Weekly Market Analysis – 03 December 2018 BMO

WEEK IN REVIEW – 26 to 30 NOVEMBER 2018 :
Stock Market Rallies with Optimism Surrounding
Fed and U.S.-China Trade Relations

The S&P 500 rallied 4.9% this week, helped by the Fed softening its policy stance and by hope that U.S-China trade tensions would be meaningfully eased at the G-20 Leaders Summit. For the month, the benchmark index rose 1.8%.

Meanwhile, the Dow Jones Industrial Average gained 5.2%, the Nasdaq Composite gained 5.6%, and the Russell 2000 gained 3.0%. For the month, the respective indices gained 1.7%, 0.3%, and 1.5%.

The stock market had one of its best days of the year on Wednesday when Federal Reserve Chair Jerome Powell said he sees current interest rates “just below” neutral. That proved to be a rally point because the language Mr. Powell used in early October indicated a view that the fed funds rate was “a long way from neutral.”

Mr. Powell added that there is no preset policy path, and the Fed will be data-dependent in its decision making, which pleased investors. By highlighting risks, though, that included previous rate increases, trade disputes, and Brexit/EU political uncertainty, the market chose to read between the lines that the Fed chair isn’t wedded to three rate hikes in 2019.

On a related note, the FOMC’s minutes from its November 7-8 meeting, which were released on Thursday, did nothing to upset the notion that the Fed will be hiking rates next month; the CME FedWatch Tool puts the chances at 82.7%.

Regarding U.S.-China trade, President Trump and President Xi are to take the G-20’s main stage when they discuss trade matters over dinner on Saturday. U.S. Trade Representative Lighthizer said that he would be surprised if the dinner meeting was not a success. Perhaps causing some jitters, though, is the fact that notable China trade hawk Larry Kudlow is reportedly expected to attend the dinner meeting, along with other staff on hand.

Wall Street Journal report published Thursday is probably as good a preview of what an eventual best-case outcome would be from the G-20 meeting between the two Presidents. The Wall Street Journal noted that (unnamed) officials on both sides have been floating the idea of forestalling any further tariffs through the spring to set the stage for a new round of talks to address changes in China’s economic policy.

In addition to the trade speculation and dovish rhetoric from the Fed, there was a positive bias in the market this week due to the belief that the prior week’s sell-off resulted in short-term oversold conditions. Efforts to pick up oversold issues, and some chasing behavior, helped fuel this week’s gains, which ultimately turned November from a negative month into a positive month for the major indices.

This week, all S&P sectors finished higher with the consumer discretionary (+6.4%), information technology (+6.1%), health care (+5.9%), and communication services (+5.5%) sectors outperforming.

The rally began with the consumer discretionary group rising on the back of continued strength from the U.S. consumer. Reports of record online Black Friday sales and encouraging forecasts for Cyber Monday sales helped lift investor sentiment. The SPDR Retail ETF (XRT) rose 5.1% this week, and Amazon (AMZN) climbed 12.5%.

Conversely, the defensive-oriented real estate (+2.7%), consumer staples (+2.9%), and utility (+2.7%) sectors underperformed the broader market, though still finished with respectable gains.

In corporate news, General Motors (GM) announced additional restructuring plans that will result in a 15% reduction of its salaried staff and the closure of five of its North American plants. President Trump tweeted his disappointment in GM and is looking to cut all of its government subsidies. Separately, United Tech (UTX) announced its intention to split into three independent companies after the Dow component acquired Rockwell Collins earlier this month.

On the earnings front, Salesforce (CRM), Burlington Stores (BURL), Dollar Tree (DLTR), VMware (VMW), HP (HPQ), and Workday (WDAY) released upbeat reports, while Tiffany & Co (TIF), GameStop (GME), and J.M. Smucker (SJM) disappointed investors.

