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Market Update

Beyond Earnings: Plunging Oil and Surprisingly Weak GDP Take Center Stage

July 29, 2016

(NOTE TO READERS: JJ Kinahan is traveling today, so the following is a guest Market Update column written by Scott Connor, of the Trader Education group at TD Ameritrade, managing Swim Lessons trader educational programming, which TD Ameritrade clients can access live beginning 10:30 a.m. CT each trading day from the Support/Chat function within the thinkorswim platform).

(Friday Market Open) It’s a busy day to end a busy week on Wall Street, and it’s starting with a bit of a thud.

Today’s first government estimate of Q2 GDP came in way below expectations at 1.2%. That’s barely above the anemic 1.1% reported for Q1. These estimates do get revised, so this isn’t the final word. But how will this weak growth estimate play into the Fed’s plans for its September meeting? There had been some talk of a possible hike at that point, but today’s number raises questions about whether that’s realistic. Just before the GDP number came out, the futures market had dialed up a 24% chance of a September hike. Keep an eye on the futures market to see how it reacts.

The pallid GDP number comes as oil continues its slide and as a major energy company, Exxon (XOM) reported below-consensus earnings. Oil plunged to new three-month lows below the 200-day moving average of $41 in the U.S. futures market Friday, and is now down more than 20% from its highs for the year. That’s a bear market, according to technical analysts.

While oil remains way above the early 2016 lows near $26, remember it was the hard-charging oil market that helped equities recover from their stomach-dropping January and February losses. Lately, oil has lost its mojo, which could be worriesome for the stock market. Fast-dropping oil prices usually aren’t a bullish signal for stocks.

Oil companies seemed to struggle in Q2, judging by the earnings so far. Exxon’s Q2 results missed on profit and revenue in a big way, and that could be a sign that even the biggest energy companies are struggling in this era of low oil prices. Chevron (CVX) also reports today. The energy sector is down more than 2% this week.

All this negativity around GDP and oil threatens to overshadow what’s been shaping up as a solid season for some of the biggest technology companies.

When a baseball player knocks three hits in four at-bats, it’s considered a great game. Four technology bellweathers reported earnings this week, and arguably, three of them hit home runs. The big sluggers were Amazon (AMZN), Facebook (FB), and Alphabet (GOG). Only Twitter (TWTR) failed to get the bat on the ball. But a .750 batting average is still pretty great.

Amazon and Alphabet reported after the close Thursday, and both easily beat consensus earnings estimates. In addition, both companies posted strong results in key businesses: cloud technology for Amazon and mobile and video for Alphabet. Earlier this week, Facebook surpassed Wall Street estimates with its earnings. But Twitter’s revenue and guidance came in below estimates. Another technology giant, Apple (AAPL), also gave Wall Street a positive report, so it seems fair to say technology has been holding up its end this earnings season. The technology sector is among the best performers on the Street this week.

Also on the positive side, pharma behemoth Merck (MRK), reported profit and revenue that topped consensus estimates.

Remember to keep an eye on European bank stress test results, due after the close. A poor result could potentially put a dark cloud over the weekend.

S&P 500

FIGURE 1: SUPPORT AND RESISTANCE The S&P 500 (SPX), plotted through Wednesday on the TD Ameritrade thinkorswim platform, continues to have strong technical support at the old resistance band between 2120 and 2134, analysts say. Resistance is tougher to track, but some suggest it’s in the 2198 to 2205 range.  Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

No Rate Cut? Bank of Japan Surprises: The Bank of Japan announced Friday it’s keeping interest rates steady. Going into the meeting, many analysts had forecast a cut in rates to further stimulate the economy, so the lack of action came as something of a surprise, and the U.S. dollar fell sharply against the yen early Friday. The bank’s governor, Haruhiko Kuroda, said the bank plans a comprehensive review of its approach, The New York Times reported. “I don’t believe we’re approaching the limits of negative interest rates or qualitative and quantitate easing,” Kuroda said, referring in part to the bank’s bond-buying program. “We’ve been pursing an aggressive monetary policy for three years, and it’s a natural time for a review.”

Stuck in a Range - Again: If it seems like the market’s been trading in a tight range lately, that’s because it has. The last day the S&P 500 Index (SPX) traded in more than a 15-point daily range was July 11. Since July 14, the index has traded in a narrow range defined by 2157 at the bottom and the all-time high of 2175.63, posted July 20, at the top. Recall that the index spent a lot of time earlier this year trading in a well-defined range between 2050 and 2100, which raises the question of whether it’s entering longer-term range-bound trading again after scampering to record highs early this month. Until Wednesday, it could have been argued that the pending Fed meeting may have been keeping the lid on further big moves, but now that’s out of the way as an excuse. Also, most of the major earnings will be out of the way after this week, leaving fewer near-term catalysts. That could mean less direction for the market, at least until the July employment data comes out a week from today.

Volatility Still Slumbers, But Summer Isn’t Always Slow: VIX futures, which measure market volatility, rose slightly Thursday after falling to below 13 on Wednesday, not far above the nearly one-year low of 11.4 recorded earlier this month. Summer doldrums often make for sluggish trading around this time of year. But as the market heads into August, investors should remember that not all summers are so calm. Just last year, VIX entered August at levels not far from the current ones, but soared to as high as 53 a few weeks later as the stock market got slammed. Back then, it was concerns about China’s economy that dug a hole for stocks and sparked the huge rise in volatility. Looking around the world, there’s certainly plenty of geo-political and economic turbulence remaining, so it’s never safe to discount potential volatility in the markets.

Good Trading,

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