Weekly Market Analysis – 22 October 2018 BMO

WEEK IN REVIEW – 15 to 19 OCTOBER 2018 :
Mixed Outing As Earnings Season Ramps Up

Stocks had a mixed outing this week after suffering heavy losses in the week prior. The benchmark S&P 500 finished flat, leaving its October loss at 5.0%, and the blue-chip Dow ticked up 0.4%. Conversely, the tech-heavy Nasdaq fell 0.6%, and the small-cap Russell 2000 lost 0.3%.

The third quarter earnings season ramped up this week after kicking off last Friday. Financial companies Goldman Sachs (GS), Morgan Stanley (MS), Bank of America(BAC), U.S. Bancorp (USB), Charles Schwab (SCHW), and BlackRock (BLK) reported mostly better-than-expected profits, helping to boost the S&P financial sector 0.8% higher.

Meanwhile, the health care sector rallied 0.5% after Dow components Johnson & Johnson (JNJ) and UnitedHealth (UNH) beat earnings estimates and issued above-consensus guidance.

Software giant Adobe Systems (ADBE) surged nearly 10% on Tuesday after it reaffirmed fourth quarter guidance and said it expects FY19 revenues to be up 20%. The information technology sector trailed the broader market this week overall though, losing 1.2%. Chipmakers were relatively weak, with the Philadelphia Semiconductor Index falling 2.2%.

Netflix (NFLX) was another notable name on this week’s earnings calendar. The streaming media giant beat bottom-line estimates and reported higher-than-expected subscriber growth by adding nearly seven million new subscribers last quarter – six million coming from overseas. However, shares fell later in the week on news that The Wall Street Journal is investigating the company’s corporate culture.

Away from earnings, home-improvement retailers Home Depot (HD) and Lowe’s (LOW) sold off on Wednesday following some disappointing housing data. Housing starts rose to a seasonally adjusted annualized rate of 1.201 million units in September, below the consensus estimate of 1.221 million, and building permits declined to a seasonally adjusted annualized rate of 1.241 million, also below the Briefing.com consensus estimate of 1.273 million.

Also of note, retailer Sears Holdings (SHLD) filed for Chapter 11 bankruptcy. While the news was not a surprise, it did generate a sentimental story line given the retailer’s storied operating history.

The minutes from the September FOMC meeting were released on Wednesday, showing that officials generally agreed on the need for more gradual rate hikes. In addition, the minutes revealed that a number of officials saw the need to hike rates above levels expected to prevail over the long run. The probability of a December rate hike remains high, ticking up to 83.7% from 79.8% last week, according to the CME FedWatch Tool.

As for the 11 S&P 500 sectors, they finished the week pretty evenly mixed between green and red. Defensive groups like consumer staples (+4.3%), utilities (+3.1%), and real estate (+3.2%) were the top performers, while growth-sensitive groups like consumer discretionary (-2.0%), energy (-1.9%) and materials (-1.4%) finished at the bottom of the sector standings.

In other markets, U.S. Treasuries slipped this week, pushing yields higher; the yield on the benchmark 10-yr note climbed three basis points to 3.20%. The U.S. Dollar Index advanced 0.6% to 95.46, but WTI crude fell 2.9% to $69.26/bbl.

The disappearance and alleged murder of Washington Post columnist Jamal Khashoggi pressured U.S. Treasury Secretary Steven Mnuchin into pulling out of next week’s Future Investment Initiative conference in Saudi Arabia. President Trump expressed confidence in intelligence reports that the murder was ordered by high-level Saudi officials, but stopped short of putting the blame on Saudi Arabia’s crown prince Mohammed bin Salman.

Elsewhere overseas, China’s Shanghai Composite touched a new four-year low this week due to investor concerns over slowing economic growth. On Friday, China reported 6.5% year-over-year GDP growth, less than the prior quarter’s growth of 6.7% and less than the expected growth of 6.6%. Meanwhile, the Euro Stoxx 50 advanced 0.5% this week despite continued angst that the Italian budget situation could get nasty.

Additionally, Canada became the second country in the world to legalize marijuana on Wednesday, causing a sell-the-news reaction in weed stocks.

(Economic Excerpts from Briefing.com)

Monday 15 October:

Retail Sales Come Up Short in September :

Retail sales were up just 0.1% in September (consensus +0.6%) after increasing 0.1% in August. Excluding autos, sales declined 0.1%. (consensus +0.4%)

The key takeaway from the report is that core retail sales, which factor into GDP growth models, were up a solid 0.5%. Hence, the headline numbers were disappointing, yet this report will still factor favorably for Q3 real GDP growth prospects.

Business Inventories in August Match Expectations :

Total business inventories increased 0.5% in August, in-line with the consensus estimate, after increasing an upwardly revised 0.7% (from 0.6%) in July. Total business sales also increased 0.5% after increasing 0.2% in July.

The key takeaway from the report is that business sales continued to outpace inventory growth year-over-year, which is a favorable trend that carries the potential to lead to a better pricing environment for businesses.

