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Market Update

Counting to 6,000: Nasdaq Nears Key Milestone as Relief Rally Marches On

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April 25, 2017

(Tuesday Market Open) After 17 years, the Nasdaq has a new big-round number in its sights: 6,000. The last time Nasdaq hit a milestone mark was when it plowed through 5,000 very early in the new century.

Other indices aren’t far from record territory, either. Strong earnings, hopes for tax reform, and continued relief trading after the French vote keep powering the market, though geopolitics remains an underlying concern.

Anyone looking for positive “hard” data on economic growth might want to check out earnings from Caterpillar (CAT), which crushed Wall Street analysts’ expectations early Tuesday on both the top and bottom lines. CAT is often seen as a good proxy for industrial sector health, and for economic health in a more general sense. Construction equipment is a big-ticket item, and buying those machines isn’t a decision taken lightly.

In its press release, CAT said the company is seeing recovery in several of the industries it serves, but geopolitical and market uncertainty, along with volatile commodity prices, remain possible challenges.

CAT was among a bunch of key companies reporting today, and most of the news looked pretty good. McDonald’s (MCD), Biogen (BIIB), and DuPont (DD) came in above Wall Street analyst’s expectations. But Coca Cola (KO) missed. Later today come earnings from AT&T (T) and Chipotle (CMG), among others. Though many economists seem worried about an economic slowdown, tracking the money flow to MCD and CAT might suggest that’s not necessarily the case.

Financials reaped the biggest reward from the hefty gains Monday, climbing more than 2% as bond prices sagged and the 10-year Treasury yield clawed above 2.3% for a while before finishing slightly below that level. Financials had dragged over the last month, but mostly strong Q1 bank earnings helped turn the tide, followed by Sunday’s first round of French voting that brought hope for more financial stability.

Other so-called “cyclical” sectors also got a boost Monday, including info tech, materials, and industrials, all of which rose more than 1%. The rally lifted every sector except telecom services, and the positive mood flowed into Tuesday as well.

There’s no time to rest on any laurels yet, however. Key policy news waits in the wings this week, including whether Congress can work with the White House to keep the government open, and what sort of tax reform plan the president might present. Let’s not forget geopolitics, either. North Korea staged some artillery drills Tuesday, media reported, but the day there ended without any major outbursts.

European and Asian markets rose slightly, and the euro continued its rise vs. the dollar. Meanwhile, volatility made a big retreat early this week, with the VIX down sharply. The VIX fell below 11 for the first time since mid-February and had its biggest one-day plunge since 2011.

Nasdaq

FIGURE 1: BEEN A LONG TIME.

The Nasdaq (COMP), tracked here over the last 20 years on the thinkorswim® platform from TD Ameritrade, approached 6000 on Monday. The last time it punched through a big round number (5000), was in early March 2000. The index is up well over 300% during the last two decades, despite two recessions during that stretch. Data source: Nasdaq. For illustrative purposes only. Past performance does not guarantee future results.

Thoughts As Nasdaq Approaches 6000: The Nasdaq is within a whisker of another milestone: 6000. It’s out-performed both the Dow Jones Industrial Average ($DJI) and the S&P 500 (SPX) over the last several months, in part because the heavily weighted technology sector posted an 8% gain during that stretch. But some analysts express concern that just a few very large-cap names account for much of the Nasdaq’s gains recently, meaning the rally isn’t all that widespread across the index. Apple (AAPL), Alphabet (GOOG), and Facebook (FB) are among the big names that have led the Nasdaq higher. On the other hand, biotechs — another category heavily represented in Nasdaq — have also had a good few months, so it’s not all a technology run. By the way, the last time the Nasdaq hit a new big round number (5000) for the first time, in early March 2000, Bill Clinton was still president. Yes, it’s been a while.

Sell in May? Another Look at an Old Saying: The month of May is fast approaching, bringing with it that old “sell in May and go away,” adage. Maybe not so fast. In four of the last five years, the S&P 500 (SPX) closed on Dec. 31 well above where it was on May 1. The only exception was 2015. Some analysts say the “sell in May” theory doesn’t work so well in years when the economy is growing, and although Q1 economic growth seems likely to be sluggish, many economists expect strong growth in Q2. Also, Q1 earnings have had a good start, so if that continues, it could be another sign that underlying company performance might be catching up with somewhat inflated stock prices. That might be good news for those who don’t particularly want to “go away” for the summer.

Drilling for Dollars: Crude oil futures are up about 14% from a year ago, which sounds decent unless you ponder the fact that U.S. oil drilling rigs are up more than 100% over the last 11 months. OPEC keeps talking about a possible extension of production cuts — something it must decide on by next month — but U.S. drilling activity may continue to make OPEC something of a moot point, as far as prices, anyway. Crude is now barely up since late November, when OPEC announced its production cut. The question is how long U.S. producers can keep raising production with prices still below $50 a barrel as of early Tuesday. A prolonged price dip under $40 a barrel early last year helped lead to a steep decline in U.S. drilling, but few analysts think oil is going back down there any time soon. From a stock market perspective, there’s far less correlation between equities and oil now than there was in early 2016, so we could see more days like Monday where stocks rally even as oil falls.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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