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Markets Open with a Big Yawn as They Seek Direction, Await Fed Input

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September 7, 2016

(Wednesday Market Open) The markets continue to appear to go nowhere in a hurry as the three major benchmarks once again hug the flat line in the early going. Is anything out there today to change that?

Yesterday, all three moved higher by the close but in small increments. The latest sign of economic weakness didn’t appear to help Tuesday’s moves either. In a surprise to Wall Street, the Institute of Supply Management’s manufacturing index dropped into the red for the first time since February amid caution from manufacturing executives. (See below.)

The Nasdaq Composite (COMP6) took the star role Tuesday, hitting an intraday high, and surpassing its Aug. 15 record close to notch a new one at 5,275.91, up 26.01, or 0.50%. At the market’s open, the index was holding on to small gains.

What may be a repeat of the last few months, the moves to the upside are notable but not terribly impressive considering they’re inching along. The Nasdaq’s 0.50% move yesterday was the strongest among the three. The Dow Jones Industrials (DJIA) tacked on a mere 0.25% to 18,538.12, up 46.16. The S&P 500 (SPX) advanced by 6.50 points, or 0.30%, to 2,186.48.

Sam Stovall, S&P Global Market Intelligence’s managing director, notes that Tuesday marked the 50th straight day that the SPX has gone without a one-day price decline—and the 42nd of any move up or down—at 1% or more. He fears that history might repeat itself.

“While this stretched-out period of complacency may have been comforting to investors, it has become disconcerting for historians, as it usually results in a downdraft,” he wrote in a note Tuesday. “During all 20-day trading periods since 1950, the S&P 500 posted an average price increase of 0.7%. However, after going 50 days without a 1%+ decline, the (S&P) 500 slipped an average 1.5% in the following 20 trading days and fell in price two out of every three times.” Does it need to be said? Past performance does not guarantee future performance.

Meanwhile, two SPX forces tapped on record highs Tuesday. Facebook (FB) shares found a new crest at $129.73, up better than 5% in the last two weeks alone. Amazon (AMZN) topped a new peak at a close of $788.87, higher by more than 4% in the last two weeks. Both are heavily weighted on the Nasdaq and were contributors to the tech-heavy index’s fresh tops.   

Apple (AAPL) shares ended Tuesday’s session on fairly even ground at $107.66, ahead of today’s special event, which many analysts and investors are guessing is about the iPhone 7 plus and Apple Watch upgrades. (See below.)

Speaking of stocks, TD Ameritrade’s Investor Movement Index (IMX) tracked another dividend-buying trend in August, as retail traders snapped up beaten-down stocks with significant dividend yields. Looking more impressive, they did so while they dumped popular stocks that had reached fresh long-term highs. Retail traders tracked by TD Ameritrade put the pedal to the metal on their stock market exposure to push the IMX up by a strong 12.15%--the highest ever in August—to 5.26 from 4.69 in July. It was also the highest level since July 2015.

Back in yesterday’s market activity, crude-oil prices finished the session to the upside, but off an early morning rally fueled by hopes that talks between Saudi Arabia and Russia would lead to a slowdown in output. Though the two said they would get a working group together to monitor the oil situation, some analysts don’t give it much weight. “Whether or not this so-called pact will eventually turn out to be something where both of these major oil producers will do something to limit production is a major question,” Dominick Chirichella, an analyst at the Energy Management Institute, said in a note.

Futures prices of West Texas Intermediate (WTI) settled at $44.83 a barrel, up $0.39, or 0.9%. Prices swayed in and out of negative territory in late trading before landing at that slight expanse. In the early going, prices were heading north, though not by much.

To further underscore the indifference in the markets, the CBOE’s Volatility Index (VIX)—that so-called investor fear gauge—held steady at 12, which is about a point higher than it was a month ago but well below its year-ago level of 26. Anxiety? What anxiety? 

