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PATTERN TRADER™ TUTORIAL 2019

It is a brand new year
with lots to look forward to
and much to aim for.

Are you financially equipped
to face the coming year?

 

Do you have what it takes to
ride out a storm and still be profitable?

 

Make Financial Literacy your TOP PRIORITY
of “must-haves” on your 2019 list of Resolutions.

 

PATTERN TRADER™ TUTORIAL 
INTRODUCTORY WORKSHOP

Date: 9th January 2019, Wednesday
Time: 07:00PM to 10:00PM
(Registration starts at 06:30PM)

…..

For more than 13 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive environment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

If you’re looking to make a huge difference in your financial life and get the most value our of your education investment, there’s no better choice than the time-tested and well reputed Pattern Trader™ Tutorial.

Register for the Introductory Workshop NOW!

Download our promo slides here:
The Pattern Trader™ Tutorial 2019

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The schedule for the FEBRUARY 2019 Batch is here:
Pattern Trader™ Tutorial – February 2019

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Screen Shot 2017-10-01 at 1.38.39 PM

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Comments Off on Weekly Market Analysis – 31 December 2018 BMO

Weekly Market Analysis – 31 December 2018 BMO

WEEK IN REVIEW – 24 to 28 DECEMBER 2018 :
Stocks Bounce in Wild Roller Coaster Ride

The S&P 500 rallied 2.9% during a week that featured its worst Christmas Eve in history, a historic rally, and a stunning reversal in late trading action. Wall Street’s end-of-the-year Santa Claus rally, which began taking shape on Wednesday, has pared the benchmark index’s monthly decline to 9.9%.

The Dow Jones Industrial Average (+2.8%), the Nasdaq Composite (+4.0%), and the Russell 2000 (+3.6%) also cut their monthly losses to 9.7%, 10.2%, and 12.7%, respectively.

Nine of the eleven S&P 500 sectors finished the week with gains with consumer discretionary (+4.7%), information technology (+3.7%), communication services (+3.6%), and financials (+3.3%) leading the advance. The utilities (-1.9%) and real estate (-0.1%) sectors were the lone groups to finish with losses.

Investors had to wait for the rally, though. The holiday-shortened trading week began with a continued effort to reduce exposure to risk, which left Wall Street with little Christmas joy.

Nevertheless, the belief that the market had become deeply oversold, in conjunction with rebounding oil prices, strong holiday sales, and some short covering, helped drive the S&P 500 to its best one-day gain (+5.0%) since March 2009.

What ensued was an unsurprising inclination to sell into strength. What surprised many, however, was the reemergence of the buy-the-dip mentality that carried stocks from steep losses to notable gains in the same session. Many attributed the late reversal to pension fund rebalancing activity, but short-covering and a rush of speculative buying interest likely played a contributing role in turning things around in such a hurry.

More so, the ability to hold up this week in the face of bad news, which included the partial government shutdown, softening economic data, and the European Central Bank highlighting an expectation for slower global growth in 2019, added to the bull case for a sustainable rebound heading into 2019.

The bond market, though, signaled a more cautious-minded mentality with risk-free U.S. Treasuries remaining resilient to selling efforts. The 2-yr yield declined nine basis points to 2.52%, and the 10-yr yield declined five basis points to 2.74%. The U.S. Dollar Index fell 0.6% to 96.34.

Investors will not receive any notable economic data on Monday, which will be a full day of trading on Wall Street.

U.S. ECONOMIC UPDATE
(Economic Excerpts from Briefing.com)

Wednesday 26 December:

Analysis delayed due to partial government shutdown 

October Case Schiller Home Price Index 5.0% vs consensus of 5.0%; September was revised to 5.2% from 5.1%

Thursday 27 December:

Initial claims print better than expected

Initial claims for the week ending December 22 decreased by 1,000 to 216,000 (consensus 225,000) while continuing claims for the week ending December 15 decreased by 4,000 to 1.701 million.

The key takeaway from the report is that initial claims continue to print at low levels that don’t suggest any meaningful softening has occurred in the labor market despite the concerns about a slower growth outlook.

October FHFA Housing Price Index grew 0.3% M/M vs. +0.2% in September 

Consumer Confidence Registers Another Pullback in December

The Conference Board’s Consumer Confidence Index decreased to 128.1 in December (consensus 133.7) from a revised 136.4 (from 135.7) in November.

The key takeaway from the report is that consecutive declines in the Expectations Index point to a growing belief that the pace of economic growth will decelerate in the first half of 2019.

Friday 28 December:

Chicago PMI Ticks Lower in December

The MNI Chicago Business Barometer, colloquially known as the Chicago PMI, decreased to 65.4 in December from 66.4 in November. The December pullback took place after the Index soared by nearly eight points in November.

The key takeaway from the report is that the overall reading remained elevated thanks to strong order backlogs and an increase in the Production Index.

KEY ECONOMIC DATA UPDATE
FOR ASIA-PAC & EUROPE

Asia-Pacific

Europe

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Friday 28 December
Stocks Trade Mixed to Close Volatile Week

The S&P 500 lost 0.1% on Friday in what was another whipsaw day of trading that saw the S&P 500 up as much 1.3% at its high and down as much as 0.6% at its low. The benchmark index finished a remarkably volatile, and history-setting, week with a gain of 2.9%.

The Dow Jones Industrial Average (-0.3%), the Nasdaq Composite (+0.1%), and the Russell 2000 (+0.5%) also experienced roller-coaster action on Friday and finished with weekly gains of 2.8%, 4.0%, and 3.6%, respectively.

Price action was relatively tame (for this week anyway) after the S&P 500 fumbled an early rally effort shortly after the start of trading. However, at around 1:30 p.m. ET, the benchmark index climbed from a loss of 0.2% to as high as 1.3% without any news to account for the move.

All sectors were up and all major indices were higher.

Nevertheless, stocks would retreat just as quickly as they had climbed with no news catalysts to account for the subsequent downturn either.  It was perhaps fitting that the S&P 500 ended the session close to where it started as that was an accurate reflection of the lack of conviction that characterized today’s trading action.

Efforts to flatten out positions in front of the weekend, which could be a four-day weekend for many (the market is open December 31 and closed January 1) were likely responsible for some of the late-day selling.

The S&P 500 sectors finished mixed with energy (-0.9%) and materials (-0.6%) underperforming the broader market. Conversely, the consumer discretionary (+0.3%) and real estate (+0.2%) sectors outperformed.

U.S. Treasuries remained resilient to selling pressure with the 2-yr yield and 10-yr yield decreasing one basis point each to 2.52% and 2.74%, respectively. The U.S. Dollar Index lost 0.1% to 96.34.

Market Internals – Friday 28 December 2018

Dollar: Lower for the week, up for the year

The U.S. Dollar closed lower for the week at $96.39 from $96.95 the previous week. For the year, the Dollar gained 4.92%.

Other currency pairs;

Bonds: Treasuries Edge Higher, but Long Bond Lags

US Treasuries ended the week on a mixed note as most tenors recorded slim gains while the long bond settled in the red. The Treasury complex started the day in negative territory, but the lower open was followed by a swift rebound that had 10s and 5s trading in the green just two hours into the cash session. The long bond also made a brief appearance in the green, but that’s where resistance was found, pressuring the 30-yr bond back to its starting level. Shorter tenors, meanwhile, continued their advance into the early afternoon, hitting fresh highs for the week in the process. The 10-yr note finished at its best level since early February while 2s and 5s settled at their best levels since the start of June. The slope of the yield curve was little changed today, but it steepened during the week. The 2s10s spread ended the week six basis points wider at 22 bps while the 2s30s spread widened by 12 bps to 52 bps.

The yield curve steepened as shorter maturities rallied to send their yields down while the 30 year yield popped 1bps. The spread on the 2s5s is 5bpsThe spread between the 5s10s widened to 17bps from 15bps the previous week while the 10s30s narrowed to 30bps from 24bps the previous week. The spread that matters most, the 2s10s, widened 6bps to 22bps from 16bps the previous week.

Looks like we’re holding off an any sort of inversion the curve for a while more, thus theoretically giving the risk markets more headroom in the months to come. 

Commodities 

The Bloomberg Commodity Index settled at 77.59, lower than 78.70 the previous week as Energy and Grains lost more ground.

WTI oil closed at $45.33 p/b, lower than the week before at $45.59. The spread between WTI and Brent widened to $6.87 from $8.23 the previous week as Brent settled at $52.20 p/b.

EIA petroleum data for the week ended December 21

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) remained virtually unchanged from the previous week. At 441.4 mln barrels, U.S. crude oil inventories are about 7% above the five year average for this time of year. Total motor gasoline inventories increased by 3.0 mln barrels last week and are about 4% above the five year average for this time of year. Finished gasoline remained the same, but blending components inventories increased last week. Distillate fuel inventories remained unchanged last week and are about 11% below the five year average for this time of year. Propane/propylene inventories decreased by 1.0 mln barrels last week and are about 5% below the five year average for this time of year. Total commercial petroleum inventories decreased last week by 2.0 mln barrels last week.

Natural gas inventory showed a draw of 48 bcf vs a draw of 141 bcf in the prior week. Working gas in storage was 2,725 Bcf as of Friday, December 21, 2018, according to EIA estimates. This represents a net decrease of 48 Bcf from the previous week. Stocks were 623 Bcf less than last year at this time and 647 Bcf below the five-year average of 3,372 Bcf. At 2,725 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count increased by +3 to 1083 following last week’s increase of +9.

Metals: Gains across the board

Agriculture:  Grains lose more ground

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE MONTH AHEAD
January 2019

January 2019 has 21 trading days and two public holidays. January is the first month of Quarter 1 that sees the start of Earnings Season for Q4 Results beginning on the second week of the month. January is the third month of DOW’s and S&P’s “Best Six Months” of the trading calendar and the last month of the year’s best three month for S&P gains.

January usually starts out mildly bullish but becomes very bullish mid-month and ends rather flat and sometimes bearish. The month is famous for its January Barometer Indicator where “As January goes, so goes the year” with an 87% accuracy. Every down January on the S&P500 has preceded a new or extended Bear Market, a flat market or a 10% correction without exception since 1950. January’s “First Five Days” have indicated a full year of gains 84% of the time.

TRIVIA

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD
Week 01 (December 31 to January 04)

According to our 5, 10 and 15 year seasonal models (Tuesday 01 January 2019 is a Holiday);

Benchmarks Indices (21 year average) for wk01:

Week 01 Key Economic Dates

Another week that’s light on data but Friday will be a hive of activity as the New Year kicks into gear with the January Non-Farms Payroll number and Fed Speak.

Sun 30 December

Mon 31 December

Tue 01 January

Wed 02 January

Thu 03 January

Fri 04 January

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

COMMENTARY
2019 PREVIEW

I am holding to the opinion that this is still only a correction, the one that was long overdue and expected. All the talk of an economic slowdown or recession have been nothing more than speculative projections by Wall Street and some cautious corporations … But for now, the numbers don’t say it. For now, this is just another correction.

The market made a valiant effort – albeit on much lower volumes –  to recover its losses for the year. However, it seem very highly unlikely that the DOW can recover 1,657 points (6.7%) in the single remaining session on Monday. Neither will the S&P500 regain its 188 points (7.1%). It might be possible for the NASDAQ to claim 319 points (4.6%) in a single session but …

The index that really matters to me, the Transports, need to recover 9.7% on Monday to breakeven for the year. I doubt that will happen seeing that it struggles to make 10% in a single quarter under normal conditions.

