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Market Update

Recovery Rally Reaches Four Days As Market Eyes Fed Minutes, OPEC Meeting

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May 24, 2017

(Wednesday Market Open) Shaking off a terror attack and political uncertainty, the stock market finds itself back to nearly where it was a week ago before last Wednesday’s sharp sell-off. Fed minutes and OPEC's meeting take center stage today and tomorrow.

A four-day rally faces steep resistance near all-time record highs between 2405 and 2406 for the S&P 500 (SPX). The question today is whether enough buyers will show up to push the market through that barrier or if pre-holiday profit taking starts to creep in ahead of the long weekend.

As the market eyes a possible test of those lofty levels, U.S. volatility eased despite the terror attack in England, with VIX dropping back below 11. Meanwhile, some so-called safe haven assets also came under pressure, including Treasuries and gold. Bond yields climbed back toward 2.3% for the 10-year note, while oil looked flat but is up five days in a row ahead of tomorrow’s OPEC meeting (see below).

While terror concerns remain front and center across the Atlantic, there was good economic news this week from that part of the world. Eurozone composite PMI remained at 56.8 in May, equal to April and near six-year highs. The euro keeps climbing vs. the dollar amid signs of European economic vigor after a long sluggish period. Generally, this could be seen as a positive development for U.S. stocks, because a healthy Europe often means better markets for U.S. companies. European stocks were mixed Wednesday, and the euro rose slightly vs. the dollar.

On the other hand, the news in Asia wasn’t as good. Moody’s Investor Services lowered its credit rating for China, and stocks there fell as investors worried about possible slowing growth.

Back home, existing home sales and Fed minutes from its May meeting come out today. Check the minutes to see if members discussed any plans to start winding down the Fed’s $4.5 trillion balance sheet, and when that might start. The concern is that if the Fed moves too quickly, it could cause interest rates to rise.

Speaking of rates, there’s an 83% chance of a hike when the Federal Open Market Committee (FOMC) meets June 13-14, according to Fed funds futures. Looking further out, there’s close to a 50% chance of an additional hike by December.

On the earnings side, Lowe’s (LOW) missed Wall Street analysts’ top- and bottom-line expectations, and shares fell in pre-market trading. Same-store sales did increase nearly 2% year-over-year, however, a positive sign. LOW faced high expectations following recent strength in the housing sector. Another closely watched stock, Tiffany (TIF), also came under pressure after it reported lower than expected sales.

Over on pit row, Advance Auto Parts (AAP) missed earnings expectations, and that followed a miss by AutoZone (AZO) yesterday. The auto parts sector missing on earnings isn’t necessarily the worst thing in the world if it’s accompanied by good auto sales. It might mean people are deciding it’s time to give up their old car and buy a new one. So watch auto sales data early next month to see if there’s a trade-off.

Gold

FIGURE 1: STUCK IN THE MIDDLE.

Gold, plotted through Tuesday on the thinkorswim® platform from TD Ameritrade, rests right in the middle of its three-month range between roughly $1,200 and $1,300 an ounce; and has generally traded in a pattern opposite the S&P 500 (SPX), denoted by the purple line. Data sources: CME Group, Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results. 

No Lollipop at Banks So Far: Market wisdom suggests that it’s hard to have a major rally without the financial sector participating, but so far this year that’s exactly the case. The S&P 500 Index (SPX) is up about 7% year to date, but the financial sector is up just 0.3% despite a decent rally Tuesday. That’s quite the change from a few months ago, when financial stocks roared out of the gate to gain 7% by early March amid hopes for rate hikes, solid sector earnings, and optimism that the new administration could soon implement market-friendly regulatory and tax policy. At that point, the financial sector and the SPX were trading pretty much in sync. Since then, they’ve gone their separate ways as political controversy raised questions about the possibility of major tax and regulatory reform and Treasury yields failed to rally. All this weighed on financials even as the SPX stayed pretty firm.

On the Brighter Side: If there’s a bright side to financial stocks sitting out the rally that’s taken indices to record highs, it could be just that. In other words, money that hasn’t been directed into financials might be on the sidelines, ready to be invested in that sector if fundamentals start to look more intriguing. A rate hike next month accompanied by more bullish Fed language might be such a catalyst, if those events occur. Then again, if financials can’t get going, they could start to drag on the rest of the market, because they’re a rather influential sector. Other sectors that haven’t performed well include energy and telecom, but arguably financials remain the one to watch.

Housing, OPEC Dominate Mid-Week: New home sales for April came in below expectations Tuesday, and the market gets a look at existing home sales today. Consensus is for a seasonally adjusted 5.65 million, down slightly from the March number, according to Briefing.com. New home sales sputtered, but upward revisions to earlier data helped take away some of the sting. Nevertheless, high-flying home construction stocks mostly fell on the data. OPEC is the other big factor, as it prepares to meet Thursday. The energy sector remains one of the weakest year-to-date, and that’s in light of last November’s oil production cuts. So it’s hard to see how an extension of those same cuts could have much impact, particularly if countries like Iraq continue to violate output limits. Crude is at five-week highs going into the meeting.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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