Looking at other markets, the Treasury yield curve saw some flattening with the 2-yr yield losing one basis point to 2.81%, and the 10-yr yield losing four basis points to 3.01%. The U.S. Dollar Index increased by 0.3% to 97.20, and WTI crude added 0.1% to $50.67/bbl, though lost over 20.0% this month.

Overseas, equity indices in the Asia-Pacific region closed the week on a modestly positive note with Japan’s Nikkei (+3.3%) showing relative strength. In Europe, the major indices closed the week slightly higher with Italy’s MIB (+2.5%) showing relative strength.

(Economic Excerpts from Briefing.com)


Tuesday 27 November:

Consumer Confidence Edges Lower in November

The Conference Board’s Consumer Confidence Index dipped to 135.7 in November (consensus 135.5) from 137.9 in October, which was the highest reading since September 2000.

The key takeaway from the report is that consumer confidence remains at historically strong levels due in large part to positive views on the labor market.

Wednesday 28 November:

Second Estimate Holds the Line on Q3 Real GDP Growth 

The second estimate for Q3 real GDP showed output increasing at an annualized rate of 3.5% (consensus 3.6%), unchanged from the advance estimate as downward revisions to personal spending and state and local government spending offset upward revisions to nonresidential fixed investment and private inventory investment. The GDP Price Deflator was also unchanged at 1.7% (consensus 1.4%).

The key takeaway from the report is that real final sales, which exclude the change in inventories, were up just 1.2%, which was the weakest growth rate since the fourth quarter of 2016.

Federal Reserve releases Financial Stability Report : Financial Stability Report

Fed Chair Powell sees current interest rates ‘just below’ neutral : Report (This report spiked the DOW up 617 points on Wednesday because the language Fed Chair Powell used early last month indicated a view that the fed funds rate was a “a long way from neutral.”)

New Home Sales Slide in October with Declines in All Regions 

New home sales declined 8.9% month-over-month in October to a seasonally adjusted annual rate of 544,000 (consensus 575,000).  September was revised up to 597,000 from 553,000.

Regardless of the upward revision to September, the key takeaway from the report is that the pace of new home sales is weak across all regions and reflects the affordability constraints fueled by rising mortgage rates.  The October sales pace is the slowest since March 2016.

Thursday 29 November:

Initial and Continuing Claims Trends at Bottom for Cycle?

Initial claims for the week ending November 24 increased by 10,000 to 234,000 (consensus 218,000) while continuing claims for the week ending November 17 increased by 50,000 to 1.710 million.

The key takeaway from the report is that it is apt to contribute to assertions that the bottom for the trend in initial and continuing claims may have been reached in this cycle.

Personal Income and Spending Up in October; Inflation Held in Check

Personal income increased 0.5% in October (consensus +0.4%) while personal spending jumped 0.6% (consensus +0.4%). Real PCE, which is the component that factors into Q4 GDP forecasts, was up a solid 0.4%.

The PCE Price Index was up 0.2% and the core PCE Price Index, which exclude food and energy, was up 0.1% (consensus +0.2%).

The tame inflation readings are the key takeaway from the report since they are supportive of the Federal Reserve taking a more deliberate approach to raising the fed funds rate.

Friday 30 November:

Chicago PMI Surges to 11-Month High in November

The MNI Chicago Business Barometer, popularly referred to as the Chicago PMI, surged to 66.4 in November (consensus 58.0) from 58.4 in October.  The November reading is an 11-month high.

The key takeaway from the report is that it was fueled by a big uptick in the New Orders Index, which hit its highest level since May 2014.  The strength in new orders is an encouraging sign of robust manufacturing demand for the Chicago Fed region.

International Key Economic Data


Friday 26 November
Stocks Climb Ahead of G-20 Meeting Between Trump, Xi

The S&P 500 finished strong with a gain of 0.8% on Friday to conclude one of its best weeks of the year. Investors turned their attention to the highly-anticipated G-20 Leaders Summit in Argentina, where U.S. President Trump and China President Xi are expected to take the main stage at a dinner meeting on Saturday.