SELF-FULFILLING PROPHECIES, YIELDS AND FFR

The Bulls are hanging on the hope that a Santa Claus Rally could bring the market out of this funk. I have to say, it is looking hopeful at this rate. If it happens by 3rd January, then another bullish prophecy will be in play; that the third year of the President’s term is a bullish year. This adds to the (skeptical) bullish Black Friday/Cyber Monday  sales that points to a bullish year ahead. The only downer is that the market didn’t sell off in May – that usually means that greed suffers the following year.

Now that the Yield Curve seems to be steepening again after that brief false alarm, the market should be good for more upside until the curve says otherwise. The spread between the 10yr bond yield and the Fed Funds Rate is 24bps wide and converging quite a bit. If the Fed hikes the benchmark rate up to 2.75% in January and the 10yr maintains the status quo, this could be an early warning signal that everything is about to change again. If the spread remains, then we can still look forward to more upside … or at worst, not see more downside.

Oil remains my bread-and-butter and I think it should range between $42 and $55 for most of the coming year unless we get confirmation of a recession that will send the black stuff lower.

Gold should make higher highs. Resistance for now is at $1,320 with a higher 52week high just below $1,400. Should the metal rise, I’ll be counting the months (up to five) in anticipation of a market capitulation if the macros are convergent. Check back with this in May 2019.

BTC (Disclaimer: I am highly prejudiced about this) should see more downside to break below $3,000 within the first half of 2019. Support should hold above $2,500 but a break below that in the second half of the year should see it get down to $1,200. Remember, there is no way to value BTC fundamentally. I don’t trade this so this is my license to be irresponsible about my call on BTC. But I still hold my call for BTC to be no higher than $300 in the long term. So far, I’ve not been wrong about crypto since it popped up above $1,000 in January of 2017.

SINGAPORE UPDATE

The STI looks set to finish another disappointing year for the 8th year running since 2010. The local benchmark index looks set to close out the year -10% down in Correction Territory and under its 50/200 DSMA Death Cross, having breached its critical 3,100 support in October. Macro-economic numbers are suggesting that the island-state is heading for a slowdown/recession in the coming year in spite of a seemingly healthy GDP. Interest rates keep rising in spite of the lower Inflation Rate while Manufacturing and Retail Sales keep falling. The Government Budget is practically non-existent, Government Spending has decreased and Consumer Spending increased only because of higher transportation costs, utility costs and fuel costs. This, as I’ve said before, is going to be a long haul pain ride.

SUMMARY

At the start of 2018, I said that I was expecting a “troublesome year” ahead that was going to either be very volatile or very flat – we got both at different times of 2018. But I never saw that year-end sell-off coming. That was a bonus! It might be too soon to say this but we finally got that correction we’ve waited so long for. Are we there yet? Maybe, but I’d rather wait for a clearer picture before I commit to making bullish calls.

For now, I reckon 2019 will see some upside by the end of the year but not without some major rocking and rolling before we get there. Recession? That’s something we’ll just have to wait and see because there’s nothing on the six-month horizon to suggest it yet. All in all, I am still bullish in the long term, albeit very cautiously bullish while holding a short-term bearish attitude until this correction is done and dusted. I will be sticking with my usual oil trades and seasonal portfolios but they will be hedged until I get an “all-clear” from the market and economic data. 

In the meantime, I’d like to wish all my readers a very Happy and Profitable 2019 ahead. 

