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GDP Data, Yellen to Take Center Stage As Market Nears Long Weekend

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May 26, 2016

(Thursday Market Open) Looming data and a speech by Fed Chair Janet Yellen scheduled for Friday loom large as the markets open. The question is whether investors decide to take money off the table later Thursday ahead of those events and in the wake of this week’s sharp rally.

There’s a long holiday weekend ahead in the U.S., but that doesn’t necessarily mean quiet trading Thursday and Friday. The government is scheduled to release its second estimate for Q1 gross domestic product (GDP) early Friday, and Fed Chair Janet Yellen is expected to make comments Friday when she receives an award at Harvard. Will Yellen opine on interest rate policy, as so many Fed officials have of late? It’s worth checking in Friday to see. Remember that sometimes, with a long weekend approaching and the market in rally mode, investors tend to take off some risk. So keep an eye out for possible pressure later Thursday.

The Fed rate watch drumbeat continued from Singapore early Thursday, where St. Louis Fed President James Bullard, in a speech, cited the “tight” U.S. labor market. “By nearly any metric, U.S. labor markets are at or beyond full employment," Bullard said, according to media reports. "In short, labor markets are relatively tight. This may put upward pressure on inflation going forward." Inflation is a metric the Fed closely watches to determine rate policy. More insight could come later today, when Fed governor Jerome Powell speaks in Washington D.C. at 12:15 p.m. ET.

Though markets sank early this year after the last Fed rate hike, there seems to be a sense now that a rate hike, if it happens, could be a sign of progress, and that’s helping drive stocks higher in a vigorous way this week. There appears to be a realization that rates going up aren’t necessarily a negative for the longer-term economy. In fact, it may be a positive vote of confidence that things are going better than people had hoped.

Aside from the economic optimism, markets may have also gotten a boost from what appears to be a bit of a “short squeeze” the last couple of days. That’s when investors who’ve shorted the market exit those positions amid rising prices.

Energy and financial stocks led the way on Wednesday, with financial names getting a continued boost from ideas that the Fed might raise rates this summer, and energy rising as the price of U.S. crude oil reached seven-month highs near $50 a barrel. Health care is another sector that has moved higher. These three sectors were among the weakest over the last year, but also are among the heaviest-weighted sectors in the S&P 500 index (SPX), and their upward moves helped provide extra thump to this week’s rally in the index.

Resistance for the SPX is at a range between 2096 and 2100. Above that, there could be additional resistance at the April market high near 2111. And the all-time high of 2134, reached a year ago, is another point technicians are discussing as a resistance area. 

Oil futures reached the benchmark $50 level early Thursday. Some oil market experts think $50 is the figure that could cause U.S. frackers to unlock the taps, perhaps causing flagging U.S. production to rise due to better producer profitability at these price levels. Now we may get a chance to find out.

Durable goods orders for April were a mixed bag. Non-defense capital orders fell 0.8%, but the rest of the report looked pretty good. Costco (COST) earnings also looked mixed, with the company beating on earnings per share but missing on sales, the same theme that’s been seen lately across the retail sector as revenues come up short.

S&P 500

FIGURE 1: SAME STORY: RESISTANCE AT 2100.

The S&P 500 (SPX), plotted through Wednesday on the TD Ameritrade thinkorswim platform, still faces resistance at 2100, a mark it hasn't penetrated since late April. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

A Cure for the Biotech Blues? It’s been miserable in the biotech market for most of the last year, with the sector down more than 30% from highs it posted last July. Lately, however, there’s been a slight rebound in the Nasdaq Biotechnology Index, which is up about 8% from three-month lows posted in mid-May. What’s behind this move? The sector may be rebounding in part because it’s been down for so long, making some stocks look a bit cheaper. And there was news in the space on Wednesday, with Bloomberg reporting that Gilead (GILD) and Celgene (CELG) are considering bids for cancer therapy company Medivation (MDVN), which would pitch them against suitors led by French drugmaker Sanofi (SNY). Perhaps this sort of M&A activity could give investors reason to get more excited about the sector, which has been somewhat shy of catalysts lately. But the coming election season, which occurs amid highly publicized concerns around Washington about drug pricing, may pose a barrier.

Gold and Copper Slide: With better odds of a summer Fed rate hike being priced into the markets, gold fell to seven-week lows on Wednesday. After climbing to near the $1,300 mark earlier this month, the shiny metal now is much closer to $1,200, a level it hasn’t been below since February. But gold isn’t alone. Other metals are also under pressure, with copper down partly due to the Fed and the strong dollar, and because of worries about demand from China, a fundamental concern that’s dogged the metal for months, analysts said. Copper, a metal that’s closely watched due to its widespread industrial application, is down more than 9% since the end of April. However, some market watchers warn that copper supplies are on the low side, and say that could lead to a rebound in price. Indeed, copper prices climbed back a little on Wednesday, posting a two-week high. Could rising copper prices signal improved industrial activity in China going forward? The jury is still out.

Greek Lightning! Remember Greece? Its ailing economy was a huge drag on world markets not so long ago. Well, the country is far from out of the woods, but there has been some progress. On Wednesday, eurozone finance ministers and the International Monetary Fund reached a deal that clears the way for fresh loans for Greece and prevents the country from defaulting on big debt redemptions in July, The Wall Street Journal and other outlets reported. Greek bond yields fell to their lowest level since November, and that helped boost Eurozone stocks. Still, European markets may continue to face some headwinds ahead of the June 23 referendum in Britain, when voters are scheduled to decide whether to remain in the European Union. Recent polls show lower odds of a “Brexit,” but there’s still nearly a month to go.

Good Trading,
JJ
@TDAJJKinahan

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