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Up We Go: Despite Some Muddy Earnings Reports, New All-Time Highs Keep Coming

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July 20, 2017

(Thursday Market Open) Another day; another record.

The go-go market of earlier this year seems to be back as investors appear to have shrugged off Washington gridlock, weak bond yields, a falling dollar, and some less rosy than expected guidance. It’s a crazy market that everyone wants to talk down, but it keeps defying negative expectations. 

The S&P 500 Index (SPX) and Nasdaq (COMP) again posted new all-time highs Wednesday, sparked in part by a strong start to earnings season. The Nasdaq is up nine days in a row; and the SPX has risen five of the last six days. Volatility, as measured by VIX, remains low.

As stocks continue to chug along at all-time highs with low volatility cooked in, the question becomes, “What’s a trader or investor to do?” The first thing is to trade what’s there. That is, you don’t have to call the top of the market. If you think things look too high, start in slowly and wait for a bit of action going your way before committing a lot of money. The same idea goes the other way.  If you feel we’re going to continue higher and you haven’t yet participated in this rally, buy in slowly. If there is a break, you’ll conceivably have a chance to buy more at a better price if you choose to do so.

The middle part of the week delivered some muddy news from the earnings arena. Morgan Stanley (MS) started Wednesday off with a nice picture, but IBM (IBM) and United Continental (UAL) late Tuesday weren’t so good and American Express (AXP) closed Wednesday with a disappointment, showing the weight of the Costco (COST) partnership ending. Today, the wait is on for Microsoft’s (MSFT) results after the close. Pay attention to the company’s conference call for not only U.S., but also for world-wide growth projections. Tomorrow morning brings General Electric (GE) and Honeywell (HON). 

Wednesday wasn’t a home run for earnings, but Q2 earnings results have generally been better than projected so far. S&P Capital IQ raised its estimate for S&P 500 earnings per share growth to 6.5%, from its previous 6.2%. Ten percent of companies have reported, and 74% posted top- and bottom-line results that exceeded Wall Street’s estimates, according to research firm CFRA.

Info tech continues to sizzle in the summer heat, putting in its ninth-straight higher session on Wednesday. A possible test comes this afternoon when MSFT and eBay (EBAY) report, followed by more big tech companies next week including Facebook (FB) and Amazon (AMZN).

From a data perspective, things look a little slow, without much on the calendar today and tomorrow following Wednesday’s stronger than expected June housing starts and building permits numbers. The 8.3% rise in housing starts could mean builders have begun responding to pent-up demand in a housing market that’s been supply-constrained. While June marked the first month of rising housing starts since February, it’s still just one month of data, so we’ll see if there’s any follow-through a month from now.

Focus turns overseas this morning after the Bank of Japan (BOJ) left its rates unchanged. The Nikkei rose, partly in response to the decision, as the BOJ, like the Fed, continues to seek that elusive 2% inflation rate. The BOJ’s decision was in line with most analysts’ expectations.

We now move thousands of miles west from Japan to the European Central Bank (ECB), which, like the BOJ, met this week and kept rates unchanged, also as most analysts had expected. The ECB said that it would continue to buy 60 billion euros in government bonds through to December or longer "if necessary." ECB President Mario Draghi is scheduled to hold a press conference this morning, and the market sometimes can move on his words. The euro is up sharply vs. the dollar over the last few weeks (see chart below), in part due to what some analysts interpreted as a more hawkish tone coming out of the ECB recently, though the ECB did try to walk back that impression. We’ll see what Draghi has to say today.

Euro

FIGURE 1: EURO CURRENCY SURGE.

After dipping below 1.04 in January of this year, the euro has been on a tear versus the U.S. dollar, hitting 14-month highs yesterday, as eurozone economies pick up steam. Data source: CME Group. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.    

Health Care In Recovery Room: Health care had been lagging the broader market over the last few days until becoming ambulatory with a rally on Wednesday. Still, the sector might not be entirely out of the sick room. Health reform is still up in the air, and some major health care insurance companies — which analysts believed might conceivably benefit from provisions in the Senate bill that failed to meet a procedural hurdle for a vote — were among the stocks getting slapped down earlier this week before recovering a bit on Wednesday. Additionally, the biotech sector, which injected plenty of vigor into health care overall year to date, leveled off for a few weeks before Wednesday’s rally. Another congressional vote on health care is now rumored for next week.

Seeking Guidance: A number of companies so far this quarter have reported strong Q2 earnings only to see their stocks fall flat as investors seemingly react to guidance that didn’t come in as high as they might have wished. The latest of these were airline United Continental (UAL) and railroad firm CSX (CSX). They’re not alone. Late last week, some of the big bank stocks fell despite beating earnings expectations, again on concern about the path forward. UAL shares slid after the company warned that Q3 passenger unit revenue might fall, and CSX shares dropped after the company guided for full-year earnings-per-share growth that was below Wall Street analysts’ expectations. Earnings reports are multi-dimensional, and beating expectations doesn’t necessarily mean everything is rosy. This trend in guidance bears watching as the earnings season continues.

Curve Straightens Out: As if earnings weren’t enough of a headwind for the financial sector, the yield curve flattened earlier this week. Banks tend to do better when longer-term rates climb. Last week’s dovish remarks from Fed Chair Janet Yellen, however, seem to still be weighing on bond yields, and chances for a rate hike by the end of the year are lingering at around 50%, according to the futures market.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: NEXT WEEK'S ECONOMIC CALENDAR.

There is nothing up on today's Economic Calendar, so here's a sneak peek at next week's loaded agenda. Source: Briefing.com

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