Happy Hunting!

~~~~~~~~~~~~~~~~~~~~~~~~~~~

PATTERN TRADER™ TUTORIAL 
INTRODUCTORY WORKSHOP

Date: 9th January 2019, Wednesday
Time: 07:00PM to 10:00PM
(Registration starts at 06:30PM)

…..

For more than 13 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive environment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

If you’re looking to make a huge difference in your financial life and get the most value our of your education investment, there’s no better choice than the time-tested and well reputed Pattern Trader™ Tutorial.

Register for the Introductory Workshop NOW!

Download our promo slides here:
The Pattern Trader™ Tutorial 2019

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The schedule for the FEBRUARY 2019 Batch is here:
Pattern Trader™ Tutorial – February 2019

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Screen Shot 2017-10-01 at 1.38.39 PM

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Merry Christmas 2018!

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Comments Off on Weekly Market Analysis – 24 December 2018 BMO

Weekly Market Analysis – 24 December 2018 BMO

WEEK IN REVIEW – 17 to 21 DECEMBER 2018 :
S&P 500 Sets New Yearly Low amid Continued Uncertainty

The S&P 500 dropped 7.1% this week, setting a new yearly low at 2408.12, amid ongoing concerns over economic growth, trade, politics, and fear the Federal Reserve could be on course for making a policy mistake. This week’s losses brought the benchmark index’s decline to 12.5% in December.

The Dow Jones Industrial Average (-6.9%), Nasdaq Composite (-8.4%), and Russell 2000 (-8.4%) also extended monthly losses to 12.1%, 13.6%, and 15.7%.

Losses were widespread with all 11 S&P 500 sectors posting weekly losses, ranging from 4.5% (utilities) to 9.0% (energy) as there was a broad-based de-risking effort.

The S&P 500 would test its February low (2532.69) three times this week: twice before the Fed’s decision and once after the Fed’s decision.

The first two re-tests invited some late buying interest that enabled stocks to close off their worst levels in their respective sessions. The third test, however, failed on Wednesday due to a sense of disappointment that the Federal Open Market Committee, and Fed Chair Powell, didn’t deliver on the market’s wishes for a more dovish-sounding perspective regarding the interest rate outlook for 2019 and the Federal Reserve’s balance sheet management.

In terms of the Fed decision, the target range for the fed funds rate was increased by 25 basis points to 2.25% to 2.50%, as expected, and the so-called dot-plot was revised to show a median projection for two rate hikes in 2019, versus three previously.

Fed Chair Powell irked the market during his press conference when he said (1) policy does not need to be accommodative now and that he doesn’t believe the current policy is restrictive and (2) he does not see the Fed altering its approach to balance sheet normalization and sees the preferred policy method being use of the fed funds rate.

New York Fed President John Williams offered a seemingly more dovish-minded perspective on Friday when he said in a CNBC interview that the Fed is listening to the market and that a balance sheet runoff is not “inflexible.” Those remarks triggered a rally effort, but true to recent form, there was selling into strength.

Some other nettlesome elements that weighed on investor sentiment this week included (1) the possibility of a partial government shutdown due to disagreements over a funding request for a border wall (2) a bothersome sense that the U.S. and China aren’t going to be able to reach a trade agreement on structural issues in their prescribed 90-day window (3) the understanding that credit markets appear to be anticipating a growth slowdown due to tighter monetary policy and (4) falling oil ($45.59/bbl, -$5.50, -10.7%) and copper ($2.67/lb, -$0.09, -3.4%) prices that fed into growth concerns.

Uncertainty, and the inability to sustain any rebound effort from short-term oversold conditions, ultimately held back buying interest and led to a flight to safety in U.S. Treasuries. The Fed-sensitive 2-yr yield and benchmark 10-yr yield dropped 10 basis points each to 2.63% and 2.79%.

U.S. ECONOMIC UPDATE
(Economic Excerpts from Briefing.com)

Tuesday 18 December:

Housing starts and permits lack single-unit boost in November

The Housing Starts and Building Permits Report for November wasn’t as strong as the headline figures suggested, as it featured little to no growth in both permits and starts for single-family units.

Total starts increased 3.2% to a seasonally adjusted annual rate of 1.256 million units (consensus 1.230 million), yet starts for single-family units declined 4.6% to 824,000, which is the lowest since May 2017. Total permits increased 5.0% to a seasonally adjusted annual rate of 1.328 million (consensus 1.270 million), yet permits for single-family units were up just 0.1% to 848,000.

The key takeaway from the report is that it substantiates the weakening levels of homebuilder confidence and is a reflection of the impact rising interest rates are having on single-family construction activity.

Wednesday 19 December:

Existing Home Sales Exceed November Expectations

Existing home sales increased 1.9% month-over-month in November to a seasonally adjusted annual rate of 5.32 million (consensus 5.20 million). Total sales were 7.0% lower than the same period a year ago.

The key takeaway from the report is that while sales have now increased for two consecutive months, the trajectory remains challenged by higher mortgage rates and limited affordability.

Thursday 20 December:

December Philadelphia Fed 9.4 vs consensus of 17.5; November was 12.9

Initial claims running low, bolstering December nonfarm payroll expectations 

Initial claims for the week ending December 15 increased by 8,000 to 214,000 (consensus 221,000). Continuing claims for the week ending December 8 increased by 27,000 to 1.688 million.

The key takeaway from the report is that it covers the period in which the survey for the December employment report is conducted. Accordingly, the low level of initial claims should translate into an expectation for solid nonfarm payroll growth in December.

Leading Indicators Increase Modestly in November

The Conference Board’s Leading Economic Index increased 0.2% in November (consensus 0.1%) after decreasing a revised 0.3% (from +0.1%) in October.

The key takeaway from the report is that the Conference Board expects the pace of economic growth to continue moderating in the second half of 2019.

Friday 14 December:

Durable goods orders data disappoints in November

Durable goods orders increased 0.8% in November (consensus 1.7%) after an upwardly revised 4.3% decline (from -4.4%) in October. Excluding transportation, orders declined 0.3% (consensus +0.3%) after increasing an upwardly revised 0.4% (from 0.1%) in October.

The key takeaway from the report is that business investment was weak, evidenced by the 0.6% decline in nondefense capital goods orders excluding aircraft. Moreover, a 0.1% decline in shipments of those same goods will be accounted for as a negative input in Q4 GDP forecasts.

Q3 GDP sees small downward revision with third estimate

The third estimate for Q3 GDP showed a downward revision to 3.4% from 3.5% (consensus 3.5%) and an upward revision to the GDP Price Deflator to 1.8% from 1.7% (Briefing.com consensus 1.7%).

The key takeaway from the report was the same as before, which is that real final sales grew at their slowest rate since the fourth quarter of 2016.

November sees boost in personal income and spending 

Personal income increased 0.2% month-over-month in November (consensus 0.3%). Personal spending rose 0.4% (consensus 0.3%).  The PCE Price Index increased 0.1% (consensus 0.0%) while the core PCE Price Index, which excludes food and energy, also increased 0.1% (consensus 0.2%).

The key takeaway from the report is that it showed PCE inflation continues to run below the Federal Reserve’s longer-run target of 2.0%, which could raise the market’s angst level about the Fed being on course to make a policy mistake with further tightening action.

Consumer sentiment holds up in December despite stock market losses 

The University of Michigan Index of Consumer Sentiment checked in at 98.3 with the final reading for December (consensus 97.5) versus a preliminary reading of 97.5 and the final reading of 97.5 for November.  That left the 2018 average at 98.4, which was the best year since 2000.

The key takeaway from the report is that sentiment wasn’t dented with the stock market’s losses; however, expectations were tempered a bit amid burgeoning concerns about income and job prospects.

KEY ECONOMIC DATA UPDATE
FOR ASIA-PAC & EUROPE

Asia-Pacific

Europe

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

FOMC RATE DECISION
Wednesday 19 December 2019

FOMC raises FFR 25 bps to 2.25-2.50% (2.375% midpoint); signals two rate hikes in 2019

Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Friday 21 December
Stocks Tumble in Risk-Reducing Efforts

The S&P 500 fell 2.1% on Friday, as uncertainty surrounding a host of issues, which included politics and trade, continued to provide a justification to reduce risk. Friday’s decline pushed the benchmark index to a new yearly low of 2408.12 and a weekly loss of 7.1%.

The Dow Jones Industrial Average (-1.8%), the Nasdaq Composite (-3.0%), and the Russell 2000 (-2.6%) also posted considerable declines to cap weekly losses at 6.9%, 8.4%, and 8.4%, respectively.

The S&P 500 had climbed to session highs in morning action (+1.5%) amid some market-soothing commentary from New York Fed President John Williams. Specifically, Mr. Williams indicated that the Fed is listening to the market and that the path of balance sheet runoff in 2019 is not “inflexible.”

That recovery effort, however, was yet again met with selling resistance that drove the market further into negative territory. Disappointment in the inability to sustain a rebound effort from short-term oversold conditions effectively led to a buyers strike that weighed heavily on the indices.

Some discouraging headlines that compounded risk-reduction efforts included (1) the threat of a partial government shutdown due to disagreement over funding for a border wall, and (2) a late-day report that Director of the White House National Trade Council Peter Navarro told Nikkei that an agreement with China in 90 days will be difficult to attain.

All 11 S&P 500 sectors finished in negative territory with the communication services (-3.1%), information technology (-3.0%), and consumer discretionary (-2.6%) groups leading the retreat.

Dow component Nike (NKE), for its part, was the best-performing stock in the S&P 500 after it released a strong earnings report and issued an encouraging FY19 currency neutral revenue growth outlook.

U.S. Treasuries remained resistant to selling pressure amid the equity sell-off. The 2-yr yield dropped four basis points to 2.63%, and the 10-yr yield was unchanged at 2.79%.

There are no companies we cover scheduled to report earnings next week. The market will be open until 13:00 ET on Monday, December 24 and will be closed for Christmas on Tuesday, December 25.

Market Internals – Friday 21 December 2018

Dollar:

The U.S. Dollar closed lower for the week at $96.95 from $97.45 after nearing nearing the yearly high the previous week.

Bonds:

US Treasuries remained resistant to selling pressure as stocks continued to be sold, prompting a continuation of flight-to-safety trades this week that helped drive yields down between nine and 11 basis points for securities ranging from the 2-yr note to the 30-yr bond.  The bulk of today’s buying interest was concentrated in shorter-dated instruments, which transpired as talk surfaced that the U.S government looks set for a partial shutdown at midnight tonight due to a political fight over funding for a border wall.  The S&P 500, up as much as 1.5% in early action, was down 2.0% as of this post.

The yield curve flattened to the downside. The spread on the 2s5s is +1bps  after being flat the previous weekThe spread between the 5s10s narrowed to 15bps from 16bps the previous week while the 10s30s narrowed to 24bps from 25bps the previous week. The 2-30 spread has narrowed to 40bps from 41bps a week ago while the spread that matters most, the 2s10s, remained unchanged 16bps from 16bps the previous week.

The spread that really matters most to me, is the one between the Fed Fund Rate and the 10year yield which has narrowed considerably in the last week. With the Fed raising the benchmark rate 25bps to 2.50% and the 10year falling 10bps to 2.79%, the FFR/10yr spread is now at its narrowest since December 2007 at 29bps.

Read up on the effects of the FFR/10yr spread here: The Fed Fund Rate & The Market 2016

Commodities 

The Bloomberg Commodity Index settled at 78.70, lower than 81.27 the previous week as Grains and Energy lost ground.

WTI oil closed at $45.59 p/b, lower than the week before at $51.20. The spread between WTI and Brent narrowed to $8.23 from $9.08 the previous week as Brent settled at $53.82 p/b.

EIA petroleum data for the week ended December 14

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 0.5 million barrels from the previous week. At 441.5 million barrels, U.S. crude oil inventories are about 7% above the five year average for this time of year. Total motor gasoline inventories increased by 1.8 million barrels last week and are about 3% above the five year average for this time of year. Finished gasoline and blending components inventories both increased last week. Distillate fuel inventories decreased by 4.2 million barrels last week and are about 11% below the five year average for this time of year. Propane/propylene inventories decreased by 3.3 million barrels last week and are about 6% below the five year average for this time of year. Total commercial petroleum inventories decreased last week by 10.3 million barrels last week.

Natural gas inventory showed a draw of 141 bcf vs a draw of 77 bcf in the prior week. Working gas in storage was 2,773 Bcf as of Friday, December 14, 2018, according to EIA estimates. This represents a net decrease of 141 Bcf from the previous week. Stocks were 697 Bcf less than last year at this time and 720 Bcf below the five-year average of 3,493 Bcf. At 2,773 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count increased by +9 to 1080 following last week’s decrease of -4.

Metals: Precious Gains

Agriculture:  Grains sell off

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD
Week 52 (December 24 to 28)

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


Benchmarks Indices (21 year average) for wk52:

Week 52 Key Economic Dates

The coming week will be light on data given the holiday season.

Mon 24 December

Tue 25 December

Wed 26 December

Thu 27 December

Fri 28 December

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

COMMENTARY

I reckon there’s going to be fireworks … and it won’t be because Santa is coming. On the contrary, the market seems to be scaring Santa away this Christmas.

The DOW needs to recover 2,274 points to close 2018 in the black while the S&P500 requires 257 points with only four-and-a-half trading days remaining. That’s a tall order given that the DOW needs to recover an average of 501 points (+2.23%) a day over the remaining 4.5 days. That is an even taller order if you consider that the last week of the trading year always has the lowest trading volumes. With the yield curve flattening, the dollar weakening and crude prices falling, this will crush any remaining confidence in risk for the coming year.

Any talk of a Santa Claus Rally seems to have all but faded into oblivion. The only thing rising quietly is Gold … and those who know what that means are counting the months downs. 

I am holding to the opinion that this is still only a correction, the one that was long overdue and expected. All the talk of an economic slowdown or recession have been nothing more than speculative projections by Wall Street and some cautious corporations.

Cut through all that noise and you still have a lofty U.S. economy that is still gainfully employed that is still recording growth that is still not dangerously inflated nor deflated that is still high on consumer spending and confidence that is still manufacturing and producing at normal levels. There are no obvious signs of economic weakness that would say that a recession is near.

There is, however, the possibility that the market could continue falling to new lows. That could have a telling effect on corporate performance and earnings come Q1 Earnings Season for Q4 results starting in three weeks’ time. Should that happen, we then could have the catalyst for the next recession. 

But for now, the numbers don’t say it. For now, this is just another correction.

Happy Hunting!

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Weekly Market Analysis – 17 December 2018 BMO

WEEK IN REVIEW – 10 to 14 DECEMBER 2018 :
Stocks Extend Losses as Uncertainty Continues to Grip Investors

Wall Street suffered another down week, as continued uncertainty surrounding economic growth, trade, politics, and the path of interest rates kept many buyers on the sidelines.  Heightened trading volatility also proved effective in keeping buyers sidelined, too, as large intraday swings proved exhausting and off-putting for many participants.

The S&P 500 lost 1.3%, the Dow Jones Industrial Average lost 1.2%, and the Nasdaq Composite lost 0.8%.

Tempering hope that last week’s sell-off created a “tradable” bottom was the continued weakness in the Dow Jones Transportation Average (-4.4%), S&P 500 financial sector (-3.5%), and small-cap Russell 2000 (-2.6%) — all of which play a key role in driving sentiment on the domestic economic outlook. For the month, these groups are down 12.1%, 10.4%, and 8.0%, respectively.

Additionally, some cautious-sounding commentary on the economic outlook from European Central Bank President Draghi, weaker-than-expected industrial production and retail sales data from China, and weaker-than-expected preliminary manufacturing PMI readings out of the eurozone fueled the negative perspective on growth prospects and the specter of downward revisions to earnings estimates.

There were some conciliatory headline developments this week on the trade dispute between the U.S. and China.  In particular, high-ranking U.S. and Chinese officials resumed trade discussions over the phone; and China is reportedly looking to tweak its “Made in China 2025” policy to allow more access and fairer competition for foreign companies.

Separately, China confirmed it will temporarily reduce its U.S auto import tariffs by 25% (to 15% from 40%) between January 1 and March 31, as both sides continue to work on a deal,  and President Trump told Reuters he would get involved in the Department of Justice case against Huawei CFO Meng Wanzhou, who was granted bail Tuesday, if it would serve national security interests and help advance trade negotiations with China.

These positive-sounding trade headlines offered some hope of a deal being struck, but ultimately, the talk wasn’t enough to overcome the fundamental concerns about a slowdown in economic growth.

The S&P 500 energy (-3.3%), health care (-1.9%), and real estate (-1.8%) sectors were some of the hardest-hit groups this week. 

Johnson & Johnson (JNJ), meanwhile, was one of the hardest-hit stocks.  The Dow component plunged 10% on Friday after a Reuters report alleged that JNJ “knew for decades that asbestos lurked in its baby Powder.” The company’s litigation counsel rejected the Reuters report as “false and misleading,” yet the stock nonetheless traded as if investors felt there was some veracity to it.

Energy stocks struggled as oil prices pulled back. WTI crude fell 2.5% this week to $51.27/bbl.

Not all was bad, though.  The S&P 500 information technology (-0.02%) ended the week roughly flat while the communication services (+0.5%) and utility (+0.6%) sectors were able to finish in the green this week.

Recent demand for Treasuries cooled off, giving yields a slight bump. The Fed-sensitive 2-yr yield rose three basis points to 2.73%, and the benchmark 10-yr yield rose four basis points to 2.89%. Meanwhile, the U.S. Dollar Index rose 1.0% to 97.45.

Overseas, UK Prime Minister Theresa May survived a “no-confidence” vote from her own Conservative Party with respect to her leadership. The vote came after she delayed a vote in the House of Commons on the UK-EU Brexit plan.  She subsequently attempted to renegotiate the plan in Brussels, yet EU officials said the plan was not open for change.

U.S. ECONOMIC UPDATE
(Economic Excerpts from Briefing.com)

Tuesday 11 December:

Producer Price Index Edges Higher in November

The Producer Price Index for final demand increased 0.1% month-over-month in November (consensus 0.0%) while the index for final demand, excluding food and energy, increased 0.3% (consensus +0.1%).

The monthly reading left the index for final demand up 2.5% year-over-year, versus 2.9% in October, and the index for final demand, excluding food and energy, up 2.7%, versus 2.6% in October.

The key takeaway from the report is that it didn’t inflame inflation concerns to an alarming degree, like the October report did, so market participants have not been bothered by the idea that it will drive the Federal Reserve to be overly aggressive with future rate hikes.

Wednesday 12 December:

Consumer Price Index Matches November Expectations

Total CPI was unchanged month-over-month in November, as expected, while core CPI, which excludes food and energy, was up 0.2%, also as expected. Total CPI was up 2.2% year-over-year, versus 2.5% in October, and core CPI was up 2.2%, versus 2.1% in October.

The key takeaway is that consumer inflation trends are not running away from the Federal Reserve’s longer-run target, which should feed into the market’s growing belief that the Federal Reserve has some data-based scope to take it easy after a December rate hike.

Thursday 13 December:

Import and Export Prices Drop in November

Import prices declined 1.6% in November after increasing 0.5% in October.  Export prices declined 0.9% in November after increasing an upwardly revised 0.5% (from 0.4%) in October.  Excluding fuel, import prices were down 0.3%. Excluding agricultural products, export prices were down 1.0%.

The key takeaway from the report is that it stirred some thinking that inflation trends could be in a topping phase, which is constructive in terms of the market’s belief that the Federal Reserve is apt to take a more conservative path with future rate hikes.

Initial Claims in Reverse Gear

Initial jobless claims for the week ending December 8 dropped by 27,000 to 206,000 (consensus 228,000). Continuing claims for the week ending December 1 increased by 25,000 to 1.661 million.

The key takeaway from the report is that it helped quell for the time being burgeoning concerns about the rising trend in initial jobless claims.

Treasury Budget Deficit Inflates in November

The Treasury Budget for November showed a deficit of $204.9 billion versus a deficit of $138.5 billion for the same period a year ago. The Treasury Budget data is not seasonally adjusted, so the November deficit cannot be compared to the $100.9 billion deficit for October.

Friday 14 December:

Retail sales rise in November, aiding Q4 GDP outlook

Total retail sales increased 0.2% in November, as expected, while retail sales, excluding autos, jumped 0.2% (consensus +0.3%).

An important item to take into account is that there were sizable revisions to the October data for total retail sales (to 1.1% from 0.8%) and retail sales, excluding autos (to 1.0% from 0.7%).  Those revisions should mitigate any sense of disappointment in the “mixed” report for November.

The key takeaway from the Retail Sales report is that core retail sales, which exclude auto, gasoline station, building materials, and food services and drinking places sales, increased 0.9%. That’s important because core retail sales are used in the computation of the goods component for personal consumption expenditures in the GDP report.

Industrial production rises in November after October decline

Industrial production increased 0.6% in November (consensus 0.3%) after declining a downwardly revised 0.1% (from +0.2%) in October.  The capacity utilization rate was 78.5% (consensus 78.6%) following a downwardly revised 78.1% (from 78.4%) in October.

The key takeaway from the report is that manufacturing output was flat on the heels of a 0.1% decline in October.  That indication runs counter to the solid uptick seen in the November ISM Manufacturing Index.

Business inventories rise again in October

Total business inventories increased 0.6% in October, in-line with the consensus estimate, after increasing an upwardly revised 0.5% (from 0.3%) in September. Total business sales increased 0.3% after increasing a downwardly revised 0.3% (from 0.4%) in September.

The key takeaway from the report is that business sales rose at a slower pace than inventories.  That distinction, if it persists, will diminish pricing power.

December U.S. Markit Manufacturing PMI 53.9, November 55.3
December U.S. Markit Services PMI 53.4, November 54.7

International Key Economic Data

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Friday 14 December
Stocks Fall on Continued Global Growth Concerns

The S&P 500 fell 1.9% on Friday to extend its monthly loss to 5.8%. Friday’s sell-off was a function of poor sentiment driven by global growth concerns and a continuation of weak price action. 

The Dow Jones Industrial Average lost 2.0%, the Nasdaq Composite lost 2.3%, and the Russell 2000 lost 1.5%. For the month, the respective indices are down 5.6%, 5.7%, and 8.0%.

The selling started overseas when China, the second-largest economy in the world, reported some weaker-than-expected industrial production and retail sales data. In addition, some weaker-than-expected preliminary manufacturing PMI readings out of the eurozone helped feed into concerns over economic growth and corporate earnings prospects.

A solid November Retail Sales report out of the U.S. didn’t change the selling bias either.  Instead, the good news on that front was drowned out by the concern that weakness abroad will eventually lead to a slower pace of growth in the U.S.

Selling picked up after the close of the European markets (11:30 a.m. ET) and would continue in an orderly manner throughout the day, culminating in the S&P 500 closing just below 2600.

Within the S&P 500, the health care (-3.4%), information technology (-2.5%), and energy (-2.4%) sectors led the broad-based retreat.

The negative bias within the health care and tech groups was driven by some corporate news, while energy fell in tandem with oil prices.

Johnson & Johnson (JNJ) dropped 10.0% after a Reuters report alleged that JNJ “knew for decades that asbestos lurked in its baby Powder.” The company’s litigation counsel rejected the report as “false and misleading.”

Within tech, Apple (AAPL) fell after an influential analyst from TF International Securities cut his first quarter 2019 iPhone shipment estimate by 20%, according to CNBC; Adobe Systems (ADBE) fell after failing to overly impress investors with its fiscal fourth quarter results and outlook; and Cisco (CSCO) fell after being downgraded to ‘Neutral’ from ‘Buy’ at Nomura.

In other corporate news, Costco (COST 207.06, -19.45) fell 8.6% after reporting its fiscal Q1 results, which included revenues that were slightly below consensus. Margin weakness, attributed to higher merchandising costs, also weighed on the stock.

There was little room to hide in the stock market, though the defensive-oriented real estate (-0.2%) and utility (-0.3%) sectors suffered only modest losses.

Investors sought safety in U.S. Treasuries, pushing yields lower across the curve. The 2-yr yield lost three basis points to 2.73%, and the 10-yr yield lost two basis points to 2.89%. Also, the U.S. Dollar Index rose 0.4% to 97.45, nearing a yearly high.

Market Internals – Friday 14 December 2018

Healthcare XLV -3.56% Energy XLE -2.51% Nasdaq 100 QQQ -2.52% Technology XLK -2.40% DJIA DIA -2.12% S&P 500 SPY -1.97% Consumer Discretionary XLY -1.85% Consumer Staples XLP -1.84% Transports IYT-1.71% R2K IWM -1.77% Industrials XLI -1.57% Retail XRT -1.42% Emerging Mkts EEM -1.24% Financials XLF -1.06% Communications Services XLC -0.98% Materials XLB -0.83% Utilities XLU -0.44% Real Estate XLRE-0.42%. Italics indicate 52-week lows

Dollar: Nearing 52 Week High

The U.S. Dollar closed higher for the week at $97.45 from $96.71 the previous week, nearing a yearly high.

Bonds: Growth Concerns Boost Treasuries

US Treasuries ended the week with gains across the curve. The Treasury market spent the entire session in positive territory with the long bond settling near its high while shorter tenors finished a bit below their opening levels. Treasuries jumped out of the gate in response to disappointing economic data from China and the eurozone, but the early gains were trimmed after generally positive economic figures from the U.S. served as a reminder of relative strength in the domestic economy. Treasuries backtracked during the first two hours of trade, but they rallied to fresh highs in midday action while equities struggled. The selling in the stock market continued into the afternoon, contributing to a steady bid in Treasuries. The U.S. Dollar Index marked a fresh 2018 high at 97.71 in early trade, but finished the session a bit shy of that level.

The yield curve flattened as the belly of the curve rose against the 30-year yield. The spread between the 2s5s is flat  after inverting by -1bps the previous weekThe spread between the 5s10s remained unchanged at 17bps from 17bps the previous week while the 10s30s narrowed to 25bps from 29bps the previous week. The 2-30 spread has narrowed to 41bps from 44bps a week ago.

Commodities 

The Bloomberg Commodity Index settled at 81.27, lower than 83.49 the previous week as Precious, Grains and Energy lost out.

WTI oil closed at $51.20 p/b, lower than the week before at $52.61. The spread between WTI and Brent widened to $9.08 from $9.06 the previous week as Brent settled at $60.28 p/b.

EIA petroleum data for the week ended December 07

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 1.2 mln barrels from the previous week. At 442.0 mln barrels, U.S. crude oil inventories are about 7% above the five year average for this time of year. Total motor gasoline inventories increased by 2.1 mln barrels last week and are about 3% above the five year average for this time of year. Finished gasoline and blending components inventories both increased last week. Distillate fuel inventories decreased by 1.5 mln barrels last week and are about 8% below the five year average for this time of year. Propane/propylene inventories decreased by 3.2 mln barrels last week and are about 5% below the five year average for this time of year. Total commercial petroleum inventories decreased last week by 6.0 mln barrels last week.

Natural gas inventory showed a draw of 77 bcf vs a draw of 63 bcf in the prior week. Working gas in storage was 2,914 Bcf as of Friday, December 7, 2018, according to EIA estimates. This represents a net decrease of 77 Bcf from the previous week. Stocks were 722 Bcf less than last year at this time and 723 Bcf below the five-year average of 3,637 Bcf. At 2,914 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count decreased by -4 to 1071 following last week’s decrease of -1.

Metals: 

Agriculture:  

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD
Week 51 (December 17 to 21)

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

Benchmarks Indices (21 year average) for wk51:

Week 51 Key Economic Dates

In the coming week, the Fed, the BoE and the BoJ will decide on monetary policy. Other important releases include: US final Q3 GDP growth, durable goods, personal spending and income, PCE prices and housing data; UK final Q3 GDP growth and inflation; Japan inflation and trade balance; and Australia employment data.

Mon 17 December

Tue 18 December

Wed 19 December

Thu 20 December

Fri 21 December

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

COMMENTARY

We’re halfway through the final month of the year which is usually one of the more bullish months on the trading calendar. However, December 2018 is proving to be otherwise so far with the Dow Jones Industrial Average down -5.6%, the Nasdaq Composite losing -5.7%, the S&P 500 extending its monthly loss to -5.8% and the Russell 2000 tanking -8.0%.

All three benchmarks are now;

They are accompanied by the other major indices, the Transports ($TRAN/$DJT) and the two Russells ($RUT and $RUI), in similar circumstances.

The coming week is going to be a real test of the Bulls’ last ounces of resilience as the FOMC makes its anticipated rate hike followed by the GDP reports of the U.S. and U.K. along with central banking policies of Japan and U.K. and policy minutes from Australia. 

I reckon there’s going to be fireworks … and it won’t be because Santa is coming. On the contrary, the market seems to be scaring Santa away this Christmas. So remember …

When Santa fails to call, the Bears will roam on Broad and Wall.

Happy Hunting!

