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Putting on the Brakes: Election Rally Starts To Fade As Weekend Approaches

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November 11, 2016

(Friday Market Open) After a big week for stocks, profit taking could be the theme of Friday’s session as investors start unwinding some positions ahead of the weekend. Stock futures came under pressure in pre-market trading, and volatility has started creeping up again.

But yields on U.S. Treasuries remained strong, perhaps a sign of growing confidence that policies proposed by President-elect Donald Trump could help the economy grow more quickly. The astronomical spike in yields, in which 10-year yields climbed from 1.7% Tuesday night to 2.13% by early Friday, helped fuel the stock market this week, and the Dow Jones Industrial Average (DJIA) posted a new record high Thursday. Financial, defense, and infrastructure-related stocks have all performed well, but technology names slumped (see below).

From a technical standpoint, watch to see if the S&P 500 index (SPX) can make its way above the all-time high just above 2193, posted in August. Since then, the 2190 mark has posed something of a barrier. And investors might want to stay on their toes even though the market has rallied a great deal. First of all, there appears to be some pullback today as investors unwind positions ahead of the weekend, something that often happens after a sharp rally. Support rests at 2152, and below that at 2126.

Also, remember that on Tuesday night and early Wednesday, SPX futures fell to just below 2030 as fear arose about a possible disputed election, and then rallied after it became clear the election had been resolved. But there’s a history of markets retracing these nighttime moves during the day session, so for the next couple of weeks, it might still pay to be wary about the possibility of the SPX revisiting that level. Another element to note: VIX is up the last couple of days, climbing back above $15. Investors are buying volatility; so tread carefully.

Last but not least, Fed Vice Chairman Stanley Fischer speaks early Friday on the global economy and U.S. monetary policy. When he spoke last week, he warned that the U.S. economy might overshoot the Fed’s goals for employment and inflation, CNBC reported. Odds of a rate hike in December stand at around 81%, according to the futures market.

S&P 500

FIGURE 1: TREASURY YIELDS SKYROCKET.

The S&P 500 (SPX), plotted through Thursday on the TD Ameritrade thinkorswim® platform, wasn’t so much the story. Rather, it was a rally to 10-month highs by 10-year Treasury yields, represented by the purple line, which surged to above 2.13% during the session on hopes for economic progress. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Infrastructure Spending in Focus: Based on Thursday’s market action, investors appear to take Donald Trump seriously when he says he wants to spend more on infrastructure, as infrastructure-related names rallied. Some economists have begun raising their Gross Domestic Product (GDP) growth estimates based in part on Trump’s economic promises. Higher GDP, if it happens, could theoretically benefit many stocks, and that’s one reason for the rally this week. On the other hand, many big technology stocks haven’t participated much in the post-election gains, and took it on the chin Thursday amid fears that Trump’s proposed protectionist trade policies might have a negative impact on the sector. The technology-heavy Nasdaq actually fell on Thursday even as the DJIA and SPX rose.

Data Calendar Light, with Oil in Focus: It’s a fairly light schedule today from an economic data perspective. There’s Michigan Sentiment later this morning and the weekly U.S. oil rig count from Baker Hughes a bit later. Rig counts have steadily risen over the last few months, and OPEC production remains abundant, meaning the supply pressure on crude continues. Oil prices fell another 1% early Friday and tested the $44 a barrel level.

Disney Earnings: Late Thursday, Walt Disney (DIS) reported fiscal Q4 earnings, and Mr. Iger’s statement seems to have lightened some concerns over ESPN.  Revenue in the company’s Media Networks business, which includes ESPN, fell 3% year over year. “The decrease at ESPN reflected lower advertising and affiliate revenue and higher programming and production costs,” DIS said in its press release. “Lower advertising revenue was primarily due to fewer impressions and lower rates.”On the thinkorswim® Company Profile Tool, you can see that a  year ago, ESPN represented 34% of the company’s revenue. Now it’s down to 26%, a fairly significant decline.

A Salute to Veterans: Today is Veterans Day. Thank a veteran for what they have done for this great country!!!

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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