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Market-Moving Catalysts are Missing as Summer Comes to End; Be Wary of Low Volume

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August 22, 2017

(Tuesday, Market Open) Earnings season is in its endgame, leaving a strong market-moving catalyst behind with little ahead beyond the Jackson Hole economic symposium and the monthly report on durable goods later this week.

But, this week and next also mark the end of summer for many, so we shouldn’t be too surprised that volume is low and that there’s been little oomph to drive trading. The three major benchmarks were edging ahead in early trading after yesterday’s mostly muted session.  

Might it have been the total eclipse of the sun that kept the markets at bay Monday? If so, today is another day, without the distractions of the coast-to-coast cosmic event to blame for thin trading. The Dow Jones Industrials Average and the S&P 500 Index managed to squeeze out small gains after much of the sky watching ended, but the Nasdaq Composite missed, ending ever so slightly lower.

After last week’s selloffs, these tiny moves to the upside might be comforting to many investors worried about a major setback to what has been an unusually long rally. Despite it all, the benchmarks are still within striking distance of finding fresh levels that would outpace record closing levels reached Aug. 7 for the Dow and SPX, and July 26 for the Nasdaq. Dow and SPX are off about 2% from their highs while the Nasdaq is behind by a little more than 3%.

A word of caution about thin trading days like these: Be very careful with the size of trading orders. Because volume is low, it typically leaves the door open for sudden moves in either direction.

On the earnings front, shares of DSW climbed better than 14% after the shoe seller reported better-than-expected earnings and an unexpected rise in same-store sales. Medtronic beat its forecast too, but came up short on revenue expectations, and its shares were off slightly.

Oil prices gave back most of the gains they pocketed Friday, falling by about 2.7% to settle at $47.56. (See graph.) Oil watchers pontificated Monday that Friday’s fast flow higher, on light volume, at the end of the session was ripe for a pullback, particularly amid another day of light trading.

The Organization of Petroleum Exporting Countries (OPEC) met Monday in Vienna, but there was no word out of the group’s closed-door meeting. Traders might like to hear that OPEC’s compliance with a pact to reduce the world’s glut of oil supply was on the rise. In July, only 75% of those part of the agreement were in compliance, according to MarketWatch.

If the Federal Reserve is right, oil prices might be pushing $100—a sight we haven’t seen since 2008—by 2025. (See below.)

Oil Chart

FIGURE 1: WHAT'S NEXT FOR OIL?

Light sweet crude oil futures, tracked through the close on Monday on the thinkorswim® platform from TD Ameritrade, reversed course, giving back nearly all of Friday’s quick gains. The week’s OPEC meeting might move that needle again. Data source: CME Group. For illustrative purposes only. Past performance does not guarantee future results.

If You Build It: The week is relatively short on economic data, but a key report out tomorrow is likely to be top of mind for Federal Reserve members: new home sales.

Housing growth is a necessary component of economic gains because it not only juices the construction and financial industries, for example, but it tends to be a big sales driver of furniture, big appliances and other home-goods items. Last month’s report was anemic at a 0.8% increase, marking a slowdown in the second quarter compared to the first.

The culprit, apparently, isn’t demand but supply. According to Reuters, the housing market is fraught by a “dire shortage of properties.” And in the supply-and-demand quotient, low supply pushes prices higher and, consequently, lock out many first-time buyers.

That should be a clear sign to the home-building industry, according to Trulia Chief Economist Ralph McLaughlin. “Though home buyers continue to snap up new homes, there is much room for growth,” he told HousingWire after last month’s report. “When taking into account the size of the U.S., new home sales are still about 30% below the 50-year average. But the signs for home builders are clear: If you build, they will come.”

Wait! What? Oil at $100-plus a Barrel: Yes, if the Federal Reserve of San Francisco’s recent economic research rings true.

“Although China’s growth has slowed recently, the country’s demand for oil could be entering a period of faster growth that could result in substantially higher oil prices,” according to a recent Economic Letter written by Deepa D. Datta and Robert J. Vigfusson.

“Analysis based on the global relationship between economic development and oil demand illustrates the prospects for Chinese oil demand growth and the resulting opportunities and challenges for U.S. producers and consumers,” according to the report.

Bottom line: The initial per-barrel prediction is oil in a range of $55 to $90. But, “…If supply did not increase to meet the additional demand growth, oil prices would have to almost double from $90 to $172 per barrel in order to balance demand and supply in our high-demand scenario,” the report says.

And a Bit about M&A: From Goldman Sachs: “For the fourth consecutive year, the total value of global M&A (mergers and acquisitions) transactions is projected to surpass $3 trillion. But instead of being driven by large-scale consolidation, this year's M&A environment has been characterized by smaller deals,” says John Waldron, global co-head of the Goldman Sachs Investment Banking Division.

Why? Legislative gridlock in Washington and regulatory uncertainty appear to be behind the shift, but Waldron says that even as it remains difficult to forecast the political backdrop, investors have remained broadly supportive of transactions across both the debt and equity markets. “The markets are really prepared to step in and finance cash-based M&A,” he says. “And we expect that to continue.” Stay tuned.

Good Trading,
JJ
@TDAJJKinahan

Economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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