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Friday Blues: Can Market Generate Positive Momentum at End of Week?

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May 20, 2016

(Friday Market Open) The last few Fridays haven’t been kind to the Street, with the market closing lower three weeks in a row. Will today be a different story?

Exactly one year after setting its all-time intra-day high, the S&P 500 index (SPX) starts Friday well below that level, but appeared ready to challenge the psychological 2050 mark. For a while overnight, a rally in oil futures lent a positive hand to equities overseas, but the oil rally has fizzled somewhat. And John Deere (DE) reported disappointing second-quarter earnings.

Nevertheless, the futures market pointed toward a slightly higher open. From a technical standpoint, the slide over the last few weeks means the SPX has fallen through some key support points, notably the long-standing support at 2050. The question today is whether the SPX can hold support at 2044, challenge 2050, and generate a little positive spirit to spring into next week.

One ongoing theme seems to be a lack of conviction on Wall Street, with sectors bouncing up and down. For instance, Thursday’s trading saw financials fall after rallying on Wednesday, while utilities rose after falling on Wednesday.

Another theme continues to be the Fed. Two Fed Presidents spoke on Thursday, and the messages were in the same vein as that of Wednesday’s Fed minutes, with an emphasis on the possibility of rate hikes as soon as next month. When Fed governors are speaking in hawkish tones, and when the probability of rate hikes have gotten higher, it makes it tough for people to get their arms around what’s actually happening beyond the topic of Fed policy. Still, keep in mind that the futures market still only predicts about a one in three chance of a June hike.

Financials fell Thursday in part as a reaction to the reversal in bond yields. The yield on 10-year Treasury notes slid under 1.85% Thursday after rising to 1.87% on Wednesday, a mark that it hadn’t reached since May 2.

Deere came out with disappointing earnings, similar to competitor Caterpillar (CAT). This time, the problem wasn’t so much weakness in Asia; it’s just the farming industry in general, with Deere’s products not selling like they were.

"John Deere's second-quarter performance reflected the continuing impact of the downturn in the global farm economy and further weakness in the construction equipment sector," said CEO Samuel Allen, in a press release.

There are a couple events on today’s calendar, including a speech by Fed Governor Daniel Tarullo at 9 a.m. ET and existing home sales for April, due at 10 a.m. Eastern. The consensus estimate for existing home sales is 5.4 million, up from 5.33 million the previous month, according to Briefing.com.

S&P 500

FIGURE 1: A WINDING ROAD FROM YEAR-AGO HIGH.

The S&P 500 (SPX), plotted through Thursday on the TD Ameritrade thinkorswim platform, finished the day down 4.4% from the all-time high posted a year ago today, but up 12.7% from February's low. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

More Hawkish Tones From Fed: On Thursday, New York Fed President Bill Dudley weighed in on a possible June rate hike, saying at a press conference that June is a “live” meeting, and that the economy appears to be growing above trend and on track to justify continued monetary tightening. He reiterated that two rate hikes this year would be “reasonable.” And Richmond Fed President Jeffrey Lacker told Bloomberg on Thursday there’s a “strong case” for a June rate hike. The Fed’s hawkish tone seems to be helping the U.S. dollar, which rose against the euro Thursday, reaching its highest levels since late March. But keep in mind that by historic standards, the Fed is taking rate hikes very slowly, having last hiked in December. Back in 2005 and 2006, the most recent time that rates were on a rising path, the Fed hiked rates eight times in 2005 and four times in the first six months of 2006. Meanwhile, overseas, a different note came from Bank of Japan Gov. Haruhiko Kuroda, who told reporters the Bank of Japan would undertake further easing measures if necessary. Japan’s rates are already negative.

Could Higher Oil Prices Boost Record Low Rig Count? It could be interesting to see what today’s weekly Baker Hughes U.S. oil rig count indicates, with crude oil prices recently posting new highs for the year above $48. Last week, the oil rig count fell by 10 to an all-time low of 318, down from 668 a year earlier and from more than 1,400 at the start of 2015. Rig counts have steadily fallen over the last year, driven by decade-low oil prices during the winter months. But with oil now trading well over $45 and even challenging the $50 mark, some analysts believe drillers might soon see high enough prices to support more activity. It’s unclear exactly what price level would cause more drilling, but $50 is a mark that may get some attention. Rig count data is due early Friday afternoon.

Airline Shares Circle Lower: Although an industry trade association recently predicted the busiest summer air travel season in history, shares of large U.S. airlines have had a tough go of it over the last month. Shares of United Continental (UAL) are down 24% since a month ago; American Airlines (AAL) shares are down 22%; Southwest (LUV) shares are down 10%; and Delta (DAL) shares are down 8%. Airlines, particularly American and United, have been struggling with declining passenger revenue for each seat flown a mile, an important industry benchmark, and American and United also disappointed the Street with their recent guidance. To make matters worse, airlines are now dealing with long lines at Transportation Security Administration (TSA) airport checkpoints. American said Thursday it plans to pay $4 million of its own money for workers to help speed up security lines. Earlier this week, hundreds of passengers were stranded at Chicago’s O’Hare airport due to long waits for TSA security checks.

Good Trading,
JJ
@TDAJJKinahan

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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