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Jump To 2-Year Highs Has Oil in Focus, But Trump Trip, SNAP, Jobs Also Eyed

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November 7, 2017

(Tuesday Market Open) After months of shying from the headlines, crude oil pushed through the noise Monday and stole some thunder from earnings season. Front-month U.S. oil futures climbed 3% yesterday to their highest close since 2015.

Oil walked back some gains early Tuesday and the stock market had a mixed feel. All three major indices set record highs yesterday for the 26th time year-to-date, putting them in record territory for the most simultaneous high closes in a calendar year.

Besides the oil rally, there’s not a great deal of news today from either an earnings or data standpoint. These are the days when anything that comes out could move the market, possibly including any news of President Trump’s Asia trip or new developments with the tax plan in Congress. A lack of news can push the market around a bit, so perhaps be careful of thin volumes and sudden moves.

Oil prices have been steadily climbing for a couple of months now, but Monday featured the kind of sharp daily rally we haven’t seen in a while. A couple factors seemed to play into the uptick, including political developments in Saudi Arabia that oil market analysts said could raise the chance of OPEC’s production caps being extended.

Oil’s rally also coincides with improved economic data and earnings coming out of the U.S., along with some signs of recovery in Europe. The European Central Bank and the Bank of England have both taken steps recently to tighten the money supply, a sign that economies there are perking up and perhaps causing more oil demand. Meanwhile, U.S. shale drillers cut back on their rigs last week, a surprising development considering the recent rise in the commodity price.

It’s a bit early to start talking about possible long-term impacts of higher oil prices (see below), partly because it’s unclear if oil can even keep these gains for long. It’s been years since oil was able to remain above $55 for lengthy periods. However, the fact that oil gained ground after pushing above $50, rather than giving back as it had done after reaching that mark over the last two years or so, could signal more staying power for this rally. We’ll have to wait and see.

Looking beyond oil, President Trump heads to China Wednesday for meetings with Chinese leader Xi Jinping. It’s unclear what might result, but investors are likely to have their ears perked for news because China is such a key trade partner. Any developments on North Korea strategies also bear watching, as that geopolitical situation remains a stress point for the markets.

Economic data are sparse today, but the Job Openings and Labor Turnover Survey (JOLTS) might be worth checking after solid gains in last week’s payrolls data.

Fed speakers head back to the lecterns after their recent meeting, most prominently with Fed Chair Janet Yellen scheduled to make “acceptance remarks” at 2:30 p.m. ET today at an award presentation in Washington, D.C. These are Yellen’s first public remarks since the news last week that she’ll be replaced next year by Jerome Powell.

Though earnings season is 75% over, plenty of reports remain on the calendar. That includes Snapchat parent Snap (SNAP) after the close today. Daily active user growth and the company’s efforts to monetize its product, especially through advertising effectiveness, could be near top of mind among investors awaiting the company’s Q3 results.

The major day for earnings this week is arguably Thursday, which brings Disney (DIS) and Macy’s (M). One thing to consider about DIS ahead of time is that content really is king these days, and DIS has become an intergenerational content portal. With that in mind, it’s interesting to read Monday’s news — reported by numerous media outlets — that 21st Century Fox (FOXA) has been holding talks to sell most of the company to DIS. You never know if these things will go through, but if it does, DIS would have another movie studio under its wings, and products like the National Geographic Channel play right into DIS’s “wholesome” image. No one seems to be talking about the Fox end of things, but the deal might make sense for them, too, because they could focus on things they do well including business news and sports.

Earnings continue to impress, and some of the companies Monday that beat Wall Street analysts’ estimates included Cardinal Health (CAH), CVS Health (CVS), Sysco (SYY), and Michael Kors (KOR), representing a rather broad spectrum of industries. So far this season, 71% of S&P 500 companies have beaten analysts’ consensus EPS estimates and 65% have beaten analysts’ sales estimates, according to research firm CFRA. The firm raised its Q3 EPS growth estimate to 6.7%, and some analysts expect even higher growth.

Semiconductors — already one of the best-performing sectors over the last year — dominated the action on Monday, with the semiconductor index rising 2% at one point during the session after news of Broadcom (AVGO) offering $103 billion for Qualcomm (QCOM), which would be the biggest deal in tech history. Also Monday, Advanced Micro Devices (AMD, which had been pummeled recently, rallied on a report in The Wall Street Journal that AMD planned to partner with Intel (INTC) on a chip.

Crude Oil

FIGURE 1: WANT OIL AND SEMICONDUCTORS ON THAT SALAD?

Here’s a chart you wouldn’t normally see: Crude oil and semiconductor stocks (purple line). Why are they together here? Because both put on their rally caps the last two months after posting near-term bottoms back in August, and both were among Monday’s leading gainers. Though the two wouldn’t appear to have a lot in common from a fundamental standpoint, it could be indicative of a strong economy to see both gaining sharply at the same time. Data sources: Nasdaq, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Seeking Opportunity: TD Ameritrade clients continued to be net buyers during October, according to the October 2017 Investor Movement Index® that came out Monday. The IMXSM, which measures what TD Ameritrade clients are actually doing and how they’re positioned in the markets, hit a near-record high of 7.40, up from 7.14 in September. Some of the stocks TDA clients bought included semiconductor companies Nividia (NVDA) and Micron Technology (MU).

Continuing a trend from last month, TD Ameritrade clients were net buyers of Chinese stocks including Alibaba Group (BABA) and JD.com (JD). Additional popular names bought include General Electric Inc. (GE), Teva Pharmaceuticals Inc. (TEVA), Square Inc. (SQ) and Switch Inc. (SWCH). TDA clients also took profit in the energy sector, according to the report.

Overall, the report showed that TD Ameritrade clients have continued to be net buyers and seem to be putting their money where they see opportunity.

Debt Ceiling Still Looms: Although Congress and the president earlier this fall pushed the debt ceiling back a few months, that doesn’t mean the issue has gone away. Worries about the debt ceiling have brought volatility and sometimes weighed on the overall market in the past, so keep it in mind as another deadline approaches. Last week, the U.S. Treasury Department said Congress needs to take action on the debt ceiling by January.

“If Congress fails to increase or further suspend the debt limit by December 8, Treasury, as it has in the past, can take certain extraordinary measures to continue to finance the government on a temporary basis,” said a report from Monique Rollins, acting assistant secretary for financial markets. "Extraordinary measures will allow the government to continue to meet its obligations through January 2018. It is currently too early to provide a more precise forecast as to how long the extraordinary measures will last," the report added.

Reflections on Oil at 2-Year High: The more expensive oil prices to some extent reflect strength in the economy and could give the oil sector a lift. It’s an open question as to how high oil might get before it starts to act as a brake on economic growth or other sector gains. Still, it’s worth noting that the stock market had one of its best recent years in 2013, when crude oil spent much of the year above $90 a barrel. That’s not to say pricey oil is necessarily a good thing for stocks; only that the market has rallied in the past when crude was much higher than today.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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