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Can Slow Brew Rally Continue? DJIA's Win Streak Reflects Focus on Earnings

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August 8, 2017

(Tuesday Market Open) Like a train rolling uphill, the Dow Jones Industrial Average ($DJI) keeps moving steadily higher, even if the gains haven’t been very steep lately. The outstanding question today is whether the index can steam its way to a 10th-straight record close.

The index climbed just 0.12% on Monday and is up less than 3% over the course of its 10-session winning streak that began on July 25. Some of the main contributors during this prolonged DJIA rally include Apple (AAPL), Caterpillar (CAT), and Boeing (BA).

The market’s resilience tells us that investors simply aren’t focusing much on possible risks. Instead, they’re ignoring a lot of geopolitical noise and watching solid earnings pour in. At the same time, it’s hard to remember a rally that got less respect, with so many voices out there calling attention to how bad things could get and looking for a pullback. So far this year, those voices haven’t been right.

The S&P 500 Index (SPX) hasn’t been putting on gains quite like the DJIA, but did manage to claw back above the 2480 mark yesterday for the first time since late July. Once again, information technology led the sector pack Monday, and that helped the Nasdaq post big gains. Consumer staples also had a good day, but the rest of the market finished not far from unchanged.

It’s time to wish upon a star today with Walt Disney (DIS) earnings after the close. With DIS, the question continues to be whether the company’s parks and movies did well enough to outpace any drag from ESPN. We’ll see if strength from early summer theme park visits can keep the stock moving higher. Another earnings report to watch this afternoon is Priceline (PCLN).

Last night, CBS (CBS) reported revenue that exceeded Wall Street analysts’ expectations and earnings per share that met projections. Meanwhile, shares of Michael Kors (KORS) swung higher on better than expected guidance from the maker of designer handbags.

Things start off a little sleepy this week on the data front, but promise to pick up as we march toward the weekend. Wholesale inventories and inflation help turn up the dial Wednesday, Thursday, and Friday, with inflation particularly noteworthy as the Fed wrestles with possible causes behind consistently weak numbers.

Today, investors get a look at June Job Openings and Labor Turnover (JOLTS), following last Friday’s better-than-expected July payrolls report. We’ll see if the headline number ticks up from the previous 5.666 million. While the report isn’t necessarily as influential these days as back when unemployment was high, it is worth watching to get a sense of how much runway the unemployment rate might have to move even lower.

Two Fed speakers opined Monday, with St. Louis Fed President James Bullard saying there’s no need for any near-term interest rate hikes, media reports said. He added that even if unemployment falls further, it wouldn’t raise inflation threats much. Meanwhile, Minneapolis Fed President Neel Kashkari delivered an upbeat assessment of the economy. There’s a growing sense among Fed watchers that next month will bring more news about the Fed’s plans to address its swollen balance sheet, and we’ll see whether that challenges equities. At this point, stocks have pretty much dealt with everything thrown at them.

TD Ameritrade investors certainly aren’t shying away from stocks. July marked a historic milestone for the Investor Movement Index, or the IMXSM, which measures what TD Ameritrade clients are actually doing and how they’re positioned in the markets. The IMX crossed 7.0 for the first time ever and finished at 7.09, up from 6.58 in June. TD Ameritrade clients were net buyers for the sixth consecutive month, as we’re seeing retail investors continue their involvement in this rally by slowly dialing up exposure to the equity market. This isn’t a “johnny come lately” rally. Major tech stocks proved popular among TD Ameritrade clients, the IMX showed. Also, some old-guard stocks like Microsoft (MSFT) are coming into play

Volatility remains sluggish, with VIX just above 10 early Tuesday.

Financials

FIGURE 1: KEEPING UP WITH THE JONESES.

Over the last three months, the financial sector and info tech sector (purple line) have competed for dominance. Both have chopped around, with big dips at times, but at this point, their gains are similar and they lead all sectors over this time period. Data source: Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Going Nowhere Fast: If it seems like the S&P 500 (SPX) has been running in place lately, that’s not your imagination. The action has looked awfully dull lately, without a daily move of any major significance since late July. In fact, the index had settled between 2470 and 2477 in each of the six sessions heading into Monday before finally clawing back to the 2480 level by the end of Monday’s session. This range-bound trading stands in contrast with the Dow Jones Industrial Average ($DJI), which keeps setting new record highs. That said, the current slow period does come after a sharp SPX rally in early-to-mid July, and the SPX has had other periods recently where it’s cooled off after a bullish stretch. The other thing to keep in mind is that the index remains just a few points below all-time peak levels.

Smaller Stocks Sag: While the Dow Jones Industrial Average (DJIA) keeps scoring new all-time highs, the Russell 2000 Index (RUT), which tracks smaller stocks, is trading near one-month lows. The RUT reached all-time peaks of its own last month, but weakened over the last few weeks for a bunch of reasons, including the sliding value of the dollar. A weak dollar makes U.S. products cheaper overseas, but that generally helps the large multi-national U.S. companies rather than smaller ones, which are less likely to be big exporters. Also, there’s a sense now that investors are focused on some of the biggest companies and paying less attention to smaller names. For instance, the 100 largest stocks in the SPX are trading at multiples above their historic averages while the other 400 names are closer to their normal price-to-earnings ratios, The Wall Street Journal recently noted. It could be that in their chase for the biggest fish in the sea, investors are flinging back some of the smaller ones.

Losing Energy: With U.S. oil futures showing little inclination to move above $50 a barrel, OPEC and non-OPEC producers gathered Monday for a two-day meeting to discuss compliance with existing caps on production. Oil prices have barely moved since last November, when OPEC put a supply cut in place, because every time OPEC cuts production, it seems U.S. production climbs. It’s unclear if producers outside the U.S. can do anything to reverse this metric, and the meeting this week didn’t appear to light any fire under the oil market. Amid this constant pressure on crude, the S&P 500 energy sector is once again the worst performing sector of the year, after briefly being eclipsed by telecom. Energy shares had a rough day Monday, and are down nearly 13% year-to-date. Telecom is the only other sector with losses this year.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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