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Can the Markets Do It Again? Major Benchmarks on Track for Fresh Peaks

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July 13, 2016

(Wednesday Market Open) Another day, another round of records shattered. The Dow Jones Industrials (DJIA) and the S&P 500 (SPX) touched pinnacles never seen before yesterday as energy and materials shares rallied. What’s on tap today?

In the early going, it appears more of the same, as markets rose overnight in Asia and Europe. Is that sustainable? Seven of the SPX’s 10 sectors finished yesterday to the upside, with utilities, consumer staples and telecom—all go-to plays in challenging times— landing in the red. Stocks got an injection of positive news early this week, including a crude oil rally, the slowing down of the Brexit process, and the prospects of new financial stimulus in Japan.

The SPX, which has struggled to get to these levels over the last year, settled at a fresh peak of 2,152.14, up 14.98, or 0.70%. So, too, did the DJIA, finishing in unchartered territory at 18,347.67, up 120.74 points, or 0.7%. The Nasdaq Composite Index (COMP6) wiped out all of this year’s losses, finishing in positive territory for the first time this year at 5,022.82, up 34.18,or 0.69%, and about 200 points away from touching its own new peaks.

The market is up 7% over the last nine trading days, a pretty amazing run and the best since early 2009, when markets were recovering from 12-year lows associated with the Great Recession.

In the early going, all three major benchmarks were moving comfortably ahead.

Do these stints of record setting mean the panic of Brexit is over or merely cast aside for the time being? What about the shift out of a low-interest rate environment that tugs at the markets? What’s changed this time around, Chicken Little? “The difference this time is sentiment," Brad McMillan, chief investment officer at Commonwealth Financial Network, told USA Today. “The market pulled back on a lot of bad news” the past year and a half, he says, "but we found out the world didn't come to an end.”

One factor that could help determine whether this rally lasts is financial sector earnings, which start to come in later this week. In a sense, it’s not so much the banks’ Q2 numbers that matter. The companies’ guidance and what bank executives say about the current financial environment could get more attention from investors.

That might appear evident in the VIX, the market’s fear measure, which has retreated to 13.55, nosediving 48% since June 24. Meanwhile, crude-oil prices popped nearly 5% to close at $46.78 and get back in tandem with the SPX. Have worries about over-supply subsided? WTI snapped a losing streak to rebound from two-month lows. That’s got some analysts looking for a move toward the $50 a barrel level.

S&P 500


The S&P 500 (SPX), plotted through Tuesday's close on the TD Ameritrade thinkorswim platform, logged another all-time finish while the DJIA, Nasdaq and even the 10-year Treasury yields powered  ahead. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Job Openings Plunge in May. But we already pretty much knew that, considering that dismal jobs report last month. What we didn’t know was how deep. According to data from the Job Openings and Labor Turnover Survey, known as JOLTS, job openings tumbled to 5.5 million in May, its lowest level all year. In April, openings were at 5.85 million. Remember, JOLTS, which tracks those who’ve started a new job, left one or got laid off, is a month behind the curve. So it explains that bleak May report but offers no insight into June’s surprisingly robust numbers. “Smoothing out the month-to-month volatility, job openings remain near record highs,” according to Wells Fargo. “The renewed gap between openings and hires may indicate further tightening in the labor market, as vacancies are harder to fill.”

Small Business Is Buoyant. Well, not exactly on top of the world, but marking a happy tone for three straight months now. The National Federation of Independent Business (NFIB) said that its optimism index is on the upside again, inching ahead a small 0.7 point in June at 94.5. That’s good news, of course, but still well below the index’s 42-year average of 98. It’s also slightly below its year-ago level. Some analysts blame the small upside on the too-hard-to-find-good-people conundrum that appears to be plaguing small and large businesses alike. Why? The share of business owners reporting unfulfilled jobs jumped to 29%--a cycle high, according to Wells Fargo—while a whopping 48% said there were few qualified applicants to fill the jobs. Will feed for hire?

Don’t Worry; Be Happy. That’s the word from Cleveland Federal Reserve President Loretta Mester, who said in Sydney today that the ricochet in jobs numbers last week assuages all worries about growing employment. "Payroll growth slowed considerably in May, raising the question of whether we were at the start of a reversal from the considerable progress that's been made in labor markets, or whether the weak reading was the type of transitory change we typically see during expansions," she said in prepared remarks. "Hiring rebounded in June, alleviating that concern." Phew! What’s more, it’s way too early to judge the full effect of the Brexit vote, she said, and interest rates will begin to rise. Gradually.

Good Trading,

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JJ Kinahan

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

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