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Resilient Market Keeps Chugging Along, But Slight Weakness Seen Early Today

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September 13, 2017

(Wednesday Market Open) Two days ago, stocks rose on relief that North Korea didn’t launch another missile. Yesterday it was hopes for tax reform that helped spark a rally. The bottom line is, the market has been resilient. It seems like every time it’s been pressed down, it’s hopped right back up, and now sits at record highs.

Today starts with stock futures trading a little lower in the pre-market and several catalysts on the calendar, including producer prices (PPI) for August, oil inventories, and Oracle (ORCL) earnings. The PPI came in at 0.2%, just under Wall Street’s expectations for a 0.3% rise.

In addition, shares of retailer Nordstrom (JWN) climbed as much as 10% in pre-market trading, and recently were up 6%. This came after media reports that the company might go private. We’ll have to wait and see.

Another closely-watched stock, Apple (AAPL), was a bit lower in pre-market trading. Some investors seem disappointed that the new iPhone X won’t begin shipping until November, which conceivably pushes some of the company’s profit for the device from AAPL’s fall quarter into its winter quarter. There’s also fear that people won’t buy the iPhone 8 between now and November as they wait for the new phone. 

Next week’s Fed meeting is in the headlights and approaching fast, but few expect another rate hike before the end of the year. The Fed could start giving details about its balance sheet unwinding, however, something many have been waiting to hear.

There’s also growing hope that Congress might start to seriously address tax reform with just a few months left until a new election year begins. Some of Tuesday’s strength, particularly in the financial sector, appeared to stem from tax reform hopes.

The potential for more saber rattling from North Korea remains a possible downside catalyst. North Korea is the wild card, which probably goes without saying for anyone who’s watched the market over the last month or two. When you look at why the market sold off lately, the cause has often been North Korea 

Financials were the second-strongest performer after telecom on Tuesday’s leaderboard, and other growth-oriented sectors like materials, energy, industrials, and consumer discretionary also rose. The tech sector didn’t perform quite as well, in part due to Apple (AAPL) declining.

Defensive sectors utilities and real estate both took it on the chin Tuesday as North Korea and hurricane fears continued to dissipate. Bonds and gold were trending lower before recovering slightly early Wednesday, and VIX fell more than 1% to 10.58 by the end of Tuesday. That’s not far from lows it reached a month ago before all these geopolitical and weather events occurred.

The low VIX doesn’t necessarily mean we’re headed back toward the quiet summer trading we saw in July and early August, but it does help that some of the political noise went away. The debt ceiling got pushed back a few months, so it doesn’t hang over the market as a potential rally killer.

Financials

FIGURE 1: FINANCIALS MUSCLE BACK.

After falling to three-month lows last week as the dollar and bond yields fell, the financial sector got back on track this week and began to climb along with the S&P 500 Index (SPX), shown as the purple line here. Data source: Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thanks, Harvey: Initial jobless claims from the Department of Labor each Thursday morning have been a sleepy affair for many months, seldom coming in above 250,000 as the country’s employment situation continues to improve. That changed last week when claims spiked to 298,000, the highest level since April 2015. We can apparently blame Hurricane Harvey. The storm that collided with the Texas coast last month might have led to a short-lived jump in claims, which could be exacerbated by Hurricane Irma’s impact on Florida over the weekend. The next data are due early Thursday, and we’ll see if claims remain below 300,000 for the 132nd week in a row. The question is how the storms might affect the September payrolls report due early next month. If there’s a bump in the unemployment rate, the Fed could come under pressure to determine if it’s simply related to the storms or if it represents a longer-term issue.

Will Consumer Prices Stay Subdued? Today’s producer price index (PPI) is followed tomorrow by the consumer price index (CPI) for August, and analysts expect a relatively subdued reading. CPI is projected at 0.3%, up from the 0.1% recorded in July, according to Briefing.com. Core CPI, which strips out energy and food prices, is seen at 0.2%. Keep in mind that year-over-year CPI in July was 1.7%, and that’s the number the Fed is likely to assess as it gathers next week. The Fed’s target rate is 2%, and inflation has remained stubbornly below that for much of the last five years. Whether it’s temporary pressure on prices caused by technology and competition or something more structural and dramatic is something we won’t know without the benefit of hindsight. The challenge for investors is trying to determine whether we’re in a new long-term era of low inflation or a temporary one.

Technically Speaking: With the S&P 500 (SPX) now trading at new all-time highs, the technical path ahead gets a little harder to read, though psychological resistance rests at the 2,500 mark. Watch the financial sector in coming weeks to see if it can shake off the blues, because sometimes financials can be a harbinger of the market’s direction.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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