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Lazy Days of Summer: Stocks in Narrow Range But Keep Posting New Highs

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August 10, 2016

(Wednesday Market Open) It’s the dog days of summer. Volatility is low. Oil prices are under pressure. Earnings are just about over. But the resilient stock market keeps posting highs.

That was again the case on Tuesday, when the S&P 500 Index (SPX) posted a record intraday high and the NASDAQ index closed at an all-time high. The SPX fell back a bit by the end of the day, but was slightly higher in pre-market trade early Wednesday.

One reason the market keeps showing vigor is a better than expected earnings season. We’re now at the tail end, with 90% of companies having reported, and of those companies, nearly 70% beat expectations.

The latest big name to report above-consensus results was Walt Disney (DIS), which late Tuesday reported adjusted fiscal third-quarter earnings of $1.62 on revenue of $14.28 billion. Analysts surveyed by FactSet had estimated earnings of $1.61 a share on revenue of $14.15 billion. So it was close, but definitely a beat. But DIS shares were down in pre-market futures trading, as concerns about the company’s ESPN network appear to dog the stock.

On Thursday, a number of the biggest retail names are scheduled to report (see below), and that could give investors more insight into the state of the U.S. consumer. Job growth has been very strong the last two months, so is that translating into more shopping? Of course, a lot of shopping these days is done online, so the “brick-and-mortar” stores may not tell the full story.

Speaking of the consumer, retail sales for July come out this Friday morning, and with that big report ahead, it’s possible slow trade could continue the next couple of days until investors see the data. The consensus is for a 0.4% rise in retail sales, according to Briefing.com, down from June’s 0.6% growth but still pretty robust.

Also on Friday, the government is scheduled to release the monthly Producer Price Index (PPI), and consensus is for no change from the previous month. The Fed continues to keep a close eye on inflation, but if analysts predicting PPI are correct, the PPI report won’t show the Fed any evidence of price growth.

Before retail sales and PPI, investors will get a look at JOLTS job openings data on Wednesday. The recent jobs report would seem to indicate some growing wage pressure, with wages up 2.6% over the last year and 0.3% in July, so it will be interesting to see if the JOLTS reports shows lots of openings in high-wage positions.

Though volatility edged up a little bit earlier this week, the VIX index slid back toward last week’s lows early Wednesday, falling to 11.47. The 52-week low is 11.02. Seasonal factors may be at play, and it’s possible the VIX could rise in September and October as a number of big events loom, including a Fed meeting, another earnings season, and the U.S. Presidential election. All those things potentially bring uncertainty, and could make for choppier markets.

“Choppy” is the last word to describe the current market, which keeps moving in a very narrow range. The SPX carved through technical resistance at 2183 on Tuesday as it soared to a peak of 2187, another new record high. But the SPX fell below 2183 by the close. That level remains worth watching from a technical perspective. 

One economic data point today is the weekly U.S. crude stockpile report from the U.S. Energy Information Administration (EIA). Consensus, according to Reuters, is for a one million-barrel crude stockpile drawdown for the week ended Aug. 5. Last week, recall that crude supplies climbed well above expectations, but gasoline supplies posted a drop, which the crude futures market reacted to positively. That helped oil recover from lows below $40.

If crude stocks defy expectations and rise again, it would be the third week in a row, and supplies are already at record levels for this time of year. The American Petroleum Institute (API) reported Tuesday that crude oil stockpiles increased by 2.09 million barrels over the last week, a bearish reading that put some pressure on oil early Wednesday. Without much economic data to trade off of until Friday, the stock market could continue to take its cue from oil in the days ahead.

S&P 500

FIGURE 1: RESISTANCE BREACHED

The S&P 500 (SPX), plotted through Tuesday on the TD Ameritrade thinkorswim platform, edged above resistance at 2183 but then fell back to close below that level. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Where Has the Productivity Gone? U.S. productivity fell in Q2 for the third-straight quarter, dropping 0.5 percent, the government said Tuesday. Economists polled by Reuters expected a gain of 0.4 percent, so the negative data came as a surprise, and also represented the longest stretch of declining productivity since the 1970s, according to The Wall Street Journal. Wasn’t new technology supposed to make U.S. workers more efficient, raising productivity? That’s exactly what happened in the late 1990s and early 2000s, when productivity rose and the economy advanced together as the rise of the Internet helped make business more efficient. Productivity growth averaged a healthy 2.6% between 2000 and 2007. But since the recession, it’s lagged. Fed Chair Janet Yellen said this summer that economists are divided on whether productivity will pick up. “Some are relatively optimistic, pointing to the continuing pace of innovations that promise revolutionary technologies, from genetically tailored medical therapies to self-driving cars,” Yellen said. “Others believe that the low-hanging fruit of innovation largely has been picked and that there is simply less scope for further gains.” According to some analysts quoted in the media after Tuesday’s data, low productivity could be a factor that keeps the Fed cautious on future rate hikes.

Did Shoppers Show Up at Brick-and-Mortar Stores? Thursday will reveal whether U.S. shoppers walked through the doors of some of the biggest department stores over the last few months, as Macy’s (M) and Kohl’s (KSS) report earnings before the open and Nordstrom (JWN) reports after the close. The last time these companies reported, back in May, the tallies were rather disappointing. Few predict big fireworks Thursday, either, with all three firms expected to deliver earnings per share well below year-ago levels, according to Briefing.com. As these results approach, it’s worth going back to the lesson from last quarter, when weak earnings from some of the big retailers contrasted with overall strong consumer spending. We may no longer be able to rely on brick-and-mortar retailer earnings to make projections about what consumers are doing, since so much of today’s shopping occurs online. The consumer appears to be alive and well, but may have shifted their preferences. That said, keep an eye on JWN’s Nordstrom Rack sales, which were relatively strong in the previous quarter. If they’re strong again, it could lend further credence to the theory that the discounting area is where the story is for brick and mortar. That would be a good sign for "big box"-type and discount retailers.

Watch Those Valuations: Though stock valuations aren’t high compared with the peaks of the Internet boom era, they do remain elevated from historic averages, perhaps a reason for investors to be somewhat cautious. That’s what analysts at Goldman Sachs are saying, anyway. The firm noted in a recent report that global stock valuations appear “stretched,” as volatility has fallen. The S&P 500 recently traded at a price-to-earnings level of 17.2, compared with the historic median of around 14. Typically, when the overall market has a high P/E, some investors look for bargains in the so-called “defensive sectors.” But even historic safe havens like utilities and health care don’t look too cheap at the moment.

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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