The Dow Jones Industrial Average gained 0.8%, the Nasdaq Composite gained 0.8%, and the Russell 2000 gained 0.5%.

The major indices hovered near their flat lines in afternoon trading before a Reuters report indicated a Chinese official saying that there are points of consensus between the U.S. and China on trade. Though, some disagreements remain. With that in mind, there seems to be a consensus building around the idea that the best one can hope for is a mutual agreement to forestall further tariff actions for several months so that further talks can be conducted to address trade policy issues.

U.S. Trade Representative Lighthizer spurred some optimism Friday morning when he said he would be surprised if the dinner meeting was not a success. He added it is entirely up to the two Presidents if a deal will be made, though.

10 of the 11 S&P sectors finished in the green on Friday with the utilities (+1.5%), health care (+1.1%), and information technology (+1.1%) sectors outperforming the broader market. 

Chip stocks also outperformed, evidenced by the Philadelphia Semiconductor Index rising 1.5%, to help lift the heavily-weighted information technology sector. NVIDIA (NVDA) led chip stocks higher, though Apple (AAPL) was unable to gain traction, eventually losing its status as the S&P 500’s largest company by market cap to Microsoft (MSFT).

Some positive earnings reports from tech companies HP (HPQ), VMware (VMW), and Workday (WDAY) also contributed to the sector’s advance. Workday and VMware beat both top and bottom line estimates, and HP beat revenue estimates. Workday also raised its fiscal 2019 subscription revenue outlook.

Transport stocks had a great day with the Dow Jones Transportation Average rising 1.3%. With oil and its derivatives factoring heavily in their cost of operations, transport issues reacted favorably to the decline in oil prices and were a leadership area in November. The average finished with a monthly gain of 6.2%.

On the other hand, the energy (-0.2%), materials (+0.4%), and communication services (+0.4%) sectors underperformed the broader market.

In other corporate news, General Electric (GE) and Marriott (MAR) lost 5.5% and 5.6%, respectively, amid some negative occurrences. A WSJ report indicated that General Electric ignored insurance risks, according to some former employees. Deutsche Bank also lowered its GE price target to $7. Separately, Marriott announced a data breach involving its guest reservation database for its Starwood-branded hotels.

Separately, the U.S. Treasury yield curve saw some flattening with the 2-yr yield adding one basis point to 2.81%, and the 10-yr yield losing three basis points to 3.01%. Also, the U.S. Dollar Index rose 0.4% to 97.20, and WTI crude lost 1.6% to $50.65/bbl, weighing on the oil-sensitive energy group.

Market Internals – Friday 26 November 2018

Dollar: Strength Prevails

The U.S. Dollar strengthened on Friday, recovering from days marked by weakness on the back of dovish remarks from the Federal Reserve, as currency traders readied themselves for a potentially headline-heavy weekend from the G-20 summit kicking off in Buenos Aires.

The ICE U.S. Dollar Index DXY was up 0.5% at 97.262, looking at a modest 0.4% bump on the week. It closed out the session at 97.20, higher than last week’s close of 96.94. For the month, the index gained 0.1%.

A highly anticipated meeting between President Donald Trump and Chinese President Xi Jinping on Saturday could help resolve the U.S.-China trade spat. Saudi Arabia and Russia are also expected to talk about the oil price.


It was a mixed Friday of trading action in the Treasury market as gains at the back end drove a curve-flattening trade.  The 10-2 spread compressed four basis points to 20 basis points in a lopsided trade that saw longer-dated securities garner modest buying interest and shorter-dated securities garner modest selling interest. 

Most of the price deck was dealt in overnight action as there was little change throughout the cash session, which featured some volatility in oil prices, additional gains for the equity market, and a saturation of coverage of the G20 Summit and the uncertainty hanging over the Saturday dinner meeting between President Trump and President Xi to discuss trade matters.

