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Dancing With $50: Oil Could Be Story Today As Earnings Approach

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October 10, 2017

(Tuesday Market Open) Like a train barreling down the tracks, earnings season rapidly approaches as investors prepare for big banks to open their 3Q books later this week. In the meantime, pre-market trading pointed to a slightly higher open Tuesday and the oil market clawed back above $50 a barrel.

Though it’s arguable that earnings season starts Thursday morning with earnings from Citigroup (C) and JP Morgan (JPM), keep in mind that a handful of firms, including Delta Airlines (DAL), report tomorrow morning. Earnings season might provide a new catalyst for a stock market that sits near all-time highs, but the focus today could be on crude as we watch to see if it can hold the $50 level.

Data start to pick up this week with Wednesday's August Job Openings and Labor Turnover Survey (JOLTS). What’s unclear is how much this one might be affected by Hurricane Harvey, which tore through Texas late that month, and, as we know from last Friday’s Payrolls report, helped to send job creation spinning lower in September. In July, JOLTS showed job openings rising to a seasonally-adjusted record high of approximately 6.2 million. High levels of job openings traditionally point to strong demand from employers and toward potential labor market tightness, something Fed officials have pointed to as well in recent days.

The other key data approaching quickly is Thursday morning’s producer price index (PPI) for September. In August, PPI was subdued at 0.2%, and core PPI, which strips volatile energy and food prices, rose just 0.1%. The question is whether Hurricanes Harvey and Irma might have caused PPI to pick up in September. Analysts expect 0.4% growth in September PPI, according to Briefing.com, but if it does come in at that moderately high level, keep the hurricanes in mind as the rise might end up being temporary. Core PPI is only expected to rise 0.2% in September. We’ll get the numbers an hour before Thursday’s stock market open.

The market came under pressure to start the week Monday, but remember it was a holiday session with low volume. So the lesson might be to not make too much out of the lower trade. Still, it was the second session in a row to see markets fall after a long stretch of gains. We’ll see if stocks can recover in the days to come as earnings get started later this week. It was the first down day for the Nasdaq after nine-straight gains, and the Russell 2000 (RUT) index of small stocks also came down from recent highs.

The longer the week goes on, the more focus is likely to turn toward big bank earnings. It’s interesting to note that financials were the worst sector performer of the day, though analysts generally expect strong earnings from the big banks.

The big news on the corporate front today is Honeywell’s (HON) announcement that it plans to split into two publicly traded companies. The separation is planned for completion by the end of 2018. One company will consist of HON’s Homes product portfolio and ADI global distribution businesses, worth about $4.5 billion. The other will be Honeywell's Transportation Systems, worth about $3 billion. HON’s shares rose on the news and are up about 24% so far this year. The question is whether this move ends up being isolated to HON or if it might inspire other big conglomerates to consider similar action. Another question is whether the news could give the industrial sector a lift, as it trails the broader market over recent days.

Even as news about HON broke, there were media reports early Tuesday that healthcare giant Pfizer (PFE) might be shopping its consumer products business, so that’s another possible development to watch.

Yesterday saw the release of the monthly Investor Movement Index, or the IMXSM, which measures what TD Ameritrade clients are actually doing and how they’re positioned in the markets. While the overall report showed a slight decline in September to 7.14 from August’s 7.45, one interesting note was clients’ increased exposure to several Chinese stocks, including Alibaba Group Holding Ltd. (BABA), Tencent Holdings Ltd. (TCEHY) and JD.com Inc. (JD). Those three accounted for three of the report’s top-10 stocks. If anyone has doubts that we’re in a global economy, news like that will hammer it home.

Speaking of global, one thing that might potentially give the U.S. market a boost today is a strong Tuesday performance by Japan’s Nikkei. In fact, all of the Asian markets rose overnight. Back home, talk of possible tax reform continues to rattle around the market, but for now it’s mainly noise.

Crude oil moved above $50 a barrel Tuesday morning as demand appeared to perk up a little after refineries re-opened in the U.S. Gulf following a tropical storm. Rumors of OPEC possibly extending production cuts also gave oil a boost. What might be interesting is to check how the storm might have affected U.S. oil supplies, which we’ll find out from the weekly government report Wednesday. It’s possible it caused a temporary rise in stockpiles, and this is the time of year we’d normally expect to see that from a seasonal perspective — even in the absence of storms.

One other note about oil: The IMX report showed ConocoPhillips Corp. (COP) and Chevron Corp. (CVX) among the stocks that were net sold by TD Ameritrade clients during September. It’s worth considering that investors exited the stocks even as crude oil climbed to $50 during the month, so it looks like it’s possible some people were trying to fade the rally in oil by selling some of the big energy names.

Copper

FIGURE 1: MIXED PICTURE.

Two of the markets that some see as derivatives for the overall economy — the Dow Jones Transportation Average ($DJT), and copper (purple line), have diverged over the last week or so. Copper has recovered to trade back above the $3 a pound level, but the DJT has stepped back from recent all-time highs. Data source: Dow Jones, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. 

Bond Chat: With Treasury bond trading closed yesterday for Columbus Day, it was a good time to reflect on where yields have been and what they might point. For a brief interlude after Friday’s payrolls report, benchmark 10-year yields popped above 2.4%, a region they hadn’t probed since July. The impetus appeared to be the surprisingly potent 0.5% rise in September wages. However, the bond sell-off didn’t last long, perhaps in part because of profit taking. Also, as we noted Friday, the wage data were somewhat misleading. Many of the jobs lost in September were lower-wage positions in the food and beverage industry, and that could have given the overall wage number a boost. All this doesn’t necessarily change the tenor of a bond market that’s been under pressure over the last month due partly to strong economic data and hawkish talk from the Fed. With expectations of an interest rate hike by December pretty much built into the market, the question becomes whether the 10-year yield can push through strong technical resistance at 2.4% and perhaps test the year’s high around 2.6% in coming weeks.

Sector Rotation? Maybe Not: A few weeks ago there was a lot of talk on the Street about how sector rotation could mean less focus on info tech, which had easily led all sectors in performance the first two-thirds of the year. Now, it’s questionable if that hypothesis has come to pass. Info tech began to fall behind the S&P 500 (SPX) in performance about a month ago, and slid nearly 2% in the two weeks before Sept. 25. Since then, however, it’s gotten its feet back under itself and easily out-gained the SPX over the last five days. Monday brought more info tech strength, with the sector coming in second on the leader board. Year-to-date, info tech is up nearly 28%, compared with about 14% for the SPX. Could sector rotation still become a factor the coming months? Sure. Having said that, however, tech has proven very resilient, recovering from several momentary dips this year as investor sentiment remains bullish.

Speaking of Strength: Though info tech gained ground over the last week, some old-fashioned sub-sectors led all comers. This included better than 6% gains for auto manufacturers and airlines during the week ended Oct. 6, and distillers and vintners rose more than 4%. It was a rough week for motorcycle manufacturers, however, as those stocks lost some of their zoom and fell more than 4%. The big gains in autos and airlines brings our focus to the Dow Jones Transportation Average ($DJT), sometimes thought of as an indicator of overall economic strength. The DJT edged downward over the last few days after hitting an all-time high last month. Another investment some see as a derivative for the economy, however, has been moving up. Copper climbed above $3 a pound amid concerns about tightening supplies and hopes for improved Chinese demand.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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