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Market Update

Tick, Tick, Tick: Two Trading Days Left in 2017; Markets Higher Early On

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December 28, 2017

(NOTE TO READERS: JJ Kinahan is traveling today, so the following is a guest Market Update column written by Shawn Cruz, Senior Specialist, Trader Group at TD Ameritrade).

(Thursday Market Open) It might be another day of thin trading in the markets if the early indications hold out. All three major benchmarks ticked up slightly as investors are counting down the last two trading days in 2017.

There’s a handful of economic reports out today that range from weekly jobless claims to data on advance trade in goods from last month to the Chicago Purchasing Managers Index. Jobless claims remained unchanged at 245,000 in the week ended Dec. 16, according to the Labor Department. Applications for unemployment benefits have been below 300,000 for more than two years, a statistic that’s generally considered a sign of a healthy labor market.  

A rocky start to Wednesday’s session ended in positive territory, but just barely amid low volume. There appeared to be few catalysts to help nudge the markets in either direction. The Dow Jones Industrials ($DJI) was the biggest gainer with only 28 points to the upside, or 0.11%. The S&P 500 (SPX) tiptoed by two points into the green, up 0.08%, while the Nasdaq Composite (COMP) added three points, or 0.04%.

That’s not necessarily unusual for a session with low volume, which tends to be characteristic of this in-between-holidays week. Investors have typically shied away from making big bets with only a few trading days left in the year and ahead of a long weekend.

Even still, the major indexes managed to avoid a three-day skid and are on track in early trading to post another month in positive territory. If that happens, it could mark the first time in history that global stocks have risen every month in one year, according to MarketWatch, citing the MSCI All-Country World Index.

In a reversal from Tuesday’s rally, retail stocks were mostly pulled down Wednesday. Why? Some market analysts speculated that investors might have been taking profits off the table before the year ended. Since bottoming in late August, the S&P Retail Index (XRT) has advanced more than 19%, with some individual stocks gaining as much as 30% to 40% in value. (See below.) The Dow, ahead of today’s trading, is up better than 25% while the SPX is logging a near-20% advance.  

Oil prices eased back Wednesday after tapping a two-and-a-half-year high the day before. A pipeline explosion in Libya could have led to Tuesday’s jolt; expectations are that the damage could be mended as soon as next week, according to some market analysts. Per-barrel prices for West Texas Intermediate (/CL), the U.S. benchmark, closed at $59.61.

Oil prices, which were trending lower in the early going, might be impacted by yesterday’s report from the American Petroleum Institute. After the bell, API said that U.S. crude supplies fell by 6 million barrels, higher than the 3.5-million-barrel decline forecast. The government’s Energy Information Administration is expected to release its more closely watched inventory report later today.

Treasury yields retracted again Wednesday, with the 10-year yield closing at 2.412% while the two-year yield settled at 1.899%. It might be interesting to keep an eye on where the yields finish the year. At this point, it looks like the 10-year yield might close the year out about where it started, which was at 2.44%. In the early going, both Treasury note yields were modestly higher.

XRT comparison chart

FIGURE 1: RETAIL'S ROCKY ROAD.

Retail stocks participated in a December rally as consumers snatched up merchandise and gift cards ahead of the holidays. Shares of the XRT (in green and red) rallied earlier this week, then pulled back. The XRT is up more than 19% since bottoming in late August. On the year, the XRT is higher by less than 3% while the $DJI (in purple) is up by nearly 25% and the SPX (in blue) has gained more than 19% ahead of today’s trading. Data sources: CME Group, Standard & Poor’s. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

The VIX’ Crazy Year. The CBOE Volatility Index (VIX), what Wall Street refers to as its “fear gauge,” has logged an unusually high number of lows this year as the markets have marched to one record high after another. It dipped below 9% Wednesday, but finished the session up a bit to 10.47%. Nicholas Colas, co-founder of DataTrek Research, told MarketWatch that December is historically when the VIX hits its lows for the year. “That may not happen this year—the November 2017 (closing) lows were 9.1—but if history is any guide (and we think it is) then U.S. stocks are in good shape going into year-end.”

The VIX has lost more than 38% of its value since hitting a 52-week high in mid August, and is trading at the 10%-11% range, which is less than half its long-term average and about 14.6% below its levels a year ago. Of the 56 lowest closing levels since the VIX was launched in 1990, 47 of them occurred this year, according to DataTrek.

Are Consumers Losing Confidence? Consumer confidence, as tracked by the Conference Board, dipped to 122.1 in December after hitting a 17-year high the month before. Consumers were less confident about their outlook for jobs but still sure about “present” conditions, according to the report.

The fallback, at least in part, might be tied to the uncertainty surrounding the tax reform bill, which was still in limbo at the survey’s Dec. 15 cutoff date, according to Wells Fargo’s Economic Group. “While the drop in expectations is noteworthy, it may not be all that meaningful,” Wells Fargo said in a note to clients. “Expectations are extremely volatile and have rarely risen much higher than they were in November. Even at their lower December level, expectations for future business conditions remain relatively high.”

Another Good Year for Earnings? That’s the word from Sam Stovall, chief investment strategist at CFRA Research, who is projecting that the tax cuts could boost the trajectory of 2018 earnings growth expectations. Earnings among SPX components are forecasted to climb 12.3% next year, according to S&P Capital IQ consensus estimates, compared with the 11.2% gain anticipated for this year.

Additionally, according to Stovall, nine of the SPX’s 11 sectors have already seen boosts to forward earnings per share estimates, led by the energy, financials, and information technology sectors, which each saw upward adjustments from 6.7% to 8.1%. The weakest gains—1% or less—are projected for the materials and real estate groups, while declines are expected for health care and utilities, Stovall added. Stay tuned.

Good Trading,
Shawn

Economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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