~~~~~~~~~~~~~~~~~~~~~~~~~~~

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Pattern Trader™ Tutorial – February 2019

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Pattern Trader™ Tutorial Intro Session

Date: 20th Dec 2018, Thursday
Time: 07:00PM to 10:00PM
(Registration starts at 06:30PM)

…..

For more than 13 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive enviroment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

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Pattern Trader™ Tutorial – February 2019

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Comments Off on Weekly Market Analysis – 10 December 2018 BMO

Weekly Market Analysis – 10 December 2018 BMO

WEEK IN REVIEW – 03 to 07 DECEMBER 2018
Global Growth Concerns Pull Stocks Lower

The S&P 500 fell 4.6% this week, as global growth concerns were exacerbated by negative developments regarding U.S-China trade negotiations and the continued flattening of the U.S. Treasury yield curve. The Dow Jones Industrial Average lost 4.5%, the Nasdaq Composite lost 4.9%, and the Russell 2000 lost 5.6%.

Investors breathed a fleeting sigh relief that trade relations between the U.S. and China did not worsen over the weekend after the two countries agreed to suspend further tariff actions for 90 days to allow more time for trade discussions. Despite President Trump’s optimism, the market’s optimism quickly waned on the supposition that a March 1 deadline to resolve major trading issues won’t be sufficient time to work out major trade issues that have been in place for years. Furthermore, the specter of increasing the tariff rate to 25% (from 10%) on $200 billion of Chinese goods should an acceptable deal not be reached weighed on investors’ minds.

In addition, the news of the arrest of Huawei Technologies’ CFO Meng Wanzhou heightened these burgeoning trade concerns. Ms. Meng was arrested Dec. 1 in Canada amid allegations that the company violated U.S. trade sanctions on Iran. Her arrest invited worries about trade negotiations going awry in the 90-day window and potential retaliation against U.S. companies doing business in/with China.

Economic growth concerns were cast into the spotlight by a decisive curve-flattening trade in the Treasury market that featured some inversions on the short end. The 2-yr yield (2.70%) and 3-yr yield (2.71%) closed higher than the yield on the 5-yr Treasury note (2.69%) this week.

Also, the difference between the 2-yr and 10-yr yields narrowed to its slimmest margin since 2007. Specifically, the 2-yr yield lost 11 basis points to 2.70%, and the 10-yr yield lost 16 basis points to 2.85%. Those moves were exacerbated by a “pain trade,” as short sellers expecting higher rates were compelled to cover their bearish bets.