The yield curve flattened as the belly of the curve fell against the 2-year yield. The spread between the 2s5s narrowed to only 3bps from 6bps the previous week and looks set to invert in the coming weekThe spread between the 5s10s remained unchanged at 17bps from 17bps the previous week while the 10s30s widened to 30bps from 26bps the previous week. The 2-30 spread has widened to 50bps from 49bps a week ago.


The Bloomberg Commodity Index settled at 82.56, higher than 81.84 the previous week as Energy and Grains gained.

WTI oil held above its critical $50.00 support but still posted a drop of 22% in November for its biggest monthly loss in a decade, settling the week at $50.93. The spread between WTI and Brent narrowed to $7.78 from $8.38 the previous week as Brent settled at $58.71 p/b.

EIA petroleum data for the week ended November 23

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 3.6 million barrels from the previous week. At 450.5 million barrels, U.S. crude oil inventories are about 7% above the five year average for this time of year. Total motor gasoline inventories decreased by 0.8 million barrels last week and are about 5% above the five year average for this time of year. Finished gasoline and blending components inventories both decreased last week. Distillate fuel inventories increased by 2.6 million barrels last week and are about 6% below the five year average for this time of year. Propane/propylene inventories decreased by 0.6 million barrels last week and are about 3% below the five year average for this time of year. Total commercial petroleum inventories increased last week by 2.4 million barrels last week.

Natural gas inventory showed a draw of 134 bcf in the prior week. Working gas in storage was 3,054 Bcf as of Friday, November 23, 2018, according to EIA estimates. This represents a net decrease of 59 Bcf from the previous week. Stocks were 644 Bcf less than last year at this time and 720 Bcf below the five-year average of 3,774 Bcf. At 3,054 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count decreased by -3 to 1076 following last week’s decrease of -3.

Metals: Precious falls, Copper rises

Agriculture: Grains Gain 


December 2019

December 2018 has 19 trading sessions, one half-day and one public holidays. December is the final month of Q4 and the year and is the second month of the DOW’s and S&P’s “Best Six Months” (from November to April). 


Week 49 (December 03 to 07)

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

Benchmarks Indices (21 year average) for wk49:

Week 49 Key Economic Dates

In the coming week, important releases include US jobs report, trade balance, ISM PMIs, factory orders and the preliminary reading of Michigan consumer sentiment; interest rate decisions from the BoC, RBA and RBI; UK Markit PMIs; China trade balance, inflation and Caixin PMIs; and Australia Q3 GDP growth. Investors will also react to next week’s OPEC meeting.

Sun 02 December

Mon 03 December

Tue 04 December

Wed 05 December

Thu 06 December

Fri 07 December



Just like that and we’re into the final month of trading. 20 sessions remaining and already, the year has proven to be “troublesome” as I said it would be at the start of the year. On four occasions in the year, the DOW closed below its 200 DSMA and spent no less than 19 weeks in negative territory. 

The Transports fared worse with no less than 23 weeks in the red and becoming the first of the major indices to experience the 50/200 Death Cross last week (26/11). The NASDAQ followed with its own Death Cross a day later (27/11). Now the S&P500 looks to join the crowd in the coming week if the relief rally has no legs. Retail and Technology stocks have already fallen below their Death Crosses. 

The Death Cross on S&P is going to create some violent gyrations if it happens. We haven’t had a Death Cross on the S&P500 since August 2015 and January 2016. On both occasions, the S&P made huge downside gyrations. It won’t help the bulls’ cause with the yield curve close to inverting as the 2yr and 5yr yields narrowed to only 3bps.

Another unhealthy sign for the bulls is that the best performing sector in November was Health Care (Pharma), the most defensive sector in the market. 

For now, there is some respite in that DOW closed above its 200DSMA on Friday. The other benchmarks still remain entrenched below theirs.

Happy Hunting!



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