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In the Pipeline: Trump’s Keystone Order Brings New Highs, Economic Optimism

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January 25, 2017

(Wednesday Market Open) Well, that was one way to break out of a long-term trading rut.

Markets soared to new all-time highs Tuesday, and looked stronger Wednesday morning as well, with the Dow Jones Industrial Average (DJIA) finally breaking the 20,000 level on the open. What’s inspiring the sudden bullishness? It looks like President Trump’s executive order to build the Keystone XL pipeline is the main instigator. 

The idea seems to be that Keystone could require hefty expenditures on materials needed for construction, which could conceivably help materials makers. Spending on big energy products tends to help the energy sector, and stocks of oil drillers had a very good day on Tuesday. But it was financials and materials that led us higher, with info tech also pushing ahead. These same sectors appear to have momentum going into today’s trading.

Today is lacking in financial numbers from the government, but we do continue to have the White House and policy being the things that lead the market around. It’s arguable that the importance of earnings season has dimmed a little because market participants realize there are going to be changes in government policy. But earnings continue to pour out, with Boeing (BA) moving higher early Wednesday after beating Wall Street analysts’ consensus on both top- and bottom-lines and Alcoa (AA) up sharply after beating analysts’ revenue estimates and predicting a 4% increase in aluminum demand this year. Later today come earnings from AT&T (T) and eBay (EBAY).

As we’ve said before, the 20,000 mark is just a number, but closing above such big round numbers sometimes gives the market a psychological boost. Both the S&P 500 Index (SPX) and the Nasdaq made new all-time highs Tuesday, and the SPX burst out of its trading range, which had been between 2252 and 2280 pretty much since mid-December.

The market we now find ourselves in is exciting for traders, because once again there’s intraday volatility. But those who aren’t minute-to minute or hour-to-hour in the market may find it prudent to not let the noise bother their investments. At times like these, long-term investors can often benefit by staying with their plan and sticking with good companies, because there is going to continue to be a lot of noise.

Overseas, European markets rose sharply Wednesday, and Japan’s Nikkei climbed nearly 1.5%. Strength in Japan’s exports seemed to spark the rally there. Oil prices dipped as U.S. production and inventories surged. Gold fell and U.S. 10-year bond yields look like they might test the 2.5% level again.

Just as equities markets chased highs, the CBOE Volatility Index (VIX) headed back toward near- term lows. Though the index touched below 11 on two brief occasions in and around the holidays, it spent much of January gyrating between 12.5 and 14. VIX finished Tuesday down .71 to 11.06, a stone's throw from its 52-week low of 10.93. Is this a sign that fear has subsided, or simply a knee-jerk reaction to a resumption of the rally in equities? One indication may be the term structure of VIX, which is still quite steep, as shown in figure 1. Some might say volatility is just around the corner, while others would say, on a long enough timeline, VIX might revert to its long-term historical mean of 19.

VIX

FIGURE 1: VERTICALITY

Though spot VIX is flirting with 52-week lows, deferred month futures contracts remain quite elevated, as seen here on the TD Ameritrade thinkorswim® platform. Source: CBOE Futures Exchange. For illustrative purposes only. Past performance does not guarantee future results.

Embracing Risk Again? After a cautious tone over the last few weeks, some signs emerged Tuesday of investors once again taking a more “risk-on” approach. So-called “safe” sectors including utilities and telecom were flat to lower, while sectors such as energy and info tech made upward strides. The bond market also reflected a bit of the more aggressive tone, as yields, which had slid below 2.4% for the 10-year Treasury note on Monday, climbed back above that level. All this came despite some disappointment on the earnings side of the ledger, as a number of large companies missed Wall Street analysts’ revenue expectations, including Johnson & Johnson (JNJ), 3M (MMM), and DuPont (DDD).

Get Ready for Unemployment Claims: Thursday morning brings the weekly government read on initial unemployment claims. Normally, this doesn’t rank high on the list of key reports, but after last week, it might be worth a closer look. The reading came in last Thursday at 234,000, dropping the four-week moving average by 10,250 to 246,750, the lowest level since Nov. 3, 1973, according to Briefing.com. It was also well below Wall Street analysts’ expectations for around 250,000, and continuing claims are also historically low. It could be interesting to see if this trend continues, as it may cause some analysts to go back to their drawing boards as they begin working on estimates for January jobs data, due a week from Friday. The jobs data can often play a big role in the Fed’s plans for rate hikes, which the futures market now projects not happening until around June. A stronger job market can also have implications for inflation and the housing market, so stay tuned.

Big Earnings Day Ahead Thursday: Even at the height of earnings season, some days stand out, and Thursday is one of them. Key reports are due that day from Bristol-Myers (BMY), Caterpillar (CAT), Ford (F), Southwest (LUV), Alphabet (GOOG), Intel (INTC), Dow Chemical (DOW), Microsoft (MSFT), and Starbucks (SBUX). That should help investors get a better sense of a cross-section of industries, including info tech, consumer discretionary and materials. As we mentioned earlier this week, earnings calls from many of these companies, especially the multinationals, could give investors insight into whether the strong U.S. dollar is having an impact on business. Also, it might be worth hearing what executives have to say about some of the proposed trade policy changes under discussion in Washington, D.C.

Good Trading,
JJ
@TDAJJKinahan

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Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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