Tom Essaye, the founder and president of Sevens Report Research in Palm Beach Gardens, Florida, says last weekend’s G-20 finance ministers and central bank governors meeting produced no progress on U.S.-China trade, and there are no…Click here to read the full article.
What’s in Today’s Report:
- Never Ever Fight the Fed
Stock futures, the dollar, and Treasuries are all little changed this morning while international markets were mixed overnight as investors focus on the Fed today.
There were no market moving economic reports o/n although rising trade tensions between the U.S. and China and several bad earnings reports citing slowing global trade (especially FDX) have become a growing headwind for risk assets since yesterday’s close.
With focus on the Fed this afternoon, it is likely to be a quiet morning with price action dictated by positioning into the announcement. The one release that could move markets this morning is the Weekly EIA Inventory Report which will print at 10:30 a.m. ET (E: +800K bbls).
Turning to the Fed, the FOMC Meeting Announcement and Forecasts will hit at 2:00 p.m. ET and then Fed Chair Powell’s Press Conference is scheduled for 2:30 p.m. ET.
To recap, the two key developments to look for from the Fed are balance sheet reductions and fewer rate hikes in 2019 (the dot plot). The market’s expectations of a very dovish Fed are extremely high right now, so there is not much room for error by the FOMC today and any sort of disappointment could spark a wave of volatility across asset classes.
What’s in Today’s Report:
- Are Commodities Bottoming?
It was another very quiet August night in the markets as US futures are flat this morning while European shares are slightly lower and Asian indexes continued to advance modestly with trade negotiations still the major focus.
The German GfK Consumer Climate edged down 0.1 to 10.5 vs. (E) 10.6 in September. Sentiment in Europe is not quite as strong as the US, but it remains mostly upbeat and strong enough for continued equity gains in the medium term.
Oil prices are slightly higher this morning despite the API reporting a slight build (+38K bbls) in crude stocks vs. (E) -1M bbls ahead of the weekly EIA report this morning.
Today, trade will continue to dominate the headlines but there are two economic reports to watch: GDP (E: 4.0%) and Pending Home Sales (E: 0.0%). There are no Fed officials or other central bank events so from a catalyst standpoint, it will likely be another quiet session.
The dollar has been a good inverse proxy for trade sentiment recently so if we see a continued pullback, stocks can continue to flirt with new highs, however any material rebound in the dollar index today will likely pressure US shares (the greenback is slightly higher so far).
Finally, I’ll be joining Liz Claman on Fox Business’s “Countdown to the Closing Bell” this afternoon at 3:00 p.m. ET to discuss the outlook for the markets and opportunities for investors as we head into the final four months of the year.
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Commodities were mostly higher yesterday as gold continued to benefit from risk-off money flows and a weaker dollar, which also propped up copper futures. Meanwhile, crude oil bucked the trend and gave back most of Friday’s rally. The benchmark commodity index ETF, DBC, fell 1.21% thanks to he declines in energy futures.
Yesterday’s pullback in oil was a textbook retracement of Friday’s very “squeezy” rally. Shorts that were run out of the market late last week repositioned yesterday morning, which influenced the heavy trading that was largely dictated by technicals. WTI futures fell 2.22% on the day.
Friday’s big rally essentially created a “gap” in the market as the bulk of the move occurred in less than an hour, and on very light volume. That set things up for a reversal, and because newswires were very quiet yesterday, algos and technical traders took control of the market and largely “filled the gap” as we ended the day near where Friday’s rally began.
As far as the longer-term trend in oil goes, yesterday’s session was rather insignificant. The market remains in a broad, sideways range with the $50 mark continuing to act as a stubborn resistance level.
Fundamentally, the OPEC/NOPEC meeting in Vienna was anticlimactic. The previous extraordinary meeting was a non-event as well, and the market is beginning to shrug off OPEC-related headlines more and more as the cartel has been largely ineffective in recent months.
The oil market remain bearish for now, as US production continues to grind higher and OPEC has so far failed at trying to offer material support to the market through their policy decisions. Looking ahead, the $50 mark in WTI is a very important technical and psychological resistance level that will not likely be violated in the absence of a legitimate bullish catalyst.
Natural gas rallied 2.42% yesterday as the market continues to show signs of life in the late summer. There was no real catalyst for the move yesterday, but nat gas is continuing to show signs of putting a bottom in and forming support in
the $2.80-$2.90 area.
Looking ahead, the bulls have their sights set on reclaiming the $3.00 mark, and a close above would be a bullish development on the charts. That would match the supply side fundamentals showing a potential long-term shift of supply levels turning lower.
In the metals, the weaker dollar was the primary influence on the market yesterday, as gold rallied 0.39% and copper rallied 1.36%. Gold continued to catch a bid from the cautious feel in the market after last week’s sharp pullback in stocks, but futures failed to close at a new high and above the $1300 mark despite rallying through the important resistance level briefly in Friday trade.
For now, we remain cautious on gold as the technical outlook is rather cloudy. If, however, bond yields break- down further (more on that in the currencies and bonds section) then gold will surely have the support to break out through $1300 and begin a new uptrend.
Copper continued to grind higher yesterday with futures hitting the highest level since late 2014. With the price action in gold and the bond market both flashing a warning sign for risk assets, copper continues to flash a positive signal for the global economy.
