for the first time since that one-day anomaly in June 2016.


May is typically a mixed month for the major indexes but can be quite bearish in midterm years. 2018 is a midterm year. Over the past 67 years, the Dow had 35 Mays that were positive, and 32 that were negative. The S&P500 has seen 39 Mays end in positive territory for the month, and 28 when it declines. The average decline over that period has been around -0.2% while the average gains have been around +0.2%.

However, midterm years have dropped the month of May by as much as 1%. Put into perspective, a 1% loss over a period of a month these days is nothing. But consider that a 1% decline will surely drop the benchmark indices below their respective 200DSMAs and that the 50/200DSMA “Death Cross” is mathematically possible in that scenario, you have a high possibility of a huge sell-off this May.

The coming week will reveal just how tight this situation is. The market will be tested by the FOMC Rate and Policy Statement mid-week and Non-Farm Payrolls at the end of the week. So watch the earnings, the VIX, the yield curve, the market’s internals and everything else in between … looks like a storm is brewing for May 2018.

Happy Hunting!


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