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Safety Play: Bonds, Volatility Rose With Stocks, But Ease After ECB Meeting

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December 8, 2016

(Thursday Market Open) Even as the Dow Jones Industrial Average (DJIA) set its 12th all-time high since the election Wednesday, fear seemed to creep back into the market, a bit of a puzzler. Bond prices rose, and VIX, which measures market volatility, also climbed.

But early Thursday, yields on the 10-year Treasury note bounced back above 2.4% and VIX retreated, so it now appears the rise in bond prices and volatility may have indicated a safety play by some investors going into the European Central Bank’s (ECB) meeting this morning.

The ECB announced an extension of its asset purchases program until at least December 2017, but will cut purchases to 60 billion euros a month from 80 billion starting in April. It left interest rates unchanged. Basically, the ECB wants to continue its battle to stimulate some inflation across the European economy. The irony is, the U.S. Fed is widely anticipated to raise interest rates next week, putting the two economies on opposite footings from a monetary policy stance.

The euro rose against the dollar after the ECB news, and U.S. stock futures moved slightly higher. The ECB’s announcement, which was basically what the market had expected, helped ease fears that the ECB might do something unexpected, and VIX tumbled back below $11.60.

Stocks rumbled to new all-time highs Wednesday for the Dow Jones Industrial Average (DJIA) and S&P 500 Index (SPX) on Wednesday, led by gains in real estate, telecom, information technology and consumer discretionary. The Dow Jones Transportation Average posted a new high as well, climbing 2.5% and helped in part by the price of crude oil falling back below $50 a barrel. We’ve talked in past columns about oil holding the $50 level, and that remains a big challenge for crude.

From a technical standpoint, 2,219 on the SPX had been where a lot of people were expecting to see some resistance, but the market went through it like a hot knife cutting a stick of butter. Short-covering added to the gains. Tracking resistance gets a bit foggy when the market’s in uncharted territory, but a band between 2250 and 2253 may mark the next level.

One thing some investors may have missed in the excitement of yesterday’s rally was yoga retailer Lululemon (LULU) killing it on earnings. The company posted 47 cents on earnings per share, compared with Wall Street analysts’ consensus estimate of 43 cents. Revenue climbed 13%, also beating estimates. The stock rose 28% in pre-market trading.

S&P 500

FIGURE 1: A MONTH OF TRUMP.

The S&P 500 (SPX), plotted through Wednesday on the TD Ameritrade thinkorswim® platform, is up more than 5% since the day before the election. The Dow Jones Industrial Average (DJIA), represented by the green line, is up 7%, and the Nasdaq Composite (purple line) is up 4.4%. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Biotech Takes a Dive: The only major bearish story Wednesday was a nearly 3% decline in biotech shares, which helped bring down the health care sector as a whole. Some of the pressure appeared to come straight from President-elect Trump, who said in an interview with Time Magazine that he wants to bring down drug prices, though he didn’t say how. Ironically, biotech was a sector that some analysts had expected would do better if Trump won, as they believed Trump’s opponent, Hillary Clinton, might be tougher on the cost of medicine. The Nasdaq Biotechnology Index had climbed sharply in the wake of Trump’s election, but by Wednesday it was down nearly 300 points from its mid-November peak. Worth noting, however, is that the Biotechnology Index remains up about 1,000 points from mid-2013 levels.

Stay Tuned Friday for Wholesale Inventories: Friday morning brings October wholesale inventories data soon after the market opens. Last month’s report showed a 0.1% rise from the month before. The inventory-to-sales ratio held steady at 1.33 in September, which pointed to some potential for improved pricing power if demand picks up, Briefing.com said at the time. However, the ratio remains up from around 1.20 a few years ago, so we’ll see if the October report shows the ratio headed back toward that level. A falling ratio could indicate retail demand being stronger than current inventory levels.

Job Hunting? When Can You Start? Wednesday’s Job Openings and Labor Turnover Survey (JOLTS report) showed 5.534 million job openings in the U.S. as of October, slightly above analysts’ expectations and the latest in a series of strong JOLTS readings. Where are the openings increasing? Health care and social assistance saw the biggest gains, but job openings decreased in professional and business services, federal government and mining and logging, the Bureau of Labor Statistics said. One thing to watch when job openings stay high is possible rising wages, but the last government payrolls report showed a small wage decline in November. It should be interesting to see if wages tick up again in December considering the recent strong economic data.

Good Trading,
JJ
@TDAJJKinahan

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