In a broader context, concerns over future economic growth drove concerns about future earnings growth. That fueled some of this week’s selling interest, which completely unwound the 4.9% gain for the S&P 500 from the prior week at Friday’s low. 

Notably, that was the case despite there being one less day of trading.  The market was closed Wednesday in recognition of the national day of mourning for President George H.W. Bush.

The worst-performing sectors this week were the financials (-7.1%), industrials (-6.3%), materials (-5.2%), information technology (-5.1%), and health care (-4.6%) sectors.  The only two sectors that escaped the week with a gain were the utilities (+1.3%) and real estate (+0.3%) sectors.

The rate-sensitive financial sector was undermined by the flattening yield curve, which raised concerns about a compression in net interest margins. Regional banks were notable laggards as worries about lower mortgage loan demand stemmed from home builder Toll Brothers (TOL) acknowledging that it saw a moderation in demand in its fiscal fourth quarter ended Oct. 31 and that it saw the market soften further in November. The SPDR S&P Regional Bank ETF (KRE) fell 7.2% this week.

Transport stocks, in particular, weighed on the trade-sensitive industrial sector. The Dow Jones Transportation Average dropped 8.0% this week. American Airlines (AAL) struggled with a steep 16.4% loss this week.

Apple (AAPL) conceded more losses this week, as it dragged on the tech space. Apple has retreated over 20.0% since releasing its quarterly report in October and has remained a signpost of the ongoing effort to liquidate/reduce exposure to this widely-owned sector, which is still the market’s most heavily-weighted sector.

The energy sector (-3.1%) was down for the week, yet it outperformed the broader market, helped by a 3.1% bump in oil prices to $52.52 per barrel.

Energy stocks pared gains on Friday after OPEC+ producers agreed to a production cut of 1.2 million barrels per day to address weakening oil prices. Russia was a party to the proposed production cuts; meanwhile, Iran will reportedly be exempt from the production cut requirements.

On a related note, Qatar, in a surprise move, announced plans to withdraw from OPEC to focus on gas production. Qatar has been a member of OPEC since 1961.

Separately, Atlanta Fed President Bostic (FOMC voter) said he thinks the fed funds rate is within shouting distance of neutral, which followed previous remarks from Dallas Fed President Kaplan (non-FOMC voter) who also suggested the fed funds rate is a little bit below neutral. A Wall Street Journal report also suggested that the Federal Reserve might be more cautious-minded about raising interest rates following its December FOMC meeting.

The November Employment Situation Report on Friday seemingly helped substantiate that view. It showed nonfarm payrolls increasing a weaker than expected 155,000 and average hourly earnings increasing 0.2%, which left them up 3.1% year-over-year, unchanged from October.  In other words, the wage growth acceleration the Federal Reserve has been bracing for was missing.

Overseas, global markets finished the week with large losses as well. Germany’s DAX (-4.2%) led the European retreat and Japan’s Nikkei (-3.0%) led the decline in Asia.

U.S. ECONOMIC UPDATE
(Economic Excerpts from Briefing.com)

Monday 03 December:

ISM Manufacturing Index Steps Up in November 

The ISM Manufacturing Index for November checked in at 59.3% (consensus 57.2%) versus 57.7% for October, led by strength in the New Orders Index.

The key takeaway from the report is that it reflects an acceleration in national manufacturing activity at a time when concerns have been picking up about a general growth slowdown.  Accordingly, it can help mitigate some of the slowdown concerns and potentially foster an improved outlook for Q4 GDP growth.

Construction Spending Slips Again in October 

Total construction spending declined 0.1% in October (consensus +0.3%) following a downwardly revised 0.1% decline (from 0.0%) in September.

The key takeaway from the report is that the weakness was driven by a decline in new single-family construction, providing further evidence of the softening in housing market activity.

Tuesday 04 December:

Fed Beige Book Meeting

Thursday 06 December:

Trade Deficit Continues to Widen in October

The U.S. trade deficit was $55.5 billion in October (consensus -$54.7 billion) versus a downwardly revised $54.6 billion (from -$54.0 billion) in September.

The key takeaway from the report is that it doesn’t reflect any improvement in the U.S trade deficit despite the tariff actions. The goods and services deficit has increased by $51.3 billion year-to-date, or 11.4%, from the same period in 2017.

Initial Claims Down, but Turn in Down Cycle Emerging

Initial jobless claims for the week ending December 1 decreased by 4,000 to 231,000 (consensus 225,000). Continuing claims for the week ending Nov. 24 decreased by 74,000 to 1.631 million.

The key takeaway from the report is that initial claims, while down in the latest week, are starting to pick up in a move that suggests the low for this cycle has been reached.

Third Quarter Productivity Edges Higher with Revision

Nonfarm business sector labor productivity for the third quarter was revised to 2.3% (consensus 2.2%) from 2.2%. Unit labor cost growth was revised to 0.9% (Briefing.com consensus 1.2%) from 1.2%.

The key takeaway from the report is that it points to fairly subdued labor costs in the third quarter, which could contribute to a willingness on the part of the Federal Reserve to be more gradual on its rate-hike path.

ISM Non-Manufacturing Index Pushes Higher in November

The ISM Non-Manufacturing Index rose to 60.7% in November (consensus 59.0%) from 60.3% in October.  The November reading was the second-highest reading this year.

The key takeaway from the report is that the services-providing sector, which accounts for a much larger slice of economic activity than the manufacturing sector does, remains in a healthy and fairly vibrant state.

Factory Orders Slump in October; Business Investment Flat

Factory orders declined 2.1% in October (consensus -2.0%) following a downwardly revised 0.2% increase (from 0.7%) in September. Excluding transportation, orders were up 0.3%.

The key takeaway from the report is that it shows a surprising lack of business investment in the face of business-friendly fiscal stimulus measures.

Friday 07 December:

November Employment Report Soothes Some Rate-Hike Concerns 

November nonfarm payroll growth was a little light of expectations, but key for the market was the recognition that average hourly earnings were up 0.2% month-over-month. The latter resulted in a year-over-year increase of 3.1%, which was unchanged for the 12-month period ending in October.

The key takeaway from the report is that the wage acceleration the Federal Reserve has been bracing for was missing. That won’t likely keep the Federal Reserve from raising the target range for the fed funds rate at its December FOMC meeting, yet it’s the type of data point that could lead the Federal Reserve to be more cautious-minded about raising rates after that.

Consumer Sentiment Unchanged — and Still High

The preliminary University of Michigan Index of Consumer Sentiment for December checked in at 97.5 (consensus 96.8), unchanged from the final reading for November and in-line with the two-year average from January 2017 to December 2018.

The key takeaway from the report is the observation that consumer attitudes around job and wage prospects are key to the consumer spending outlook and that some caution on that front may now be warranted as consumers recognize the goal of raising interest rates is to slow the pace of economic growth.

Wholesale Inventories Up Again in October; Sales Dip 

Wholesale inventories increased 0.8% in October (consensus 0.7%) on top of  an upwardly revised 0.7% increase (from 0.4%) in September. Wholesale sales were down  0.2% following a downwardly revised 0.1% increase (from 0.2%) in September.

The key takeaway from the report is that inventory growth exceeded sales growth, which is a dynamic that could give way to lower pricing.

Consumer Credit Expansion Ramps Up in October

Total outstanding consumer credit increased by $25.4 billion in October after increasing an upwardly revised $11.6 billion (from $11.0 billion) in September.

The key takeaway from the report is that the healthy expansion in consumer credit is a good portent for consumer spending activity.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

International Key Economic Data

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Friday 07 December
Stocks End Losing Week on Downbeat Note

The S&P 500 lost 2.3% on Friday to close a losing week (-4.6%) on a sour note. The major averages fumbled an early morning rally effort and steadily retreated throughout the day to finish near session lows.

The Dow Jones Industrial Average lost 2.2%, the Nasdaq Composite lost 3.1%, and the Russell 2000 lost 2.0%. For the week, those indices lost 4.5%, 4.9%, and 5.6%, respectively.

The inability to sustain an early rally effort following Thursday’s strong rebound, and a generally supportive employment report, raised some concern that the week’s down leg had yet to run its course. Volatile price action also undercut investor sentiment and tempered confidence in buy-the-dip efforts.

Within the S&P 500, the information technology (-3.5%), consumer discretionary (-3.1%), and industrial (-2.6%) sectors underperformed the broader market.

Apple’s (AAPL) poor performance within the tech space was reflective of the ongoing effort to liquidate/reduce exposure to the market’s most heavily-weighted group. The sector’s non-response to Broadcom’s (AVGO) upbeat earnings report was also indicative of the negative sentiment hanging over the sector. The tech sector lost 5.1% this week and is now down 14.6% this quarter.

Chip stocks also struggled with the Philadelphia Semiconductor Index losing 3.7%. NVIDIA (NVDA) underperformed with a notable loss of 6.8%.

Within the industrial sector, transport stocks were one of the most-heavily hit groups on Friday with the Dow Jones Transportation Average losing 3.9%, as growth concerns and an uptick in oil prices fed selling efforts. American Airlines (AAL) and FedEx (FDX) were notable laggards with steep losses of 9.1% and 6.1%, respectively.

On the other hand, the utilities (+0.4%) group was the only sector to finish in positive territory on Friday. The energy sector (-0.6%) also showed relative strength.

Looking at energy, OPEC+ producers agreed to a production cut of 1.2 million barrels per day to address weakening oil prices. Russia was a party to the proposed production cuts, yet Iran is reportedly exempt from the production cut requirements. WTI crude rose 2.0% to $52.60/bbl, although it gave up a good chunk of its gains.

In earnings, lululemon athletica (LULU) and Ulta Beauty (ULTA) fell 13.4% and 13.1%, respectively, after releasing their earnings reports. Lululemon sold-off despite beating top and bottom line estimates.  Ulta tumbled after the company issued Q4 guidance below consensus.

U.S. Treasuries extended their recent climb, pushing yields lower, amid the equity sell-off. Friday’s gains were led by the front end, which responded favorably to the November employment report and a contention from St. Louis Fed President Bullard (a 2019 FOMC voter) that the Fed could consider delaying a rate hike at the December FOMC meeting due to the narrowed yield curve.

Specifically, the 2-yr yield fell seven basis points to 2.70%, and the 10-yr yield fell two basis points to 2.85%. For the week, the 2-yr yield dropped 11 basis points, and the 10-yr yield dropped 16 basis points. Meanwhile, the U.S. Dollar Index decreased 0.2% to 96.92 on Friday.

Separately, the CBOE Volatility Index (VIX), which is often referred to as Wall Street’s “fear gauge,” rose 9.6% to 23.23. For the week, the VIX climbed nearly 30.0%.

Market Internals – Friday 07 December 2018

Dollar: Slump Continues

The U.S. Dollar decreased 0.0475 or 0.05% to 96.71 on Friday December 7 from 96.7957 in the previous trading session.

Bonds: Shorter Maturities Invert

U.S. Treasuries wrapped up a winning week with more gains as the stock market continued to flounder, trade concerns continued to fester, and expectations for an overly aggressive Federal Reserve in 2019 continued to fall by the wayside.  Today’s gains were led by the front end, which responded favorably to the November employment report and a contention from St. Louis Fed President Bullard (a 2019 FOMC voter) that the Fed could consider delaying a rate hike at the December FOMC meeting due to the narrowed yield curve.  The 10-2 spread widened five basis points today to 15 basis points while 2-yr and 3-yr yields continued to trade above the 5-yr yield.  The S&P 500 was down 2.6% as of this post while the Nasdaq Composite was down 3.3%.  The weakness there continued to drive a flight-to-safety in the Treasury market.  Yields for securities ranging from the 2-yr note to the 30-yr bond dropped between 11 and 17 basis points this week.

