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What’s Driving Market Mania? Investors’ Appetites for Risk Appear Voracious

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July 12, 2016

(Tuesday Market Open) Welcome to the search for yield. The stock markets are jumping again today as investors’ appetites for risk appear voracious after last week’s warmly welcomed jobs report and this week’s ascension of a new U.K. prime minister.

The S&P Index (SPX) and the Dow Jones Industrials (DJIA) are both on track to scale fresh peaks with the Nasdaq Composite Index (COMP6) not far behind. Is this a meaningful new bull phase? Or does the old adage that bears and bulls make money, and pigs get slaughtered apply here?

The S&P 500 (SPX), already a closely watched measure, was hawk-eyed Monday as it waded into historic waters before hitting an intraday high of 2,143.19. When the session ended, the SPX settled at 2,137.16. That was up by 7.26 points, or 0.34%, besting its record close of 2,130.82, reached on May 21, 2015. On the way there, it overcame a major resistance hurdle at 2,135 points.

Certainly, that’s notable but at least one analyst doesn’t think it’s decisive. Not yet. Katie Stockton, BTIG's chief technical strategist, told CNBC Monday that she needs to see SPX close above 2,135 for two straight Fridays before she’ll be comfortable with the bullish trend. “That would convince me that we've broken out," she said. "Then we can arrive at some pretty impressive upside targets." Her prediction at that point? A 12% move to 2,400.

In the early going all three major benchmarks were moving comfortably ahead. Yesterday, DJIA flirted with record territory, closing higher by 80.14 points, or 0.44%, to 18,266.93, within spitting distance of a fresh crest that it might reach today. Its record of 18,312.39 was hit May 19, 2015.

The session’s biggest winner yesterday was COMP6, which advanced 31.88 points, or 0.64%, to finish at 4988.64 after peeking above 5,000 intraday. Early trading puts it solidly over 5,000. Can it hold?

Some analysts point to excruciatingly low bond yields as helping to prime the market pumps. The yield on the benchmark 10-year U.S. Treasury note dipped to a record 1.36% close on Friday and fell again Monday before closing at 1.43%, its highest level in a month.

Crude oil prices broke their relationship with the SPX yesterday, backtracking by $0.65, or 1.4%, to close at a two-month low of $44.76 a barrel. Last week, crude lost more than 7% as supply rose. But the tables appear to be turning today, as crude is bouncing higher by 2%.

S&P 500

FIGURE 1: FINALLY A BREAKTHROUGH!

The S&P 500 (SPX), plotted through midday Monday on the TD Ameritrade thinkorswim platform, overtook a record high that's been in place for more than a year as investors search for yield. Will it reach new heights again today? Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

FedSpeak. And plenty of it. Federal Reserve members are out in full force on the economic-speaking circuit every day this week. Nine Fed members will be at the pulpits 14 times, with five of them there twice. Will they all stick to the same script? If their individual rhetoric ahead of June’s meeting—the one where they unanimously made no move to raise interest rates and gave no indication of when they might—was any indication, some analysts say it’s likely we’ll hear a lot of divergent opinions. Already, Kansas City Fed President Esther George returned to her hawkish ways in a speech before a business group in Missouri. She said that Friday’s June jobless reports is validation that the economy is back on track and keeping interest rates low “can create risks.” You might remember that she’s dissented twice on keeping interest rates low. Wednesday also brings us the Beige Book, which really has a beige cover, of anecdotes Fed members collect from businessmen, economists and other market experts in their districts to get an on-the-ground gauge of economy.

How Good Is This? Investors appears to be bathing in the warmth of last week’s surprisingly strong jobs report, but today brings us another important measure of labor demand: Job Openings and Labor Turnover Survey, the so-called JOLTS report. It offers insight into labor demand and hiring, meaning how robust is the labor market and are businesses finding enough qualified people to fill open positions. How significant is this metric? Very, because Fed Chairman Janet Yellen refers to the data on her so-called dashboard as an indication of labor market strength. But don’t expect May’s report to mirror Friday’s healthy job numbers. JOLTS is backward looking and will likely reflect the weak May results, which were pretty dismal and were revised down in Friday’s report. The better results should show up in June’s report next month.

How Do We Stay Higher? Some analysts looking for catalysts to keep the markets moving forward say they may find them in higher earnings. That could be a very forward-looking notion considering that many analysts are projecting another straight quarter of lower quarterly profits among SPX players. But as Lindsey Bell, S&P Global Market Intelligence senior analyst, sees it, Q1 was the earnings trough and the Q2 results coming out now will show only a 5.1% decline on a year-over-year basis compared with Q1’s 6.8% pullback. If that’s a trend that continues, could Q3 and Q4 results be positive or just less negative?   

Good Trading,
JJ
@TDAJJKinahan

Economic Report Calendar

FIGURE 2: THIS WEEK'S ECONOMIC REPORT CALENDAR.

Source: Briefing.com

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JJ Kinahan

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

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