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It’s Yellen Time: Quiet Market Could Liven With Fed Chair Speech, New Data

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August 22, 2016

(Monday Pre-Market) A week that looks like it might start out slowly could end with some fireworks as key data and a speech by Fed Chair Janet Yellen loom large. Perhaps the new data and whatever Yellen says could bring some excitement to a market that’s been generally range-bound the last few weeks.

Trading early in the week could continue in the current mode, with light volumes amid little economic data to trade on. But Thursday brings durable goods data, and on Friday the market will get a look at the government’s second estimate on Q2 gross domestic product (GDP). Recall that the first estimate of 1.2% came in well below analysts' expectations, so it could be interesting to see if the government changes that either up or down.

Why might the durable goods report get investors’ attention? It’s easy to say who cares about dishwashers and washers and dryers, but it’s a nice way to measure peoples’ confidence. If people are out spending on something that’s a bit of a bigger purchase it shows confidence, and it’s something the Fed will look at.

Speaking of the Fed, Thursday also brings the start of the Fed’s 2016 Economic Symposium, and that means focus will center directly on Jackson Hole, Wyoming, where Yellen is scheduled to speak Friday. It’s unlikely Yellen would comment directly on the Fed’s plans for interest rate policy, but as always when she speaks, investors should be prepared to read the tea leaves for any hints of what Yellen sees as she looks at the economy and all of the recent data. Late last week, Fed speakers tended toward more hawkish statements about possible rate hikes, so it should be interesting to see if Yellen projects a positive tone about economic progress. Her read on inflation could certainly get some attention, as should anything she says about the longer-term outlook.

As of the end of last week, odds for a September rate hike remained rather low at about 18%, according to the futures market, but futures prices predict a better than 50% chance of a December rise.

Earnings season is pretty much over, and it’s been mostly a good one for U.S. companies, with about 70% beating expectations. Now some might point out that expectations were low to begin with, and that’s certainly the case. But the big difference between this earnings seasons and earnings earlier this year is the tone of the CEO conference calls. Earlier in 2016, CEOs were talking about watching expenses. Listening to the calls now, they’re saying, “We see growth; we see opportunity.” Many people wonder why the market rallied so much. Well, the market is a leading indicator, so it’s possible the market picked up on those future expectations from CEOs. Now we’ll see if the CEOs were right.

Anyone watching the market the last two weeks knows that crude oil prices have rallied sharply, up about 20% from early August lows. Crude has had a great couple of weeks, but breaking $50 a barrel could be difficult, as it’s proven to be on other recent occasions when the market tested that level. Whether or not the oil rally continues, it’s worth noting that oil prices and the stock market just aren’t as closely corellated as they were earlier this year. The recent corellation was 71%, down from above 90% in early 2016.

With volume likely to be light early in the week, it’s important for investors to be extra careful in their trading. This market keeps chugging along and grinding higher despite any obstacles that get thrown at it, for instance, weak GDP and Brexit. The old adage is, “never sell a slow market,” and people seem to have learned that, judging from recent action.

S&P 500

FIGURE 1: LOW VOLATILITY CONTINUES

The S&P 500 (SPX), plotted here through midday Friday on the TD Ameritrade thinkorswim® platform, faces resistance at around 2188 and above that at 2200. Low volatility continued as the week closed. Source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Analyze This: There’s a school of thought that psychology can play a big role in trading, and that’s why it sometimes can be difficult for the major indices to break through big round numbers. For instance, back in 1999, the Dow Jones Industrial Average’s (DJIA) first break above 10,000 grabbed headlines all over, even though most traders then insisted there was nothing magical about the figure. Same thing in early 2008 when crude oil futures pierced the $100 a barrel mark for the first time. The S&P 500’s (SPX) continued challenge of 2200, a mark just above current record highs but not touched so far, is part of the same psychological backdrop, representing a nice round number that for some reason the market has failed to reach. But 2188 is more of a true technical resistance level. Below the market, there’s support at around 2155, so the market has a little room on the upside, but a little more room on the downside.

Jeans and Footwear Sales Strong: Two stores that seemed to be everywhere in the 1980s, Gap (GPS) and Foot Locker (FL), both reported earnings last week, and both beat estimates. Gap’s earnings came in slightly above estimates, helped in part by a pickup in apparel spending, the company said. But Gap still faces an uphill battle in turning around its three major chains: Gap, Old Navy and Banana Republic, Bloomberg reported. Same-store sales fell 3 percent at Gap and 9 percent at Banana Republic. Old Navy was unchanged in the period. Gap said in a press release that it’s not satisfied with the results but sees “underlying signs of progress.” Meanwhile, FL stock rallied after the company beat on top- and bottom-lines. "Within the second quarter, we drove comparable sales gains across basketball, running, and classic footwear, as well as apparel," said Chief Executive Richard Johnson, in a press release. Both GPS and FL shares are now slightly up year to date.

Fed Speakers Give Bond Yields a Late Boost: Yields on 10-Year U.S. Treasuries, which had fallen below 1.5% earlier this month, got a boost Friday toward 1.6%. Some analysts said the impetus appeared to be remarks made late Thursday by San Francisco Fed President John Williams, who said, "in the context of a strong domestic economy with good momentum, it makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later,” according to media reports. Also, New York Fed President William Dudley made what some analysts interpreted as positive comments about the economy on Thursday.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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