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Dog Days Are Barking: Thin Volume Possible As Jackson Hole, Durable Goods Awaited

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August 23, 2017

(Wednesday Market Open) The countdown to Jackson Hole is on after one of the market’s biggest rallies of the year. Low volume continues to be the story in these dog days of summer, meaning stocks could move up and down more quickly than usual in thin trading.

The symposium in Wyoming featuring remarks from European Central Bank President Mario Draghi and Fed Chair Janet Yellen starts tomorrow. Listen for any hints Yellen might give about the Fed’s balance sheet and interest rate plans, as well as her current take on the economy. Draghi could touch on the European economy and inflation outlook as many investors wait to see if the European Central Bank (ECB) is prepared to reverse some of the stimuli it’s been applying for so long. U.S. stocks were lower Wednesday in pre-market trading, following a downturn in European stocks earlier in the day.

The big news early Wednesday came from Lowe’s, which reported earnings and revenue below Wall Street’s expectations. Shares fell 6% in pre-market trading. The company lowered its outlook but did note that same-store sales rose slightly more than analysts had expected. The weakness at LOW was a little surprising considering the strong housing and home improvement market we’ve seen.

Nearly every sector moved higher Tuesday, including some of the less “defensive” ones like materials, financials, info tech, and industrials. That’s a pivot from earlier this month, when defensive stocks got more of the love. With the 10-year U.S. Treasury bond paying 2.2 per cent or less, defensive sectors like utilities and telecom were ones where many investors had been looking to enhance their yields through dividends while at the same time hoping for stability. One thing of note yesterday is we didn’t see bonds get sold too hard, so there wasn’t the rotation that sometimes occurs when stocks rise.

The Nasdaq’s three-day losing streak ended, and the index is now up 17% for the year. The Dow Jones Industrial Average ($DJI) had its best day since April, and even the embattled Russell 2000 (RUT) index of smaller stocks rose 1%. Light volume ruled the day, and stocks rocketed higher. However, there wasn’t much follow-through from Asian markets overnight.

Renewed hopes for U.S. tax reform helped shift the market into high gear yesterday (see below), and several companies reported better than expected earnings. That included luxury homebuilder Toll Brothers (TOL). Tax reform has been on many investors’ wish lists since last November’s election, and now there are hopes that not all is necessarily lost on a tax plan.

Congress is also under pressure to address the debt ceiling deadline approaching at the end of next month. Watch for possible volatility if Congress becomes deadlocked over that issue in coming weeks. President Trump’s hints last night at a possible government shutdown might have weighed on pre-market trading today.

Tomorrow morning investors might want to look for a little blue box as Tiffany (TIF) opens its books. Brocade (BRCD) and Marvell (MRVL) join TIF on Thursday’s earnings calendar.

Today’s weekly crude oil stockpiles data from the government later this morning might get more attention than usual, if only because recent weeks saw such dramatic drawdowns, including more than 9 million barrels last time out. On the other hand, U.S. production continues to grow.

Oil fell early Wednesday. Meanwhile, defensive assets like gold and bonds made a slight comeback.

New home sales for July are due today, and existing home sales for July are on the calendar tomorrow. Analysts expect a pretty steady number of 5.56 million existing home sales on a seasonally adjusted basis, according to Briefing.com. That’s up slightly from 5.52 million in June. High prices and dwindling supplies were the story in June, so check and see if anything changed the following month. Durable goods are due later this week.

From a technical perspective, yesterday’s rally pushed the S&P 500 (SPX) above its 50-day moving average of 2450, a technical resistance point. More resistance is up near 2475.

Materials

FIGURE 1: THANKS FOR THE LIFT.

The materials sector recharged Tuesday thanks in part to strength in copper futures (purple line) and other industrial metals. Data sources: CME Group, Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Material Matters: One of the better-performing sectors recently is materials, which rose more than 1% at times on Tuesday. Last month, the International Monetary Fund (IMF), said in its World Economic Outlook that it expects global economic growth of 3.5% this year followed by 3.6% growth in 2018. That includes “stronger and more sustained growth” in Europe due in part to easing political concerns, the IMF said. Typically, though not always, materials stocks do well when the economy grows thanks in part to increased demand for materials used in construction, chemicals, paper products, and numerous other industries. That said, materials trail the S&P 500 Index (SPX) year to date and are the fifth-best performing sector of the 11 SPX sectors in 2017.

Copper Near 3-Year High: In another possible reflection of improved global economic growth, copper futures posted their highest levels since November 2014, helped in part by investors’ speculative bets, analysts said. Just as a rise in crude oil can help energy companies, the higher move in copper appeared to give a lift to shares of mining and metals companies. Copper is often thought of as something of a canary in a coalmine for the economy, so its rise above the $3 a pound level this week for the first time in nearly three years might be seen as a positive indicator. Early last year, when fears spread about the world economy amid concerns about China and Europe, copper fell below $2 a pound.

Diving Back into the Risk Pool: Tuesday’s action on Wall Street showed investors more willing to take on risk than they’d seemed to be in previous days. The tech and biotech-heavy Nasdaq climbed for the first time in four sessions as biotech shares climbed more than 1%. Additionally, more cyclical sectors like materials and financials showed some zip after flagging the last few days. VIX took a seat, falling more than 10%, while bond yields also climbed slightly. There was renewed talk Tuesday that Congress might focus once again on possible tax reform, Briefing.com said, and that might have given the market some of its mojo back.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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