The yield curve inverted on the shorter maturities for the first time since 2006 as longer maturities’ yields fell against the 2-year yield. The spread between the 2s5s inverted to -1bp from 3bps the previous week. The spread between the 5s10s tightened to 16bps from 17bps the previous week while the 10s30s narrowed to 29bps from 30bps the previous week.

The spread that investors monitor for a true inversion of the yield curve, the 2-10 spread, has narrowed to 15bps from 23bps a week ago.

The next warning sign that this market is ready for a more significant downside will be the convergence of the 10yr yield against the Fed Funds Rate. You can read all about it in an older article here: The Fed Fund Rate, The Market & 2016 (Original article titled “Riding The Rate” was published in the Business Times in 2007 and republished in BTInvest in the Business Times on April 2015 .)

Commodities 

The Bloomberg Commodity Index settled at 83.49, higher than 82.56 the previous week as Energy, Precious and Grains gained.

WTI oil closed at 52.61, higher than the week before at $50.93 after OPEC+ producers agreed to a production cut of 1.2 million barrels per day to address weakening oil prices. The spread between WTI and Brent widened to $9.06 from $7.78 the previous week as Brent settled at $61.67 p/b.

EIA petroleum data for the week ended November 30

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 7.3 mln barrels from the previous week. At 443.2 mln barrels, U.S. crude oil inventories are about 6% above the five year average for this time of year. Total motor gasoline inventories increased by 1.7 mln barrels last week and are about 4% above the five year average for this time of year. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories increased by 3.8 mln barrels last week and are about 5% below the five year average for this time of year. Propane/propylene inventories decreased by 1.3 mln barrels last week and are about 3% below the five year average for this time of year. Total commercial petroleum inventories decreased last week by 8.3 mln barrels last week.

Natural gas inventory showed a draw of 63 bcf vs a draw of 59 bcf in the prior week. Working gas in storage was 2,991 Bcf as of Friday, November 30, 2018, according to EIA estimates. This represents a net decrease of 63 Bcf from the previous week. Stocks were 704 Bcf less than last year at this time and 725 Bcf below the five-year average of 3,716 Bcf. At 2,991 Bcf, total working gas is below the five-year historical range

Baker Hughes total U.S. rig count decreased by -1 to 1075 following last week’s decrease of -3.

Metals: Precious Recovers, Copper Consolidates

Agriculture: Grains Gain Again

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD
Week 50 (December 10 to 14)

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

Benchmarks Indices (21 year average) for wk50:

Week 50 Key Economic Dates

In the coming week …

Sun 09 December

Mon 10 December

Tue 11 December

Wed 12 December

Thu 13 December

Fri 14 December

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

COMMENTARY

The big news last week was the inversion of the shorter end (2yr, 3yr and 5yr) of the yield curve. If that rocked the DOW by 800 points (3%), imagine what will happen when the key benchmark 10yr yield inverts against the 2yr.

As of Friday’s close, the S&P500 and Russel1000 closed below their 200/50DSMA Death Crosses to join the NASDAQ and Russel2000 that crossed below their own Death Crosses a week earlier and the Transports that crossed below two Friday’s ago. 

The DOW (Industrials) has yet to get its Death Cross but remains below its 200DSMA above its 24,200 support. At this rate, it is likely to happen before December Expiration Friday (21 December) or even by this coming week if it breaches the 24,200 support.

All the benchmarks are negative for the year including the Transports and Russels.

