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Earnings Tailwind, Tax Hopes Give Boost, But Caution Seen Ahead of France Vote

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April 21, 2017

(Friday Market Open) After stumbling through much of March and early April seeking a positive catalyst, the stock market seems to have found one: Strong earnings.

The latest companies to exceed Wall Street analysts’ expectations were Visa (V) and General Electric (GE), both of which posted gains in futures trading. The entire market seems to be getting a lift not only from earnings, but also from technical buying and from Treasury Secretary Steven Mnuchin saying the administration is going to release a tax reform plan, “very soon,” according to media reports.  

Anxiety over the French vote this weekend could put a cap on any rallies, however, as many investors might shy away from taking on big positions ahead of this potential market-moving event.

From a technical standpoint, the S&P 500 (SPX) engineered a close Thursday just a notch above what had been key resistance at 2355, near the 50-day moving average. The push through that level could be seen as a bullish development for those who watch technical indicators. Sometimes this sort of price movement can draw new buying interest.

Visa’s results late Thursday came after American Express (AXP) reported a strong quarter.

The upbeat earnings from two credit card companies within 24 hours of each other may buttress thoughts that consumer confidence could indeed be translating into more consumer buying, something that hasn’t been so evident from recent government economic data.

It’s always good to listen to what company leaders say in their earnings conference calls, and that’s proving the case once again this quarter. The takeaway so far sounds mostly positive. Last quarter, many CEOs said they saw their companies as poised for growth, and some say the same thing this quarter. It’s refreshing to hear this kind of sentiment two quarters in a row.

Big bank earnings, now mostly in the rear view mirror, have been the shining star of the season so far, with the exception of Goldman Sachs (GS). It’s possible, however, that GS slumped due to losing some key talent to the Trump administration.

In foreign exchange, the euro is coming off of five-week highs, and the dollar made slight gains early Thursday. It could be interesting to see if a falling euro and a rising dollar affect commodity prices. Oil was flat early Thursday, but remains well below the weekly highs. A rising dollar can often help push down commodity prices, including oil. European and some Asian stock markets piggybacked on Thursday’s U.S. market gains, rising Friday.

On the economic data side, leading indicators yesterday came in a bit above expectations, rising 0.4% in March. Eight of the 10 indicators rose, and it was the seventh-consecutive month in which the total index has climbed. Existing home sales are due this morning.

If you need a signal that the economy is growing, transportation companies can often provide it. CSX (CSX) beat expectations for Q1 and raised its dividend. In the company’s press release, it said, “The business environment continues to improve.”

S&P 500

FIGURE 1: STOCKS OUTSHINE GOLD FOR NOW

The S&P 500 (SPX), tracked here through Thursday on the thinkorswim® platform from TD Ameritrade, closed above key technical resistance at 2355, the 50-day moving average, and has started to post stronger gains than the gold market (purple line), which was on a run earlier this month. Data source: Standard & Poor’s, CME. For illustrative purposes only. Past performance does not guarantee future results.    

Cyclicals Winning Tug-of-War…For Now: It’s been a tug-of-war the last few weeks between so-called “cyclical” stocks, which tend to rise when the economy is seen as strong; and so-called “non-cyclicals,” which investors often pile into when the economy is perceived as weak. On Thursday, cyclicals grabbed the rope and gave a firm pull, with technology, financials, industrials, consumer discretionary, and materials sectors among the leaders. Non-cyclicals like utilities, consumer staples, and health care took a back seat. While the day’s action — fueled in part by strong tech earnings and new rumbles about possible tax reform — may indicate optimism, the market has been volatile lately. We’ll see who takes a stronger hold of the rope Friday.

Retail Rebound: The embattled retail sector, which had been under pressure from last month’s weak retail sales report as well as from Internet competition to malls, led consumer discretionary to a strong showing on Thursday. Some of the big gainers included Foot Locker (FL), Gap (GPS), Kohl’s (KSS), and Starbucks (SBUX). It may be that those robust credit card company earnings signal more foot traffic to the malls than some might have expected.

Bonds Slump From Recent Highs: Though 10-year Treasury yields climbed back from five-month lows under 2.2% late this week, they remain pretty far below what might be expected considering the Fed is in a tightening cycle. International turmoil probably plays a role, as other safe havens like gold and the yen have also risen lately. Still, it shouldn’t go unmentioned that U.S. economic data just hasn’t been that solid lately, and that also could be playing into the bond market strength as well.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar.

FIGURE 2: 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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