After Gains, Market Appears to Take a Breather for Some Profit Taking

Equity index futures were pointing to a lower open ahead of a deadline on U.S. tariffs on goods from China, the world’s second largest economy.

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Key Takeaways

  • Geopolitical worries seem to have cooled off a bit

  • Tiffany stock sinks Wednesday despite bumper quarter

  • Tech, consumer discretionary stocks help market Wednesday

(Thursday Market Open) After a string of gains, investors appear to be taking a break and taking some profits as trade and geopolitics, while still making noise, seem to be toned down a bit.

Equity index futures were pointing to a lower open after Asian markets were mostly lower ahead of a deadline on U.S. tariffs on goods from the world’s second largest economy and as President Donald Trump accused China of undermining progress on U.S.-North Korea relations.    

Cooler Geopolitical Waters

Despite the ripples, geopolitical waters have been relatively calm in recent days amid progress on the trade front, with the U.S. and Mexico striking a trade deal. On Wednesday, trade winds appeared to blow in favor of the market, helping to send two of the three main U.S. indices sailing to fresh records. 

On the heels of news of the U.S.-Mexico trade agreement, Canada rejoined trade talks with the U.S. and its prime minister said a deal could be reached Friday. 

Tensions between the U.S. and its two North American Free Trade Agreement partners had been headwinds amid broader international concerns including trade disputes with the European Union and China.

So an easing in those worries appeared to give stocks a leg up on Wednesday. As tensions lessened, Wall Street’s fear gauge, the Cboe Volatility Index (VIX), fell and the U.S. dollar, often considered a haven in troubled times, also slid. 

Tech, Consumer Sectors Advance

The tech sector, which can be a leader of the overall market because of the size of its companies and how widely held they are, got some help from Morgan Stanley, which raised price targets for Amazon (AMZN) and Alphabet (GOOG, GOOGL). AMZN and Microsoft (MSFT) hit all-time highs. The tech heavy Nasdaq closed at a record, and the S&P 500, where information technology was the second best performing sector after consumer discretionary stocks, closed at a new high.

While the consumer discretionary sector gained more than 1%, some retailers within that sector didn’t fare so well. Dick’s Sporting Goods (DKS), American Eagle (AEO), and Express (EXPR) all dropped after reporting quarterly results. Although these companies dipped on the day, the sector as a whole may have legs under it as the U.S. economy seems to be humming along just fine and consumers apparently are out spending.

Crude Oil Continuing March Higher

Meanwhile, the energy sector finished in the green as crude prices rose for the second day in a row on a weaker than expected inventory report and a bit of apparent tension in the Middle East related to economic sanctions on Iran. Crude oil has been on a tear these past few weeks (see figure 1 below) as signs that disruptions in Iranian oil output due to sanctions may be tightening global crude supplies. Closer to home, the Energy Information Administration (EIA) reported Wednesday that crude inventories fell by 2.6 million barrels last week.    

On Thursday morning, futures on West Texas Intermediate (WTI) Crude (/CL) pierced the $70 a barrel mark to the upside for the first time in about a month. Some chart watchers might be paying close attention to this psychologically significant level. 

FIGURE 1: CRUDE REALITIES. Crude oil prices (/CL) have been climbing steadily since mid-August. On Thursday morning, /CL crossed above $70 a barrel for the first time in nearly a month. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

A Divergence in Tech: On a day when technology stocks were the second best performing sector in the S&P 500, it’s notable that Facebook (FB), Snap (SNAP), and Twitter (TWTR) were all down Wednesday. The day’s trade can serve as a reminder that not all tech companies are the same, and it might serve investors well to separate social media from other tech stocks. FB has been hit with a data privacy controversy and a huge stock selloff amid worries over revenue growth. And there’s also the issue of fake news. Still, the social media giant has shown it can monetize its product. But there are still some questions about future prospects for TWTR and SNAP. Also, the main product for these companies is fundamentally different than that of, say, AAPL, which sells iPhones and computers and recently became the first publicly traded company to hit a market capitalization of $1 trillion. Amazon (AMZN), which isn’t included in the official S&P 500 tech sector but is heavily involved in tech, is another fundamentally different business and is approaching that $1 trillion market cap mark. And tech stalwarts Microsoft (MSFT) and GOOG/GOOGL aren’t that far behind.

Turnaround for Tiffany Stock: The stock of Tiffany & Co. (TIF) spiked higher Tuesday morning after the luxury retailer beat Wall Street analysts’ estimates for both sales and earnings per share and increased its full-year earnings outlook. But then shares started to slide. Although they ended Tuesday in the green, they were well off the intraday high. On Wednesday, the fall continued, with shares ending the day down more than 4%. Given the strong quarter, what gives? It’s possible that as investors looked more closely at the results they began to focus on increasing costs that came during a quarter when TIF’s bottom line was helped by a lower tax rate. While the lower tax rate means comparing this year to last casts a favorable light, those positive comparisons from tax reform won’t last forever. For the longer term, it remains to be seen how TIF will use the extra money.

Moving Higher After Elections: With the stock market going gangbusters, there’s always room for caution. But there still appears to be room for optimism too, if history serves as a reliable guide this year and next. The S&P 500 has gained an average of 7.5% in Q4 of midterm years and risen an average of almost 17% in the 12-months after the election, according to investment research firm CFRA. These gains have come after midterm year Q2s and Q3s that were more challenging because of uncertainty surrounding elections, the firm said. The S&P 500 recently set what many consider a duration record for a bull market and has been setting new all-time highs. So the market “might be due for a rest, which would be consistent with the slight decline recorded during Septembers of midterm election years,” CFRA said. “Following this slight resetting of the dials, however, the market has traditionally delivered above-average Q4 and 12-month forward price returns and frequencies of advance.”

Good Trading, 

JJ

@TDAJJKinahan 

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