On Edge: Market Seeks Direction As Investors Await Host of Key Developments

The day begins with U.S. markets seeking direction as investors await news on a number of fronts later this week, including Brexit, an ECB meeting, Fed minutes and the start of earnings season.

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6 min read

Key Takeaways

  • Market awaiting Fed minutes, ECB meeting Wednesday

  • Light volume on Wall Street lately despite new catalysts


  • More tariff worries as EU and US trade tough talk

(Tuesday Market Open) Markets are on the cusp of a lot of news, but none has broken yet. This week brings a Brexit deadline, a European Central Bank (ECB) meeting, Fed minutes, and the start of earnings season, but for now, that’s all in the future and stocks don’t appear to be moving too far one way or another.

The ECB meeting and Fed minutes are Wednesday, while earnings season begins in earnest on Friday. In the meantime, stocks might chop around a bit looking for direction in continued low-volume trading (see more below). Last Friday’s strong U.S. jobs report appeared to spark some buying that day, but the firmness didn’t really carry through into the new week.

Brexit is another thing that’s out there, but it’s had a limited impact on U.S. stocks recently, maybe in part because people tend to be more focused on the China tariff situation. China trade is still the number one issue, even if there aren’t any new headlines about it. The U.K. is asking for another delay on Brexit, and if the European Union says no, that could potentially bring some volatility back to the U.S. markets as investors look at possible ramifications. The current Brexit deadline is Friday.

Adding to the list of stuff to watch across the Atlantic is a renewed tiff between the U.S. and E.U. over tariffs. Both sides are barking at each other this week as the U.S. considers new tariffs, and that’s not necessarily helpful when you consider all the trade between them. If things get more tense, it could conceivably have an impact on some of the multinational U.S. companies that sell lots of product in Europe. These include pharma, agriculture, machinery, and aircraft makers. There’s also a big intellectual property trade.

Slow Go

If there’s something the market’s had trouble scrounging up lately, it’s volume. Even during last week’s solid rally, trading was light, and sometimes a rally amid light volume might raise questions about just how much conviction the rally holds.

Slow trading continued Monday as the new week began, even with catalysts like Friday’s jobs report, initial public offerings (IPOs) hitting the market, and the excitement of earnings season just ahead. We’ll have to wait and see if things pick up once earnings season begins in earnest with the big banks reporting this Friday.

If last week’s jobs data didn’t push volume much higher, it seems unlikely that any of this week’s less impactful data would do the trick. Today is pretty light on the data calendar, with February job openings the only number that might get more than a glance. Inflation data tomorrow (see more below) could be something that gets a closer look.

Some Investors Flee FAANGs

Monday did bring some news in the form of the Investor Movement Index® (IMXSM). The IMX measures what TD Ameritrade clients are actually doing and their exposure level to markets. TD Ameritrade clients increased exposure to equity markets during the March IMX period, with the IMX increasing to 4.65, up 1.31% from the previous period. Some of the stocks that saw investor interest included electric car and cannabis companies.

What’s interesting about IMX last month is that it showed retail investors selling shares of Amazon (AMZN), Facebook (FB), Netflix (NFLX), and Apple (AAPL). That’s four of the five “FAANGs.” The Amazon selling was especially notable, because clients had been buyers of Amazon for eight straight months while also showing immense interest in NFLX in recent periods.

A lot of the momentum in the market over the last few years has come from the FAANGs, so the question might be, if they were the momentum stocks, where will the new momentum come from? None of the FAANGs have made it back to their recent highs, which might call into question whether they can regain all the mojo they had a year ago.

Some think semiconductors could make up for part of the lost FAANG enthusiasm, but semis had kind of a mixed day Monday. Some went up, others went down. It was just one session, however, and the whole sector has been on a roll lately.

The stock that had been on a roll until Monday was Boeing (BA), which fell 4% and basically took the Dow Jones Industrial Average ($DJI) along with it. By this point, there’s really no mystery about what’s ailing BA, but an analyst downgrade might have clipped the stock’s wings after it mounted a comeback last week from recent lows. 

The company reports earnings later this month, and at that point maybe investors can get more insight into BA’s long-term plans around its embattled 737 MAX program. BA said last week it’s temporarily cutting production of the plane by 20% as it deals with issues surrounding two fatal crashes.