Happy Hunting!

~~~~~~~~~~~~~~~~~~~~~~~~~~~

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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)

U.S. ECONOMIC UPDATE

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.

Bonds:

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.

Commodities 

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 

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE MONTH AHEAD
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). 

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD
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

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

COMMENTARY

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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Comments Off on Weekly Market Analysis – 26 Nov 2018 BMO

Weekly Market Analysis – 26 Nov 2018 BMO

WEEK IN REVIEW – 19 to 23 NOVEMBER 2018 :
Energy, Tech Stocks Crushed as S&P 500 Loses Yearly Gains

The S&P 500 fell 3.8% on this holiday-shortened trading week, erasing its gain for the year. The Dow Jones Industrial Average lost 4.4%, the Nasdaq Composite lost 4.3%, and the Russell 2000 lost 2.6%.

There was palpable sense of real angst about the market’s prospects with market commentary beginning to emphasize the growing risk of a bear market. Factors contributing to that outlook have included rising recession risk; widening credit spreads; the message being sent by the sharp losses in cyclical sectors and former leadership stocks/sectors; lack of buy-the-dip success in November, calling into question the prospects of a seasonal rally; and burgeoning calls to bolster defensive positioning in investment portfolios.

Energy and tech stocks took the brunt of the damage with the energy (-5.1%) and information technology (-6.1%) sectors posting heavy losses this week. The consumer discretionary (-4.3%), communication services (-4.0%), materials (-3.5%), and industrial (-3.2%) sectors also had poor performances.

WTI crude, which has been pressured by ongoing supply concerns and decreasing demand, dropped 9.2% to $51.28/bbl this week and extended its decline to 33.3% from last month’s four-year high. Oil prices were pressured on Tuesday after some speculation that Saudi Arabia might not force an oil production cut after U.S. President Donald Trump defended the United States’ relationship with Saudi Arabia in the wake of the killing of Jamal Khashoggi. U.S. crude stockpiles also rose for the ninth consecutive week, according to the U.S. Energy Information Administration’s weekly crude inventory report.

The tech sector, in particular, has been prone to liquidation efforts that have aimed to reduce exposure to a crowded sector running into concerns about a cyclical slowdown, valuations, and increased regulatory scrutiny. In addition, a lack of leadership and the continued inclination to sell into strength have translated into a lack of buying interest.

Apple (AAPL) shares took a hit after a Wall Street Journal report indicated the company cut its production orders for all three new iPhones it launched in September. Regarding the iPhone XR, Apple reportedly slashed its production plan by up to a third of the approximately 70 million units it had asked some suppliers to produce between September and February. Apple has fallen 21.3% since providing a disappointing outlook for the holiday quarter on November 1.

Facebook (FB) shares continued to struggle, losing 5.6% this week, amid ongoing negative publicity surrounding the social network. CEO Mark Zuckerberg was reportedly not happy with COO Sheryl Sandberg over the handling of the Cambridge Analytical scandal, according to a WSJ report. Also in the report, Mr. Zuckerberg’s newly-adopted, aggressive leadership style has not fared well with key executives, some of whom have resigned.

Conversely, the real estate (-1.5%) and utility (-1.4%) sectors were the only groups to finish with weekly losses under 2.0%.

This week featured a list of earnings reports from notable retailers. Reports from Lowe’s (LOW), Target (TGT), Kohl’s (KSS), L Brands (LB), and Ross Stores (ROST) reflected ongoing concerns over gross margin pressures, elevated inventory levels, disappointing same-store sales, and included some cautious guidance. On the other hand, retailers Urban Outfitters (URBN), Best Buy (BBY), Foot Locker (FL), and Gap (GAP) released more positive reports. Separately, Deere (DE) missed top and bottom line estimates.

In other corporate news, a U.S. appeals court refused to stop generic versions of Johnson & Johnson‘s (JNJ) prostate-cancer drug Zytiga from entering the market, according to Bloomberg. Also, Chinese authorities approved United Tech‘s (UTX) acquisition of Rockwell Collins (COL) for $140/share in cash and stock.

U.S. Treasuries ended the week on a mixed note. The 2-yr yield added three basis points to 2.83%, and the 10-yr yield decreased two basis points to 3.05%. Meanwhile, the U.S. Dollar Index increased 0.4% to 96.94

Overseas, the Asia-Pacific Communications Summit concluded on Sunday without the release of a joint communique due to the ongoing trade disagreement between United States and China. On a related note, U.S. Trade Representative Robert Lighthizer released a report on China’s intellectual property practices, alleging that China has not altered its “unfair, unreasonable, and market-distorting practices” that led to the imposition of tariffs. China’s Shanghai Composite lost 3.7% this week.

(Economic Excerpts from Briefing.com)

U.S. ECONOMIC UPDATE

Tuesday 20 November:

Single-Unit Strength Missing from October Housing Starts and Building Permits Report 

Housing starts increased 1.5% month-over-month in October to a seasonally adjusted annual rate of 1.228 million units (consensus 1.230 million) from an upwardly revised 1.210 million (from 1.201 million) in September. Building permits slipped 0.6% to a seasonally adjusted annual rate of 1.263 million (consensus 1.260 million) from an upwardly revised 1.270 million (from 1.241 million) in September.

The key takeaway from the report, however, is that there wasn’t any strength in single-unit permits or starts, which were down 0.6% and 1.8%, respectively, month-over-month and down 0.6% and 2.6%, respectively, year-over-year.

Wednesday 21 November:

Leading Indicators Growth Slows in October 

The Conference Board’s Leading Economic Index increased 0.1% in October (consensus 0.1%) after increasing a revised 0.6% (from 0.5%) in September.

The key takeaway from the report is that the Conference Board believes that while the Leading Index still points to robust growth in early 2019, the rapid pace of growth may have already peaked. The Conference Board expects longer-term growth to moderate around 2.5%.

Lower Aircraft Orders Weigh on October Durable Orders Report 

Durable Goods orders for October decreased 4.4% (consensus -2.6%) after decreasing a revised 0.1% (from +0.8%) in September. Excluding transportation, durable goods orders increased 0.1% (consensus +0.4%) after a revised 0.6% decrease (from +0.1%) in September.

The key takeaway from the report is that the headline decline was driven by a drop in aircraft orders while motor vehicle and parts orders increased modestly.

Initial Claims Miss Expectations 

Initial claims for the week ending November 17 increased by 3,000 from last week’s revised rate of 221,000 (from 216,000) to 224,000 (consensus 215,000). Continuing claims for the week ending November 10 decreased by 2,000 from last week’s revised level of 1.670 million (from 1.676 million) to 1.668 million.

The key takeaway from the report is that even with the upward revision to last week’s reading, claims remain not far above multi-decade lows. This week’s miss is likely the result of economists basing their estimates on last week’s unrevised reading.

Existing Home Sales Snap Six-Month Skid in October 

Existing home sales increased 1.4% month-over-month in October to a seasonally adjusted annual rate of 5.22 million (consensus 5.20 million). The October reading represented the first month-over-month increase in seven months. Total sales were 5.1% lower than the same period a year ago.

The key takeaway from the report is that even with the October increase, the level of sales remains at levels from late 2016 as higher mortgage rates and a limited supply of lower-priced homes weigh.

Consumer Sentiment Index Dips in Final November Reading 

The final reading of the University of Michigan Index of Consumer Sentiment for November ticked down to 97.5 (consensus 98.3) from 98.3 in the preliminary reading.

The key takeaway from the report is that the modest downtick was due to changes in sentiment among different income earners. Those in the bottom third of the income distribution reported an increase in sentiment while those in the top third of the income distribution reported a decrease in sentiment. There was no change in sentiment among Democrats and Republicans after the midterm election.

Friday 23 November:

U.S. Markit Manufacturing PMI- Prelim 55.4, October 55.7; Services PMI- Prelim 54.4, October 54.8

Initial read on Black Friday 2018: Traffic okay, online strong, discounts similar to last year

Overall, Black Friday doesn’t have the sense of urgency as in the past and feels more like a busy regular weekend day in many of the stores. Like last year, they are not too concerned and don’t believe too much weight should be given to the slow Black Friday traffic, given many of the promotions were available for the past couple of weeks.

Early in-store traffic seemed best at Best Buy (BBY), Kohl’s (KSS), Macy’s (M), Target (TGT) and Walmart (WMT). As expected, electronics and toys seem to be winning categories. The colder weather in the Northeast appears to be boosting sales of cold weather gear, such as coats, scarves, gloves, sweaters and boots.

Other International Events of Interest

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Friday 23 November
Energy Stocks Drag on Broader Market amid Falling Oil Prices

The S&P 500 lost 0.7% on Friday in what was a shortened, low-volume trading day on Wall Street. Friday’s volatile session extended the benchmark index’s weekly losses to 3.8%.

Meanwhile, the Dow Jones Industrial Average lost 0.7%, the Nasdaq Composite lost 0.5%, and the Russell 2000 finished flat on Friday.

The oil-sensitive energy sector greatly underperformed the broader market with a loss of 3.3%, as oil prices continued to fall. WTI crude fell 6.1% to $51.28/bbl, extending its decline to 33.3% from its October 3 high. A Wall Street Journal report indicated that Saudi Arabia and OPEC are considering a disguised production cut to satisfy President Donald Trump. Specifically, the cartel would retain current output targets, first set in 2016, which would imply a production pullback because Saudi Arabia is allegedly overproducing by nearly 1 million barrels a day.

FANG stocks also struggled on Friday with Facebook (FB) and Apple (AAPL) leading the retreat. Apple reportedly resumed production of its 2017 iPhone X amid shrinking demand for its 2018 iPhone X Max model, according to IBN; and has also reportedly lowered the price of its iPhone XR in Japan to increase sales, according to the WSJ. Facebook and Apple shares dropped over 5.0% and 10.0%, respectively, this week.

On the other hand, the consumer staples (+0.3%), health care (+0.1%), and utility (+0.1%) sectors closed on a higher note.

Also, many companies within the consumer discretionary sector (-0.4%) were on display as consumers flocked to retailers for the sales-driven Black Friday shopping event. Though financial media commented on consumer traffic trends, the small sample size should not be used to draw final conclusions about the strength of holiday sales across the country.

In the bond market, the 2-yr yield added one basis point to 2.83%, while the 10-yr yield shed one basis point to 3.05%. The bond market will officially close at 2:00 PM ET. Also, the U.S. Dollar Index, which tracks the dollar’s performance against six major currencies, rose 0.2% to 96.94.

Overseas, global equities closed Friday on a mixed note. China’s Shanghai Composite led Asian markets lower with a loss of 2.5%, while Italy’s MIB led the European advance with a gain of 0.6%.

Market Internals – Friday 23 November 2018

Dollar: Holiday Week Ends on Upbeat Note

The U.S. Dollar Index closed up 0.2% at 96.94, reclaiming the remainder of its loss from last week. The Dollar Index faced some selling on Thursday, but that decline was erased in early Friday morning trade. The greenback maintained an upward bias during a quiet U.S. session, while the euro was been pressured by another reminder of weakening economic data in the eurozone. Meanwhile, the pound has been pressured by misgivings ahead of this weekend’s EU leader summit where British Prime Minister Theresa May is expected to present a final version of Brexit deal.

Bonds: Quiet Session Produces Slight Gains

U.S. Treasuries ended the abbreviated week with modest gains. Treasuries started the cash session on a higher note, as the market responded to a shaky outing from markets in China (-2.5%) and Hong Kong (-0.4%) and a weak start in U.S. equities. Treasuries built on their gains during the first hour of the session, but mid-morning action saw 2s, 5s, and 10s return to their opening levels in a move that coincided with a rebound in stocks. For its part, the long bond continued backtracking until reaching its flat line. Treasuries remained near their intraday lows during midday action, which saw the stock market dip back toward its opening low. Unsurprisingly, today’s participation was on the light side with trading volume drying up into the afternoon.

The yield curve flattened as longer maturities’ yields fell against the 2-year yield. The spread between the 5s10s narrowed to 17bps from 18bps the previous week while the 10s30s remained unchanged at 26bps from 26bps the previous week. The 2-30 spread has narrowed to 49bps from 53bps a week ago.

Commodities 

The Bloomberg Commodity Index settled at 81.84, lower than 83.91 the previous week as energy and grains fell.

WTI oil continued falling off that proverbial cliff, settling the week at $50.42. The spread between WTI and Brent narrowed to $8.38 from $10.30 the previous week as Brent settled at $58.80 p/b.

EIA petroleum data for the week ended November 16

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 4.9 mln barrels from the previous week. At 446.9 mln barrels, U.S. crude oil inventories are about 6% above the five year average for this time of year. Total motor gasoline inventories decreased by 1.3 mln barrels last week and are about 6% 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 0.1 mln barrels last week and are about 7% below the five year average for this time of year. Propane/propylene inventories decreased by 2.0 mln barrels last week and are about 3% below the five year average for this time of year. Total commercial petroleum inventories decreased last week by 0.2 mln barrels last week.

Natural gas inventory showed a draw of 134 bcf vs a build of 39 bcf in the prior week. Working gas in storage was 3,113 Bcf as of Friday, November 16, 2018, according to EIA estimates. This represents a net decrease of 134 Bcf from the previous week. Stocks were 620 Bcf less than last year at this time and 710 Bcf below the five-year average of 3,823 Bcf. At 3,113 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count decreased by -3 to 1079 following last week’s increase of +1.

Metals: Gold rises, Silver and Copper fall

Agriculture: Grains Decline

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD
Week 48 (November 26 to 30)

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

Benchmarks Indices (21 year average) for wk48:

Week 48 Key Economic Dates

In the coming week, the FOMC minutes will be keenly watched, alongside US second estimate of Q3 GDP growth, personal spending and PCE prices; UK consumer confidence and monetary indicators; Eurozone business survey, inflation and jobless rate; Japan consumer confidence, unemployment and flash Nikkei manufacturing PMI; China NBS PMIs; and Q3 GDP estimates for India, Canada and Brazil.

Sun 25 November

Mon 26 November

Tue 27 November

Wed 28 November

Thu 29 November

Fri 30 November

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

COMMENTARY

It is amusing to read a lot of the headlines this past week, making the last couple of weeks sound like a bloodbath when in fact, the benchmarks are not even in correction territory (a Correction is -10% from the previous high) let alone bear market territory (a Bear market is a correction of more than -20% from the previous high). Fact is, the benchmarks are only down by 6% to 7%, they are all negative for the year and all under their respective 200DSMAs … again.

The drop is February was way worse but the headlines today are screaming like its 2008 all over again. Okay, maybe it is the start of another 2008 but I am not a fortune-teller and I see things for what they are. And right now, I see a healthy American economy that is no where near recessionary levels.

All I see is a normal market correction – one that is way overdue and not likely to be sustainable – that could be the start/continuation of a longer period of  volatility or the start of another 2008 or the bottom of this volatility that could start an upswing into Christmas.

Who the hell knows? I don’t know where these experts buy their crystal balls from but I sure would like to have one.

RememberKISS” …

If you don’t want to lose your trade, book your profits early. No one ever lost a trade by booking profits.

Happy Hunting!

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Comments Off on Weekly Market Analysis – 19 November 2018 BMO

Weekly Market Analysis – 19 November 2018 BMO

WEEK IN REVIEW – 12 to 16 NOVEMBER 2018 :
Stocks Lose Ground Over Continuing Growth Concerns

Wall Street tumbled this week, with consumer discretionary and information technology stocks leading the retreat.