Treasury Budget Deficit Increases by $113.2 Billion in FY18 :

The Treasury Budget for September showed a surplus of $119.1 billion versus a surplus of $7.9 billion for the same period a year ago. The Treasury Budget data is not seasonally adjusted, so the September surplus cannot be compared to the $214.1 billion deficit for August.

The budget deficit for fiscal 2018 totaled $779.0 billion versus $665.8 billion in fiscal 2017.

Tuesday 16 October:

Industrial Production Up in September Despite Hurricane Florence :

Industrial production increased 0.3% in September, matching the consensus estimate, after increasing an unrevised 0.4% in August.  Hurricane Florence had an estimated effect of less than 0.1 percentage point on output growth.  The capacity utilization rate remained at 78.1% for the second straight month, slightly shy of the consensus estimate of 78.2%.

The key takeaway from the report is that it revealed the strongest year-over-year growth rate in industrial production (+5.1%) since December 2010.

Wednesday 17 October:

Housing Starts Sluggish in September :

The key takeaway from the September Housing Starts and Building Permits report is that the supply of new homes isn’t picking up fast enough to meet the demand for new homes at more affordable price points. Accordingly, overall home sales activity will continue to be curtailed by affordability constraints.

Fed releases minutes from September FOMC policy meeting :

Key Excerpts :

Minutes of the Federal Open Market Committee

Thursday 18 October:

Initial Claims Send Good October Payrolls Signal :

Initial claims for the week ending October 13 dropped by 5,000 to 210,000 (consensus 212,000). Continuing claims for the week ending October 6 decreased by 13,000 to 1.640 million, which is the lowest level since August 4, 1973.

The key takeaway from the report is that it covered the week in which the survey for the October employment report was conducted. Accordingly, with the low level of initial claims, economists will have a basis to forecast another solid increase in nonfarm payrolls.

Philadelphia Fed Index Eases in October, but Remains Rooted in Expansion :

The Philadelphia Fed Index eased to 22.2 in October (consensus 20.0) from 22.9 in September. The dividing line between expansion and contraction for this regional manufacturing survey is 0.0.

The key takeaway from this report is that manufacturers remain optimistic about the outlook, as 48% of respondents expect business activity to increase over the next six months versus only 14% that expect declines.

Leading Economic Index Rides Consumer Expectations to September Gain :

The Conference Board’s Leading Economic Index increased 0.5% in September (consensus +0.5%) after increasing an unrevised 0.4% in August.

The key takeaway from the report is that there was widespread strength in the basket of leading indicators.  The strongest contribution came from average consumer expectations for business conditions (+0.14 percentage points), which should be constructive for consumer spending activity.

Friday 19 October:

Rising Mortgage Rates Clip Existing Home Sales in September :

Existing home sales declined 3.4% month-over-month in September to a seasonally adjusted annual rate of 5.15 million (consensus 5.30 million), which is the lowest sales level since November 2015. Total sales were 4.1% lower than the same period a year ago.

The key takeaway from the report is that home sales activity was pressured by the limited supply of lower-priced homes and the affordability constraints presented by higher mortgage rates.


Friday 19 October
S&P 500 Finishes Flat Despite Strong Start

The S&P 500 closed Friday at its flat line, a fitting end to a flat week; the benchmark index ended just 0.02% above last Friday’s close. The session began with a bang, with the S&P 500 adding as much as 1.0%, following a positive overnight performance from Chinese markets and more upbeat earnings. However, sentiment soon shifted, prompting a slow and steady retreat from early highs.

As for the other major averages, the blue-chip Dow Jones Industrial Average added 0.3%, tech-heavy Nasdaq Composite lost 0.5%, and the small-cap Russell 2000 fumbled 1.2%.

China’s Shanghai Composite rebounded from a four-year low on Friday, adding 2.9%, despite reporting a lower-than-expected GDP reading (+6.5% actual vs +6.6% consensus). Chinese officials made a collaborative effort to ease investor angst about liquidity risk and China’s economic fundamentals.

On the earnings front, Procter & Gamble (PG) and PayPal (PYPL) jumped 8.8% and 9.4%, respectively, after beating earnings estimates. Procter & Gamble wowed investors with quarterly organic sales increasing 4% — its highest increase since Q1 of its fiscal 2014 year. In addition, Dow component American Express (AXP) enjoyed a healthy gain of 3.8% after besting earnings estimates and raising its profit guidance.

Within the S&P 500 sectors, investors played defense again. The consumer staples (+2.3%), utilities (+1.6%), and real estate (+1.0%) sectors finished atop Friday’s leaderboard. Conversely, the consumer discretionary (-0.9%) and health care (-1.0%) sectors weighed on the broader market, and energy (-0.8%) and materials (-0.7%) also underperformed.

Looking at other markets, U.S. Treasuries ticked lower to conclude the week, pushing yields higher. The 2-yr yield and 10-yr yield each increased two basis points to 2.90% and 3.20%, respectively. For the week, the 2-yr yield added four basis points, and the 10-yr yield added three basis points. In addition, the U.S. Dollar Index fell 0.3% to 95.46.

In energy, WTI crude recouped some of its recent losses on Friday, settling 0.8% higher at $69.26/bbl. Still, the commodity remains near a one-month low.