Crude Capers

One thing to consider watching is the creeping price of crude, now above $64 a barrel in the U.S. Prices have been climbing steadily most of the year, but got new energy Monday amid concerns about violence in Libya and how that might affect supply. OPEC is keeping a tight lid on production as it tries to soak up excess stockpiles, but U.S. rig counts have started to rise lately. High prices often tend to encourage U.S. production, and it’s worth wondering how long OPEC can remain disciplined if crude is going for more than $70 in Europe, as it currently is.

The other thing to wonder is whether $3 a gallon gas in many U.S. cities might be enough to have consumers get worried about costs and start to hurt transport companies. If investors are worried about high gas prices’ impact on transports, it isn’t showing in the Dow Jones Transportation Average ($DJT). That index is up sharply over the last month and managed slight gains Monday.

Speaking of sectors, leaders in the sector race Monday included Energy (not surprisingly considering the crude rally), along with Info Tech, Consumer Staples, and Consumer Discretionary. The BA weakness helped put pressure on Industrials, and so, apparently, did an analyst downgrade of General Electric (GE).

Two arguably positive factors Monday were Treasuries and the dollar, which both fell. Yields crawled up to 2.52% for the 10-year Treasury by the end of the day, and the dollar eased a bit.

New Traction for Transports: Despite rising crude and gasoline prices, the Dow Jones Transportation Average (candlestick) has executed a sharp u-turn from last month’s weakness, as this chart shows. Meanwhile, the Russell 2000 Index (purple line) of small-caps is also moving higher, but bank earnings in coming weeks could pose a test for the index, which has a heavy exposure to banks. Data Source: S&P Dow Jones Indices, FTSE Russell. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

Careful Approach? Past isn’t always prologue, but if recent market action is any guide at all, the road to new highs for the S&P 500 Index (SPX) might not be linear. The most recent times the SPX pushed toward key psychological levels, it tended to chop around a bit as it came near. For instance, in February it  jumped back and forth as it negotiated a new challenge to the 200-day moving average for the first time in several months. The climb toward 2800 also had its slips and slides along the way, including a week back in early March when the SPX and the two other major U.S. indices all recorded lower closes every single day. 

Back on Sept. 20, the SPX posted an all-time intraday high just above 2940 after closing the previous session at an all-time high settlement just above 2930. As of six months later, both of those remain all-time intraday and closing peaks. The first psychological test for the SPX, if it’s going to re-challenge those summits, is 2900, and Monday’s failure to really test the 2900 level could be a sign of investor hesitation to chase things much higher for now. Last Friday’s better than expected jobs report, however, could be a helpful catalyst for bulls as the week advances. 

After Jobs Data Impress, Factory Orders Slump: The bearish counterpoint to last week’s jobs report, however, might be Monday’s factory orders report for February. The number fell 0.5% from the previous month, not far from the negative 0.6% Briefing.com estimate. Also, the government downwardly revised January’s figure to a flat performance. We’ve been talking for awhile now about the soft business investment environment, and this report might offer more evidence of that. However, it’s not the best idea to directly compare the weak factory orders to the strong jobs data, because the jobs data were for March and the factory orders were for February, when winter weather and the government shutdown were still front and center. When more March data starts working its way in, it might be interesting to see if it shows signs of a spark the way jobs did.

Inflation Expectations Still Subdued: Later this week, the key economic reports look like they’ll probably be tomorrow’s consumer price index (CPI), Thursday’s producer price index (PPI), and Friday’s Michigan sentiment report. For March CPI tomorrow, Briefing.com consensus stands at 0.3%, up from 0.2% in February. Investors might want to keep a closer eye on year-over-year CPI, which was hardly even noticeable at 1.5% overall in February and 2.1% for core CPI. The Fed has pledged patience with rates, and inflation has generally stayed at or below the central bank’s 2% goal. It would likely take a surprisingly high number tomorrow to get anyone worried about the Fed, and even if the number did come in high, it might be marked off as an anomaly. No one month is ever a trend.

Good Trading, 

JJ

@TDAJJKinahan 

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Economic calendar for week of April 8. Source: Briefing.com
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Key Takeaways

  • Market awaiting Fed minutes, ECB meeting Wednesday

  • Light volume on Wall Street lately despite new catalysts


  • More tariff worries as EU and US trade tough talk

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