Dog Days Arrive Late As Lackluster Trading Dominates, But Apple Event On Tap

The markets seem to be struggling for direction ahead of central bank and OPEC meetings later this week and next. Apple’s iPhone event today could provide some distraction.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Skyscrapers: wild ride through Italy, China, U.K.
5 min read
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Key Takeaways

  • Lackluster trading looks likely to continue after slow Monday

  • Apple holding event to unveil new iPhones today

  • Financials started the week strongly, while Tech shares stepped back

(Tuesday Market Open) In many years, markets kind of drift into a late-summer range and sit there as traders and money managers head to the mountains or beaches. Then activity picks up after Labor Day.

This year it seems like the opposite, with a volatile August but a relatively sleepy September. It’s almost as if the “dog days” of August started a month late. It even feels like August across much of the country, with temperatures expected to soar into the high-80’s today in parts of the Midwest.

So far this week, watching Wall Street is like watching paint dry. It’s that quiet and dull. European and Asian stocks didn’t provide much direction early Tuesday, and pre-market trading indicated little in the way of change for U.S. stocks.

Maybe Apple (AAPL) can provide some excitement. It’s expected to unveil its new iPhone lineup at 1 p.m. ET today.

Trade with China is also in the mix after the U.S. Treasury secretary said Monday that there is a “conceptual agreement” around intellectual property theft. That would be a big step forward if the two countries could agree. The issues have always been a lot more complex than just getting China to buy more soybeans.

Banks Kick Off New Week With a Bang

The Financial sector had a day in the sun Monday, thanks in part to rising Treasury yields. After facing pressure for months from falling yields, big bank stocks got a boost Monday as the 10-year Treasury yield rose above 1.6% and the 10-year/two-year yield relationship stayed out of inversion. Financials tend to do better when interest rates are rising, because that can help banks’ profit margins.

Shares of some major banking firms posted 2% or better gains on Monday, including JP Morgan (JPM), Bank of America (BAC), and Citigroup (C). Bank earnings season for Q3 kicks off in just about a month, so it’s not too early to start thinking about what kind of tone these companies might end up setting after many showed resilience in Q2.

The rise in yields Monday could have something to do with more economic and trade war optimism. It didn’t change the fact that the futures market still predicts a 93% chance of the Fed lowering rates by 25 basis points next week. While you can never predict anything, typically when the market points to a 93% chance of the Fed doing something, it tends to happen, historically.

The real question is what happens with rates later this year, and a lot depends on the data that come starting later this week with inflation and retail sales. If the Fed starts to see signs of inflation creeping in, that could potentially derail any desire to take rates down much further. We’ve already heard a number of Federal Open Market Committee (FOMC) members say they don’t think even one rate cut is needed. 

One school of thought suggests that the Fed is planning to cut rates because rates are negative overseas and the U.S. looks out of balance. The benchmark German 10-year bund recently yielded around negative 0.6%. This week’s European Central Bank (ECB) meeting could provide new perspective on where rates and the economy might go over on that side of the Atlantic. Stay tuned for the outcome of that meeting Thursday morning. 

Even though Financials rang up big gains, the market was flat to lower overall Monday with trading a bit lackluster. We’ve been range-bound for a while between 2750 and 3000 in the S&P 500 Index (SPX), and it seems likely that range could potentially remain in place as long as the tariff situation remains unresolved.

The other sector that got out of this week’s starting gate in good shape was Energy. Hopes are rising for OPEC to stick with cuts to crude production when it meets this week, analysts said. That’s all well and good, but nothing OPEC has done this last year really seemed to help as far as supporting crude prices, so we’ll see if this next round of OPEC talks has any different outcome.

Technology, on the other hand, had a slow start this week and saw shares down again in pre-market trading Tuesday. Remember that we’re getting toward the end of the quarter, which means we could start to see some “window dressing” develop in coming weeks as mutual funds shift positions before those quarterly reports to investors go out.

Retail Update (Retail Investors, That Is)

Last month, TD Ameritrade clients started cautiously buying equities and continued to use fixed income, according to the Investor Movement Index® ( IMXSM ), released Monday. The headline number of 4.62 in August inched up slightly from July. The IMX is TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets.

