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Can Rally Advance? Terror Attack, OPEC, Washington In Focus After 3 Days Of Gains

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May 23, 2017

(Tuesday Market Open) Last Wednesday’s sharp sell-off seems like a long time ago following three consecutive days of gains. Tuesday begins with major indices within striking distance of all-time highs as investors mull last night’s terror attack in England along with a long list of other potential market-moving factors.

There’s a lot on the menu this week before we reach the three-day Memorial Day weekend, including Thursday’s OPEC meeting, formal presentation of President Trump’s budget proposal, Fed minutes tomorrow, and conceivably more Capitol Hill drama. This remains in many ways a news-driven market, especially now that the bulk of earnings are in the rear view mirror. Politics could continue to be the focus in coming days.

That said, with President Trump on a foreign trip, Washington seems a little quieter. There’s also a sense that the president’s trip has been somewhat market-friendly to date, considering the major business deals he signed in Saudi Arabia and his overtures toward peace in Israel. The fact that these headlines — rather than the more incendiary ones seen last week — are dominating the news cycle might be providing the market some support.

Monday’s strength translated to nearly every sector, with only energy failing to post gains. Information technology resumed its leadership, with a nearly 1% rise, while utilities and industrials came in second and third. Consumer discretionary also gained big. Still, safe havens like gold and the yen kept climbing and bonds didn’t move much lower. The dollar continues to lose ground (see below) amid U.S. political uncertainty, which, according to some analysts, might mean less chance of aggressive Fed policy. Gold and the euro gave back a tiny bit of their recent gains early Tuesday.

Arguably, the broader story behind the rebound since last Wednesday is the widely held sense that stocks can recover from brief slides. That’s what happened after Brexit last year, and after an overnight sell-off following the U.S. election. The so-called “Trump put,” or the idea that the administration could eventually work with Congress to implement market-friendly tax and regulatory policy, continues to help provide a floor. The question is whether markets can once again test all-time highs at just above 2400 for the S&P 500 (SPX) and make further gains. To date, that’s been a struggle.

As Tuesday’s session begins, some of the key factors to watch include two scheduled Fed speakers, concern over Monday night’s bombing in England, and reaction to President Trump’s proposed budget. Volatility remains low, with VIX falling back below 11 after last week’s sharp rise. Oil also took a step back from one-month highs reached Monday, but stay tuned for weekly U.S. stockpile data tomorrow. OPEC meets Thursday, and is widely expected to announce an extension of production cuts. The question is whether all members can stick to the lower output goals, and if a longer regime of lower production can have more impact on prices. The jury is still out.

On the data front, new home sales represent the key report today (see below). Luxury home builder Toll Brothers (TOL) reported strong earnings and guidance, another factor pointing toward firmness in the housing construction industry.

Nasdaq

FIGURE 1: TECH LEADS RECOVERY.

The Nasdaq Composite (COMP), plotted through Monday on the thinkorswim® platform from TD Ameritrade, has recovered a major percentage of last Wednesday’s losses as info tech stocks led all sectors Monday. Small-cap stocks, represented by the Russell 2000 (RUT), shown in the purple line, haven’t come back as strongly and continue to lag the Nasdaq over the last month. Data sources: Nasdaq, FTSE Russell. For illustrative purposes only. Past performance does not guarantee future results.

Bond Strength Continues: Though stocks recovered most of the losses sustained in last Wednesday’s sell-off, bond prices remain relatively high, with yields not showing much rebound. The benchmark 10-year Treasury yield remains below the key 2.3% pivot point that’s been a guidepost for months. Even so-called “junk” bonds continue to trade at high levels and relatively low yields. The strength in bonds might reflect some investors wanting to hold a hedge in case there’s more political turmoil that could potentially delay the administration’s tax and regulatory policies.

Could Dollar Put More Force Into Stock Rally? If you’re wondering what sort of catalyst could potentially send the market higher, maybe it’s right in your wallet. The U.S. dollar is trading at its lowest level since the November election, and common wisdom is that a weak dollar can help corporate earnings and equity values. That holds especially true for big multi-national companies, so perhaps it’s no coincidence that Deere (DE), which has a large overseas presence, reported strong quarterly growth during a time period that saw general weakness in the dollar. It could also help explain some of the recent strength in major info tech companies, which tend to rake in substantial revenue internationally. There’s talk that continued weakness in the dollar could give Q2 earnings a lift as well. Where might the dollar go next? A lot could depend on what the Fed does and says at its June meeting. If the Fed raises rates and sounds more aggressive about future rate hikes, that could potentially put a new charge into the greenback.

Who’s Buying New Homes? This morning’s April new home sales data has big shoes to step into following a nearly 6% rise posted in March. Sales that month reached a seasonally adjusted 621,000, the highest since July 2016, highlighted by more than 25% sales growth in the Northeast region of the country. This frenzied activity came even as prices rose more than 1% overall, and mortgage rates remained well above the lows of last summer. April sales are expected to remain relatively strong at a seasonally adjusted 605,000, according to consensus estimates compiled by Briefing.com. Existing home sales are up next, with data due Wednesday morning.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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