Concerns over peak earnings growth continued to linger, and a further breakdown in oil prices also weighed on investor sentiment. Brexit reentered the mix this week, and, as always, U.S.-China trade headlines were plentiful. The S&P 500 lost 1.6%, the Dow lost 2.2%, the Nasdaq lost 2.2%, and the Russell 200 lost 1.4%.

Within the tech space (-2.5%), Apple (AAPL) got off to a rough start after two more suppliers, Lumentum (LITE) and Qorvo (QRVO), cut their guidance. Disappointing guidance from chipmakers NVIDIA (NVDA) and Applied Materials (AMAT) also weighed on the sector, with NVIDIA plunging nearly 20% on Friday.

Meanwhile, a host of retailers reported earnings this week, including Walmart (WMT), Macy’s (M), Home Depot (HD), and Nordstrom (JWN) to name a few. The reports generally showed better-than-expected profits, but shares sold off in response nonetheless. The SPDR S&P Retail ETF (XRT) lost 4.5%, while the consumer discretionary sector lost 3.8%.

The oil-sensitive energy space (-2.1%) fell in tandem with WTI crude, which dropped 6.1% to $56.52/bbl and extended its losing streak to 12 sessions before bouncing back.

Saudi Arabia announced it would reduce its oil exports in December by 500,000 barrels a day due to a seasonal slowdown in demand, but President Trump rebuked that decision on Twitter. There were also reports that OPEC and non-OPEC allies could be entertaining a plan to cut production by 1.4 million barrels per day in 2019. However, OPEC cut its 2019 oil demand forecast for the fourth consecutive month.

In Washington, Congresswoman Maxine Waters, who is set to take over the House Financial Services Committee this January, vowed that the days of weakening bank regulations will be coming to an end. Ms. Waters’ comments should not have been seen as a surprise as it was understood this would likely be the case following the midterm election results. However, a knee-jerk sell off in the financial space, which finished the week lower by 1.3%, suggested otherwise.

Conversely, outperforming the broader market were the lightly-weighted real estate (+0.8%), materials (+0.4%), and the heavily-weighted health care (-1.1%) spaces.

Elsewhere, U.S. Treasuries saw heightened demand amid market turbulence and a softer-sounding perspective from Fed Vice Chair Richard Clarida. Mr. Clarida conceded on Friday that he thinks the Fed is getting closer to a neutral rate, which is a dovish stance compared to Fed Chair Jerome Powell’s “long way from neutral” comments from last month. The 2-yr yield lost 13 basis points to close at 2.80%, and the 10-yr yield lost 12 basis points to close at 3.07%.

This week saw the market bounce on any U.S.-China trade development no matter if the news was new or repetitive.

A Financial Times report suggested China and the U.S. are trying to reach a trade truce ahead of the G-20 meeting at the end of the month, but clarification from the U.S. Trade Representative’s office said that the next round of tariffs for China are not on hold. President Donald Trump chimed in that China is open to a trade deal, though a list of concessions reportedly presented from China before did not mention structural reforms that have been demanded by President Donald Trump.

At the very least, National Economic Council Director Larry Kudlow did confirm that the U.S. and China have resumed trade discussions.

Overseas, UK Prime Minister Theresa May received cabinet approval for her draft withdrawal statement for Brexit. However, Brexit secretary Dominic Raab, and several other ministers, resigned after the approval, and reports indicate that the 1922 Committee received 48 letters needed to trigger a vote of no-confidence in Prime Minister Theresa May. The vote could take place next week.

(Economic Excerpts from Briefing.com)

U.S. ECONOMIC UPDATE

Tuesday 13 November:

Fiscal Year Begins with October Treasury Budget Deficit

The Treasury Budget for October showed a deficit of $100.5 billion versus a deficit of $63.2 billion for the same period a year ago. The Treasury Budget data is not seasonally adjusted, so the October deficit cannot be compared to the $119.1 billion surplus for September.

Wednesday 14 November:

October CPI In-Line with Expectations

The all items index for consumer prices increased 0.3% month-over-month in October while the all items index, excluding food and energy, increased 0.2%. Both were in-line with the consensus estimate.

The key takeaway from the report is that it points to a firming in consumer inflation, which fits the Federal Reserve’s inclination to raise rates again in December.

Thursday 15 November:

Retail Sales Bounce Back in October 

Total retail sales increased 0.8% (consensus +0.5%) following a downwardly revised 0.1% decline (from +0.1%) in September. Excluding autos, retail sales jumped 0.7% (consensus +0.5%) following an unrevised 0.1% decline in September.

The key takeaway from the report is that it reflects healthy consumer spending activity that will provide a positive input for Q4 GDP forecasts. Core retail sales, which exclude auto, gas station, building equipment and materials, and food services sales, jumped 0.3%.

Initial and Continuing Claims Increase in Latest Week, but Healthy Low Claims Trend Intact

Initial claims for the week ending November 10 increased by 2,000 to 216,000 (consensus 214,000). Continuing claims for the week ending November 3 increased by 46,00 to 1.676 million.

The key takeaway from the report is that the weekly increases did very little to alter trends in the four-week moving average for both series, which remain near historic lows and indicative of a tight labor market.

Import and Export Prices Push Up in October 

Import prices increased 0.5% in October. Excluding fuel, they were up 0.2%. Export prices increased 0.4%. Excluding agricultural exports, they were up 0.5%.

The key takeaway from the report is that nonfuel import prices remain tame, up just 0.7% year-over-year, versus 1.4% for the 12-months ending October 2017.

Empire Manufacturing Survey Reflects Pickup in Activity in November 

The Empire Manufacturing Survey for November increased to 23.3 (consensus 20.0) from 21.1 in October, bolstered by an increase in the index for shipments, inventories, the number of employees, and prices paid.

The key takeaway from the report, which uses 0.0 as the dividing line between expansion and contraction, is that manufacturing activity in the New York Fed region continues to run at a good pace.

Philadelphia Fed Index Points to Slower Activity in November 

The Philadelphia Fed Index for November fell to 12.9 (consensus 20.5) from 22.2 in October, as most component indexes fell back from stronger levels.

The key takeaway from the report is that manufacturing growth slowed in the Philadelphia Fed region in November, yet it still remains in an expansion mode with a reading above 0.0.

Business Inventories Match September Expectations 

Total business inventories increased 0.3% in September, in-line with the consensus estimate, after increasing 0.5% in August. Total business sales increased 0.4% after increasing 0.5% in August.

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.

Friday 16 November:

Manufacturing Output Props Up Industrial Production in October 

Industrial production increased 0.1% in October (consensus +0.3%) following a downwardly revised 0.2% increase (from +0.3%) in September.  The capacity utilization rate dipped to 78.4% from an upwardly revised 78.5% (from 78.1%) in September, which was the highest rate since January 2015.

The key takeaway from the report is that manufacturing output increased for the fifth straight month despite a big drop in motor vehicle assemblies, which underscores solid activity otherwise for the manufacturing base.

Other International Events of Interest

EARNINGS – S&P 500 Aggregate Estimates and Revisions; 2018 Q3

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Friday 16 November
Broader Market Gets Lift from More Trade Chatter; Chip Stocks Weigh

The S&P 500 chipped in a 0.2% gain on Friday after President Donald Trump again signaled China’s desire to make a deal on trade. Disappointing guidance from chipmakers, however, kept gains in check. The Dow Jones Industrial Average gained 0.5%, the Nasdaq Composite lost 0.2%, and the Russell 2000 gained 0.2%. For the week, the S&P 500 declined 1.6%.

Speaking from the White House, President Trump reiterated his claim that China wants to make a trade deal. He said that China sent a “large” list of things they’re willing to do, but the list is not yet in-line with the President’s standards. Nevertheless, the market, desperate for a positive solution on trade, reacted positively to the comments.

Also, a dovish perspective from Fed Vice Chair Richard Clarida on Friday helped ease some early angst.

Mr. Clarida thinks the Fed is getting closer to a neutral rate, which is a somewhat contrasting view from Fed Chair Jerome Powell in October who said the Fed is still a “long way from neutral.” The Fed-sensitive 2-yr yield subsequently dropped six basis points to 2.80%, and the benchmark 10-yr yield lost four basis points to 3.07%. The U.S. Dollar lost 0.5% to 96.46.

Proving strong support for the broader market were the real estate (+1.4%), utilities (+1.3%), energy (+1.1%), materials (+1.0%), and health care (+1.0%) sectors, which combine for roughly 30% of the S&P 500’s market capitalization.

Conversely, the top-weighted information technology sector shed 0.1%, though recouped most of its losses largely due to resiliency from Apple (AAPL). Discouraging guidance from NVIDIA (NVDA) and Applied Materials (AMAT) weighed on the sector early. Weaker-than-expected chip demand, which left NVIDIA with excess inventory, led to fourth quarter revenue and EPS guidance that was well below current consensus estimates. Applied Materials also lowered its top and bottom line guidance below consensus but was able to add some gains. The Philadelphia Semiconductor Index lost 1.2%.

Facebook (FB) weighed on the communication services sector (-0.4%) with a loss of 3.0%. On-going negative publicity surrounding the company has helped pull the stock back to its lowest level since April 2017. Also, Amazon (AMZN) and retail companies dragged on the lagging consumer discretionary sector (-0.5%).

Retail companies continued to struggle after Nordstrom (JWN) and Williams-Sonoma (WSM) released mixed earnings reports. Nordstrom reported a significant one-time charge that knocked EPS lower by $0.28, and its revenue and its full-price comparable sales figures were on the softer side. Williams-Sonoma guided its revenue to the low end of Wall Street estimates. Both companies beat earnings expectations, though. The SPDR S&P Retail ETF (XRT) lost 1.4% today and 4.5% this week.

Separately, WTI crude added 0.1% to $56.52/bbl, extending its rebound effort to its third straight session after snapping a 12-session losing streak.

Overseas, reports from the United Kingdom indicated that the 1922 Committee received 48 letters needed to trigger a vote of no-confidence in Prime Minister Theresa May. UK’s FTSE shed 0.4%, and the British pound rose 0.4% to 1.2830 against the dollar, which is far from a frantic move in the market that should be most impacted by Brexit fears.

Market Internals – Friday 16 November 2018

Dollar: Index Turns Negative for Week

The U.S. Dollar Index closed down 0.5% at 96.43, slipping to levels from last Thursday. The greenback spent the overnight session inside a narrow range, but it slid to lows after Fed Vice Chair Richard Clarida said that policymakers are seeing some evidence of a slowdown in the global economy with a potential impact on the United States. Mr. Clarida also said he believes the Fed is close to a neutral rate range, which was received as a signal that future rate hikes might be limited in number. With Friday’s selling, the Dollar Index is down 0.5% since last Friday, booking its first weekly decline in five weeks.

Bonds: Streak Extended

U.S. Treasuries ended the week on Friday with gains across the curve but lower for the week. The 5-yr note and the 10-yr note outperformed from the start, but the 2-yr note caught up shortly after the open, as the market responded to comments from Fed Vice Chair Richard Clarida, who was interviewed by CNBC. Participants paid particular attention to comments that could be categorized as dovish, but the Fed vice chair did not signal big shifts in policy. Instead, he acknowledged that some evidence of a slowdown in the global economy with a potential impact on the United States is becoming visible. Mr. Clarida added that the central bank should be data-dependent and that the neutral rate is not far away. Separately, Chicago Fed President Charles Evans said that hiking the fed funds rate to “about 3.25%” is reasonable, given the economic outlook. This view implies four more rate hikes. Treasuries continued their advance into the afternoon, finishing near their best levels of the day. Today’s rally helped Treasuries finish the session at or above their closing highs from October with all tenors recording their fifth consecutive advance on a cash basis. Futures on 2s, 5s, 10s, and 30s logged their sixth advance in a row.

The belly of the yield curve fell to steepen the curve. The spread between the 5s10s widened to 18bps from 15bps the previous week while the 10s30s widened to 26bps from 20bps the previous week. The 2-30 spread has widened to 53bps from 46bps a week ago.

Commodities 

The Bloomberg Commodity Index settled at 83.91, higher than 82.89 the previous week even as Crude fell because Nat Gas, Metals and Grains gained.

WTI oil fell off a cliff, settling the week at $56.46. The spread between WTI and Brent widened to $10.30 from $9.99 the previous week as Brent settled at $66.76 p/b.

EIA petroleum data for the week ended November 09

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 10.3 mln barrels from the previous week. At 442.1 mln barrels, U.S. crude oil inventories are about 5% above the five year average for this time of year. Total motor gasoline inventories decreased by 1.4 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 3.6 mln barrels last week and are about 8% below the five year average for this time of year. Propane/propylene inventories decreased by 0.8 mln barrels last week and are at the five year average for this time of year. Total commercial petroleum inventories decreased last week by 1.4 mln barrels last week.

Natural gas inventory showed a build of 39 bcf vs a build of 65 bcf in the prior week. Working gas in storage was 3,247 Bcf as of Friday, November 9, 2018, according to EIA estimates. This represents a net increase of 39 Bcf from the previous week. Stocks were 528 Bcf less than last year at this time and 601 Bcf below the five-year average of 3,848 Bcf. At 3,247 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count increased by +1 to 1082 following last week’s increase of +14.

Metals: 

Agriculture: 

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THE WEEK AHEAD
Week 47 (November 19 to 23)

This is the week that starts the Christmas Sales phenomenon known as Black Friday (23 November) and Cyber Monday Sales (26 November).

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

Benchmarks Indices (21 year average) for wk47:

Week 47 Key Economic Dates

In the coming week the US will publish building permits and housing starts, existing home sales, durable goods orders and flash Markit PMIs. Other important releases include: ECB and RBA meeting minutes; UK CBI factory orders; Eurozone flash Markit PMIs; and Japan inflation and trade balance.

Mon 19 November

Tue 20 November

Wed 21 November

Thu 22 November

Fri 23 November

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COMMENTARY

I am expecting to see some semblance of normalcy returning to the market. If it does this week, I am back to the usual seasonal trades starting with the retail sector as earnings season winds down.

Looks like I’m waiting till after Black Friday then. The past two weeks have been nuts. Nuts because I have had to entertain countless (and I mean I really lost count) number of eMails, private (FB) messages, Tweets, WhatsApps, phone calls and everything else in between with regard to margin calls, assignments and troubled accounts. It’s simple: break the rules and you’ll be punished – and its not like I’ve not said it before. Here’s the banner from 2012.

The level of complacency has been phenomenal. Amongst the bunker traders and energy trading desks, the number of margin calls have been higher than that of 2014 (when oil fell from $105 to $45) and 2015 (when oil fell to $27). Within the equity space, assignments went through the roof amongst Options Traders as some got caught in the Bull Trap over the last two weeks and in the Bear Trap at the end of October.

Me? I stopped trading after crude broke down from $76 to failed to find support at $65. Thank goodness for old habits (of not trading between October and Black Friday) because I would have been on the wrong side of the trade if I did.

Sometimes, not trading is the best way to not lose money.

To lose graciously and walk away with your life is better than winning without your life to savour the victory.

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Now comes the slow bleed to the downside that will have even the most hardcore Crypto believers running. Just like in the Tulip Mania, the few remaining sellers hung on to the belief that the mania would return and hung on to their precious-but-worthless bulbs while their net worth dwindled. So watch for those reports that tout ‘buy’ signals now – they always crawl out of the woodwork when shit happens.

One more leg up, man, one more leg up!

The only thing that will revive this form of currency is a major shift to regulated valuation, liquidity and capital controls that are pegged to some form of capitalisation that will give it a proper and legitimate demand-supply purpose, something that can be monetised for commercial reasons and most of all, a real NEED for such a currency.

But that would defeat the current purpose of this currency, wouldn’t it?

Game over, man, game over.

Happy Hunting!

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