Fed Chairman Jerome Powell’s comments on interest rates at the end of July helped launch a volatile month for stocks, with some investors apparently seeking what they might have seen as potentially less-risky assets, the IMX for August appeared to show. With volatility jumping in August, some popular stocks among TD Ameritrade retail traders included Walt Disney (DIS), Amazon (AMZN), and Microsoft (MSFT), according to the IMX. Stocks that got sold included Apple (AAPL), Micron (MU), and Qualcomm (QCOM). 

Millennials kept buying Uber (UBER), apparently because they took to heart what their parents taught them about “buying what you know.” So far, that strategy hasn’t worked too well for anyone going long on UBER. 

Volatility has died down a lot since those wild days of early August, with the VIX recently registering under 16. It would have to get even quieter to go back to July lows below 12, though.

FIGURE 1: PUZZLE PIECE? As Treasury yields rose Monday, the Financial sector (IXM - candlestick) got a lift and volatility (VIX-purple line) dipped. The correlation between VIX and Financials isn’t perfect, but the chart does seem to show a relationship between declining volatility and strength in the Financial sector. This could be because high volatility this year has often been associated with lower yields, which tend to weigh on Financials. Data Source: Cboe Global Markets, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results. 

When Activists Appear: AT&T (T) shares popped Monday after news of a major investment by a big activist shareholder. In the past, but not necessarily this particular time, such investor moves have had varied impacts on the companies targeted. For instance, sometimes we’ve seen activist investors come in and take apart companies. While there’s no way to predict what might happen with T, it’s important to consider a cautious approach and remember to know what you don’t know, so to speak. 

One big mistake a lot of investors make is to think they know more than anyone else and that they know what’s going to happen. That’s a case for disaster, because in a situation like the one with T today, even professionals don’t know how things could turn out. So maybe people who like a particular stock in such a scenario might want to still consider buying it, but buying in increments. That gives you a chance to see what might happen without taking as much risk.

Tweet Tracker: While we’re on the subject of tweets, it’s interesting to see that analysts at JPMorgan (JPM) have created an index to track the impact of President Trump’s tweets on U.S. interest rates, according to CNN. It’s called the "Volfefe Index," an apparent reference to both volatility and a certain "covfefe" tweet that launched a social media frenzy back in 2017. According to JPM, the number of “market-moving” tweets—which the firm defines as those that are immediately followed by a substantial move in Treasury yields—has increased “in dramatic fashion” lately. 

This isn’t a political column, but investors these days definitely need to consider the impact of presidential tweets, something brought home last month when a negative Trump tweet about the tariff issue reversed early market gains pretty dramatically one session. If you’re a short-term investor, it might not be a bad idea to take a look at JPM’s research to help be better prepared the next time a market-moving tweet happens. It even gives data on the types of words used most often in market-moving tweets and the time of day such tweets tend to happen. Long-term investors, as always, should consider not focusing so much on minute-by-minute volatility based on tweets or any other issue, because doing so can put you at risk of trading out of fear. 

Traditional Indicators Divorcing? Traditionally, small-caps and transport stocks both tend to be thought of as barometers of where the broader market might go, but that’s being called into question. The Russell 2000 small-cap index (RUT) was down 11% year-over-year going into this week while the Dow Jones Transportation Average ($DJT) was down 9%. The SPX, meanwhile, was up nearly 3%. That’s a pretty large gap. The RUT did outperform the broader market on Monday, but one day isn’t a trend.

Why is the RUT in a rut, pardon the pun? Some analysts say it could reflect some investors embracing larger, more well-known stocks in times of economic uncertainty. The popularity of big Technology stocks also has drained some money from small-caps to large-caps over the last decade. There’s also a high proportion of struggling regional banks represented in the RUT, and those companies could have heavy exposure to credit risk from companies taking out loans. With the RUT languishing over the last year and not getting much support even last week when the rest of the market climbed, focus on the index could continue. If it starts to climb steadily, that could be a bullish sign for stocks in general as RUT often reflects what’s going on in the domestic economy.

Good Trading,

JJ

@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • Lackluster trading looks likely to continue after slow Monday

  • Apple holding event to unveil new iPhones today

  • Financials started the week strongly, while Tech shares stepped back

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