S&P 500

FIGURE 1:

The S&P 500 (SPX), plotted through Tuesday's close on the TD Ameritrade thinkorswim platform, edged up 0.30% to end the session—once again—under 1%. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Is the Economy Still Rolling? It’s a question that appears to be worth asking these days, after a slew of economic reports in recent sessions point to sluggishness. The latest was yesterday’s surprise report from the Institute for Supply Management (ISM) that noted that the nonmanufacturing index tumbled 4.1 percentage points to 51.4 from 55.5 in July. It was the largest one-month drop since February 2010 and well short of Wall Street’s expectations. What fueled the dive? Steeper drops in new orders, plunging 8.9 percentage points to 51.4, its lowest points since the end of 2013, and production, which plummeted 7.5 percentage points to 51.8.

The report came on the heels of Friday’s disappointing employment numbers showing that 151,000 jobs were created in August, down from July’s revised number of 275,000, according to the Commerce Department. It, too, was under Wall Street’s projections of 180,000 jobs.

Let’s remember this on all the reports: Though they weren’t fantastic numbers, they weren’t horrible either. Both showed an increase—the line between contraction and expansion on the ISM report is 50.0—but the ISM summary of executives’ remarks noted that “The majority of respondents' comments indicate that there has been a slowing in the level of business for their respective companies.”

Wells Fargo, however, called the weakness “exaggerated, but weak nonetheless,” in a report. “The comments from respondents give nothing to suggest such a dramatic weakening in activity,” according to the note to clients. “While we do not want to dismiss the sharp slowdown in growth implied by the survey, August can be a difficult month for responses.”

Soooo…what will the Federal Reserve do about that? Probably nothing, according to many analysts and market observers. Despite much of the August rhetoric from Fed Reserve members about the market apathy toward a September hike in interest rates that was very much “alive,” these reports are likely to keep the data-dependent Fed in its wait-and-see mode, according to analysts. “The slowdown looks somewhat exaggerated but gives the Fed another reason to hold off in September,” Wells Fargo added in its ISM report. And the CME Group’s Fed funds futures point to a 15% probability—the lowest in more than a month—of a rate hike in September. December’s probability now sits at 46.9 and the FedWatch tool doesn’t see a chance over 50% until February, and even then, it’s only at 51.1%. It hangs in the 50%-range until it finally hits 60.6% in July 2017.

Meanwhile, Consumer Spending Fell in August Too. That’s according to Gallup’s monthly roundup of Americans’ daily self-reports of average spending. Consumers said they only spent about $91, on average, per day in August. That’s down from July’s daily spend of $100, which was the highest average for any month since July 2008, according to Gallup. The $91 daily average is in line with the year-ago reports of $89 a day, but slightly below averages for July 2014 at $94 and July 2013 at $95. The trend is tough to miss.

And Then There’s Apple’s Big Surprise Event. Unless Chief Executive Tim Cook is bringing a hat on stage and pulling a rabbit out of it, analysts and a number of published reports, including technology blogs, think they’ve already figured out what’s on the today’s secret agenda. The expectations don’t appear to be terribly robust with little inside tweaks and outside design projected.

If the reports are on track, here’s what investors may see: new iPhones, expected to be called iPhone 7 and iPhone 7 Plus, may be trimmer, thanks to the removal of the headphone jack, which is causing some consternation among consumers ahead of any design change; if that modification happens, it also will come with a better water-resistant case; cameras may be new and improved, with a new dual-camera system, meaning two sensors, that is said to be able to capture clearer, brighter pictures. AAPL also may do away with the phone’s clickable home button and replace it with a fingerprint reader. It could even change the phone’s display to “an edge-to-edge organic light-emitting diode (OLED) screen,” according to the Wall Street Journal, which also reports that more sweeping changes to the smartphones will come with the iPhone’s 10th anniversary next year. Though some analysts have called these expected changes “uninspiring,” they note that they will have to be enough to spark interest in buying new phones at a time when AAPL’s smartphone sales growth is slowing.

Also on tap today, according to some reports, is the next act of the Apple Watch, which is expected to be upgraded with a GPS chip and a faster processor. Stay tuned.

Good Trading,

JJ

@TDAJJKinahan

Economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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