Market Internals – Friday 19 October 2018

Dollar: Streak Snapped

The U.S. Dollar Index closed down on Friday at 0.2% at 95.64, marking its first decline since Monday. The Dollar Index held its ground during the Thursday overnight session, but it began retreating once attention turned to Europe. A rebound in Italian debt boosted the euro, which in turn pressured the Dollar Index to a session low around 12:45 ET. The Index climbed off its low, but it held the bulk of Friday’s decline, trimming this week’s gain to 0.5%.

Bonds: Down Week Ends on Lower Note

U.S. Treasuries ended the week on a lower note, but intraday movement was limited, as the 10-yr note and the 30-yr bond settled within striking distance of their opening levels. Treasury futures held their ground in overnight trade while Asian markets had a mixed showing. China reported slightly weaker than expected year-over-year growth (actual 6.5%; expected 6.6%) for the third quarter, but the report was overshadowed by comments from several Chinese officials, who discussed measures for supporting China’s capital markets. The remarks helped China’s Shanghai Composite jump 2.6% after hitting a four-year low yesterday. The sideways action in the Treasury futures market was followed by selling just before the U.S. cash open. That weakness took place as Italian debt rebounded from this week’s low. Treasuries saw some selling during the first two hours of the session, but longer tenors showed resilience while 2s and 5s remained near their morning lows until the close. The slope of the yield curve was unchanged when compared to last Friday. The 2s10s spread remained at 30 bps while the 2s30s spread held at 48 bps.

The yield curve rose across the board. The spread between the 5s10s remained at 15bps from 15bps the previous week while the 10s30s remained at 18bps from 18bps the previous week. The spread between the 2yr and 30yr yields is only 48bps. 


The Bloomberg Commodity Index settled at 85.95, lower than 86.24 the previous week as energy, grains and copper fell.

WTI oil broke below $70.00 p/b and settled the week at $69.12. The spread between WTI and Brent widened to $10.66 from $9.09 the previous week.

EIA petroleum data for the week ended October 12

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 6.5 mln barrels from the previous week. At 416.4 mln barrels, U.S. crude oil inventories are about 2% above the five year average for this time of year. Total motor gasoline inventories decreased by 2.0 mln barrels last week and are about 7% above the five year average for this time of year. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories decreased by 0.8 mln barrels last week and are about 3% below the five year average for this time of year. Propane/propylene inventories increased by 2.0 mln barrels last week and are about 5% below the five year average for this time of year. Total commercial petroleum inventories increased last week by 3.0 mln barrels last week.

Natural gas inventory showed a build of 81 bcf vs a build of 90 bcf in the prior week. Working gas in storage was 3,037 Bcf as of Friday, October 12, 2018, according to EIA estimates. This represents a net increase of 81 Bcf from the previous week. Stocks were 601 Bcf less than last year at this time and 605 Bcf below the five-year average of 3,642 Bcf. At 3,037 Bcf, total working gas is below the five-year historical range.

OPEC sees oil prices continuing lower over the coming weeks, according to the WSJ.

Baker Hughes total U.S. rig count increased by +4 to 1067 following last week’s increase of 11.




Week 43 (October 22 to 26)

According to our 5, 10 and 15 year seasonal models;

Benchmarks Indices (21 year average) for wk43:

Week 43 Key Economic Dates

Next week, important releases for the US include: Q3 GDP growth, flash Markit PMIs, new and pending home sales and durable goods. Elsewhere, ECB and Bank of Canada monetary policy decisions; Eurozone, Germany and France flash Markit PMIs; and Japan flash Markit Manufacturing PMI will also be in the spotlight.

Sun 21 October

Mon 22 October

Tue 23 October

Wed 24 October

Thu 25 October

Fri 26 October


With 17% of the S&P 500 having reported quarterly results, reported earnings are up 22%; 81% have beat on the bottom line but only 51% have traded higher in response.

Next week is the start of three very heavy weeks of earnings reports with almost a third of the DOW and S&P 500 reporting quarterly results.



Despite the recent drop, I am still not a buyer yet. For now, I prefer to stay heavily hedged on any long position or just stay short (with tight stops) for the possibility of a further drop given October’s reputation.”

That was definitely a good plan which I will keep for the next two weeks at least. Let’s not forget that we’re coming into the busiest and most volatile weeks of earnings season in the coming two weeks.

The S&P500 closed a single point below its critical 200DSMA on Friday while the DOW narrowly avoided testing its own 200DSMA. The NASDAQ is two sessions below its 200DSMA but the Transports have it worse – eight sessions below is 200DSMA and looking like confirming its second Death Cross below the 200DSMA next week – the 10DSMA crossed below the 200DSMA on Wednesday and next week is likely to see the 20DSMA flow suit.

With a huge batch of big-hitters announcing their earnings in the coming week, I can’t see any reason for this technically bearish signal to be sustained. If we do get a few surprises that shock the market into lower lows, I will be ready as I have not changed my stance from the last two weeks. I am still not a buyer and will stay heavily hedged or short with tight stops.

Happy Hunting!


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