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Historic Marker Ahead? DJIA Eyes 20,000 As Volume Thins in Holiday Trading

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December 21, 2016

(Wednesday Market Open) The market keeps knock, knock, knocking on the door of 20,000. It’s the story that doesn’t seem to end.

The Dow Jones Industrial Average’s (DJIA) failure thus far to reach 20,000 doesn’t detract from the fact that the index has now posted 17 record closes since the election, a very impressive run. It topped out Tuesday at 19,987, a new all-time intraday high. Pre-market trading pointed to a slightly lower open this morning, and trading volume has been sort of tepid the last few days. It’s possible volume might fall off the table now that this week’s key earnings are in.

Remember, 20,000 is just a number. There’s nothing magical about it, and the DJIA consists of only 30 stocks, making the SPX a far better barometer of the overall market.

The old saying is, “dance with the one that brought you,” and that’s what the market did Tuesday. Leading sectors continued to be the ones that helped the market reach these lofty levels, with industrials, financials, and consumer discretionary clearing the way. The financial sector is up nearly 23% over the last three months, most of that coming after the election. There’s a growing sense that President-elect Trump’s proposed tax policies, infrastructure spending, and easing of business regulations could spark better growth, and financial stocks would presumably stand to benefit.

While data has been sparse so far this week, investors got a look at some notable earnings reports yesterday, including Nike (NKE), which released results that beat analysts' estimates and sent shares up 3% in pre-market trading. NKE reported earnings of 50 cents a share, 7 cents higher than anticipated, and its sales increase of 6% exceeded estimates. On a less cheery note, FedEx (FDX) shares fell nearly 4% in pre-market trading after the company missed Wall Street’s expectations for earnings per share. The FDX news was a bit concerning, but we’ll see if the holiday season can provide a boost for its current quarter.

With volume light, this could be a good time for investors to review portfolios and make sure they’re appropriately positioned for Q1. Volatility continues to drop, falling back toward its 52-week lows below 12 early Wednesday, but keep in mind that thinly-traded holiday markets can sometimes move more quickly than normal. The old saying is that when volume is light, that’s not usually the best time to step up the size of trades, perhaps something to keep in mind over the coming days.

From a technical perspective, SPX again failed on Tuesday to push through technical resistance at 2272. We’ll see if it can pierce that level today.

S&P 500

FIGURE 1: IN LOCKSTEP

The S&P 500 Index (SPX), plotted here through Tuesday on the TD Ameritrade thinkorswim® platformhas traded pretty much in lockstep with the 10-year Treasury yield (purple line). The question is whether 10-year yield can close the year at 2.5% or above, which some see as a bullish technical signal for yields. Source: Standard & Poor's. For illustrative purposes only. Past performance does not guarantee future results.

How Many Hikes Next Year? Richmond Fed President Jeffrey Lacker said recently he fears the Fed could “get behind” the market if it goes too slow on rate hikes, according to media reports. If that were to happen, there’s a chance the economy could become overheated, so Lacker plans to be on the lookout for any signs of inflation. One place to watch for possible inflation is wages, and Fed Chair Janet Yellen noted Monday that wage growth is picking up. Keep an eye on the December jobs report, due in early January, for signs of more pay acceleration, as the Fed seems to be watching that closely.

Anything Wrong With Rising Wages? Arguably, just about everyone loves getting a raise. But it’s a bit of a double-edged sword when it comes to the economy. On the one hand, rising pay puts more money in consumers’ pockets, generally a good thing for businesses. But wages that rise too quickly could put some companies under pressure to pass along the wage increases in the form of higher prices, which potentially could choke demand. And rising wages could also eat into companies’ margins, leading to a possible negative impact on earnings. Average hourly wages actually fell 3 cents in November, but were up 2.5% year-over-year, the government said earlier this month.

Durable Goods; GDP Ahead Thursday: To date, it’s been a quiet week from a data standpoint, but that changes with today’s existing home sales and tomorrow’s durable goods orders and gross domestic product (GDP) reports. Durable goods orders, often a measure of consumer sentiment, are projected to fall 4.5% in November after a 4.8% gain in October, according to Briefing.com. But remember, October’s number was skewed by a 12% rise in transportation, and would have been up just 1% without that. With transportation excluded, November durable goods orders are seen rising 0.2%, Briefing.com said.

Wall Street analysts’ consensus prediction for Q3 GDP is 3.3%, Briefing.com said. That would be up from the previous estimate of 3.2%. If it turns out to be in that neighborhood, it would certainly represent a big improvement from the 1% type of growth seen earlier this year. What’s playing into the better numbers? At the time of its last estimate, the government cited an increase in personal consumption expenditures growth. We’ll find out tomorrow if that’s still the case.

Good Trading,
J
@TDAJJKinahan

Economic calendar.

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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