Looking ahead, the path of least resistance is still higher for copper, which is a positive for the global economic outlook and risk assets. Yet, the biggest thing to watch with regard to the rally is the dollar, as a reversal back higher in the buck could significantly damage the uptrend in all metals.
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Why the Monthly OPEC Report Was Bearish Oil
An excerpt from today’s Sevens Report—get a free 2-week trial of the report with no commitments.
Oil remains the big story, as its early morning sell-off to multi-month lows prompted a pullback in stock futures, and ultimately the major US equity indices opened lower. WTI futures finished the day down 1.43%, only slightly above where they opened ahead of the late-November OPEC meeting, where members agreed to collectively cut output.
OPEC released its monthly oil market report yesterday, and the big catalyst in the data was a self-reported increase in February oil production by the de facto leader of the cartel, Saudi Arabia. According to direct communication, Saudi Arabian oil output rose 263.3K b/d to 10.01M b/d. The dip below the psychological 10M mark in early 2017 helped futures stay afloat above $50, as Saudi Arabia was showing their commitment to price support by cutting below their allotted quota (which in fairness they are still below). While data gathered by secondary sources showed another drop of 68.1K b/d to 9.80M b/d in Saudi production, the markets focused on the bearish direct communication data, as it suggests that Saudi Arabia’s commitment to oil cuts may be becoming exhausted.
Another notable takeaway from the release was that OPEC only projects that US oil supply will grow at 340K b/d in 2017. Still, at the current pace (which we will admit does not seem sustainable through the medium term), US producers have already brought 318K b/d online in 2017. Today’s EIA report very well could show an increase through that annual expected rise of 340K b/d.
Bottom line, the rapid increase in US production in recent months has been the biggest long-term headwind for the oil market, as it has offset the efforts of the global production cut agreement while simultaneously causing angst within the ranks of OPEC (namely the Saudis) as they start to see market share slip away.
Without the full commitment of Saudi Arabia to the global production cut agreement, the deal loses a lot of its luster, as they are the key player who has always taken on the bulk of the cuts and taken the near-term hit in market share for the longer-term benefit of the entire cartel. Meanwhile, “compliance cheating” by other members is historically high, and the chances that compliance remains as high as it is right now if Saudi Arabia begins to increase production are essentially zero.
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How Far Could Stocks Go?
Stocks have screamed to all-time highs in recent weeks, and with new highs always comes the question of how far could stocks go? We like to regularly offer fundamental valuation updates as we did two weeks ago, but it is also important to outline what the charts are telling us as far as upside targets and key support levels for near-term price movements.
In the wake of the election there were a lot of very important technical developments. The two most notable were the shift from a bear market signal to a bull market signal in Dow Theory when the S&P was trading at 2165, and confirmation of that signal when the S&P broke to all-time highs November 21.
Currently, both the technical trend and upside momentum of the market continue to suggest the path of least resistance is higher for the medium term. That is the case in spite of the fact that there are countless fundamental uncertainties, most important are related to politics and fiscal policy.
In a situation like this, where technicals are largely divergent from fundamentals, many financial professionals and investors look for some direction as to how far stocks could rally from current levels and where a pullback would most likely pause if not reverse. So, we put together a few upside targets as well as downside support levels to watch for the S&P 500.
In a quick review, when any issue (stock, bond, commodity or currency) is trading in never-before-seen territory, there are only two ways to come up with targets in the direction of the new highs—measured moves, and likely areas of interest for options traders. The latter is relatively easy to figure out, as options volumes generally cluster around the big round numbers (in this case 2350 and 2400).
Tracking Measured Moves.
Measured moves, on the other hand, are a little more scientific. The idea behind a measured move is that if the market moved a certain distance against the dominant trend, it will more than likely move at least that far back in favor of the trend once it resumes.
- Our next upside target is actually a combination of two measured moves and a likely area of interest for S&P option traders: 2450. On the daily chart, a measured move can be calculated from the late-October lows (2084) to the late-December digestion area (2271), which results in a measured move to 2458 in the S&P from current levels. In a supporting fashion, a measured move on the weekly chart can be calculated from the previous S&P highs of 2126 to the February ’16 lows of 1810. That results in a target of 2442.
- This gives us an ultimate target window of 2442-2458, which encompasses a likely options trader target of 2450.
- Bottom line, we are not suggesting that this bull market will end in the mid 2400s; however, for those looking to take profits, you likely will not be alone in doing so in that window around the 2450.
Turning to support levels, the February melt-up in stocks has left a large “volume gap” on the chart, which basically means stocks sprinted from around 2300 to 2360. Because of the velocity of that move higher, there were not many logical support levels created in the month of February. And a set up like that raises the odds that there could be a swift move back through that area.
- There is an initial and minor area of support around 2343, where there was minor consolidation on February 16. This area will at least be noticed by technical traders and volume-driven algorithms.
Secondary and more formidable support lies near the previous set of new all-time highs established in December in the band between 2270 and 2280. Here there will be buyer support from both bulls who missed out on the breakout as well as faster-money short sellers looking to book profits.
- Our final support zone is derived from a weekly timeframe, and again at a previous all-time high of 2100, where the most consolidation occurred since the tech sell-off finally ended in 2002.
These levels are meant to provide you with a general idea of the most important technical levels on either side of the broader stock market right now. This information, we have heard in the past from advisor subscribers, is very useful in conversations with clients.
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