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Stocks Broke Out of Summer Slumber Friday. Are They Still Awake Today?

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September 12, 2016

(Monday Before Market Open) This week’s trading activity might be marked by anecdotes and expirations given what’s on tap and the Friday fallout. Are traders nervous enough to pull the markets into the red this week?

Three Federal Reserve speakers are taking to a dais ahead of the Fed’s blackout period before its next interest-rate decision meeting Sept. 20-21. Given the market reaction to Friday’s Fedspeak, particularly from Boston Fed President Eric Rosengren who turned his typically dovish comments hawkish ahead of the open, it looks to be a big question. His remarks helped pull the markets down like a magnet that, at midday, didn’t appear to be loosening its grip. Even Fed Gov. Daniel Tarullo’s more dovish comments after the open in a CNBC interview didn’t appear to lighten Rosengren’s impact.

Investors trading in options and futures also should take note that this Friday is the once-a-quarter expiration of those contracts. Remember, this happens on the third Friday of March, June, September and December. Typically that generates stepped-up trading activity in the last hour of the session, what’s become known as the “triple-witching” hour, when traders characteristically close, roll out or offset their expiring options. It is a time to remember to practice discipline.

Meanwhile, the economic-reports docket is crammed this week with what might create more fodder for further market activity. Or not. Initial unemployment claims for the week ending Sept. 9, for example, are expected to be turned in Wednesday. How might they move the markets? If they steer off the course they’ve been on for 79 straight weeks, which has been steady declines with initial claims staying below a key 300,000 level. The latest initial claims reports have, more or less, looked like the ones before them. An abrupt turn up might be disruptive.

Retail sales out Thursday may be another biggie on the economic horizon for obvious reasons: Consumers drive some three-quarters of the nation’s economy. If they’re not spending, the country’s not growing. In recent months, retail sales—with and without big-ticket automobile purchases thrown into the pile—mostly have moved slightly higher. But in July, the overall result came in at a big, fat 0.00, reflecting a slowdown in discretionary sales, or buying the things we can live without. Strip out autos and that number fell into the red, pushed mostly by a 2.7% fallback in gasoline sales. Food and beverage sales also tumbled as a result of falling prices. Might all that have changed in August with the heavy back-to-school shopping rush?  

Friday was headed for a blitz, in relative terms compared with the slow-as-molasses trading that has smudged most of the summer activity. At midday, all three major benchmarks were on track to post their worst day since June, marked by deep triple-digit declines on the Dow Jones Industrials (DOW) and at or nearing 2% drops on both the S&P 500 (SPX) and the Nasdaq Composite (COMP6). That drop on the SPX was the first 1% or more decline in 53 days, a move that S&P Global Market Intelligence’s Sam Stovall warned about early last week.

In midday trading, the Volatility Index (VIX), the market’s so-called fear gauge, was soaring into the mid-20% ranges as a reflection of trading activity. The VIX typically turns higher when stocks are falling, largely generating extreme readings during times of market uncertainty, negativity and panic. The VIX has languished in lackluster land through most of July and August, touching a trough it hadn’t seen for two years at 11.02 on Aug. 9.  

S&P 500

FIGURE 1: TIMBERRRR....

Well, on a relative basis. The S&P 500 (SPX), plotted through midday trading Friday on the TD Ameritrade thinkorswim platformthinkorswim® platform, was tumbling better than 2% amid a broader market meltdown. Why is this notable? Because in the last month, SPX has traded in a tight 10-point range with barely a handful of outliers, as highlighted above. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

On the Fedspeak Beat. What appears to be raising the eyebrows of some Fed watchers is the last-minute press release announcing that long-time dove, Fed board member Lael Brainerd, will speak today at the Chicago Council on Global Affairs. Monday, which will also feature talks from Atlanta Bank President Dennis Lockhart and Minneapolis President Neel Kashkari, is the last day of any Fedspeak ahead of its Sept. 20-21 meeting, which will be a do-it-or-don’t day for a step up in interest rates.

The talk on Wall Street is that the Fed may be putting her out there to send a message that may or may not clear up the uncertainty that has dogged the markets in recent sessions. Here’s what some analysts, on both sides are saying, according to Barron’s: “As a dovish member, Brainard would carry a lot of credibility delivering a more hawkish message,” commented Peter Hooper, chief economist at Deutsche Bank Securities. Or, this: “There’s a view that she may be going out to express some comfort with the idea of one rate hike this year,” says Gene Tannuzzo, portfolio manager at Columbia Threadneedle Investments. If either of these statements pan out, the next question is when? September or December?

A Little More on that Auto Report … Experian’s Q2 look at the state of the automotive finance market late last week had a couple of other nuggets of information that may give some insight into how consumers, of all risk segments, are spending on cars. Not the kind of cars, mind you, but the path of the purchases. Experian is seeing an uptick in the number of vehicles that are being leased, rather than an outright buy. Some 31.44% of all new cars were leased in Q2 compared with 26.92% a year ago. In the used-car market, 55.61% of them were leased in Q2 compared with 54.30% a year ago. What’s more, consumers carrying prime credit scores represented the biggest jump of those new borrowers leasing cars, sitting at 36.5% for the quarter. At the same time, consumers with prime and super-prime scores are increasingly turning to used vehicles as their car choice, Experian found. What are the ramifications of these trends to the auto industry?

Good Trading,

JJ

@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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