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Stock Market Update: 01/04/2017

Stock Market Update excerpt from The Sevens Report.  Stocks surged to start the new year as a resumption of the Q4 “Trump/Reflation” trade, along with strong economic data sent stocks moderately higher to start the year. The S&P 500 rose 0.85%.

Stocks were higher from the outset Tuesday in part because they needed to play catch up to foreign markets, which rose on Monday while the US was closed. But, even without the foreign tailwind, US stocks would have  been higher Tuesday as there was a clear resumption of what outperformed in Q4. Cyclical stocks, the dollar and oil were higher while bonds were lower. That “reflation” trade accelerated following the open after strong December ISM Manufacturing data.

Stock Market UpdateMarkets lost a bit of momentum midday as politics interjected into yesterday’s trade (a theme we should all get used to in 2017). Trump’s tweet about GM (he mentioned border taxes) helped stoke some worries about trade issues for 2017 (although the announcement that Ford was keeping a plant in the US was met positively).  The Stock Market drifted lower on general digestion, and hit the lows for the day up just 7 points in the S&P 500. However, stocks bounced off intraday support at 2245 and rallied during the final 30 minutes to finish with solid gains.

Trading Color

Volumes and activity still muted yesterday, and while certain sectors did mimic Q4 performance (cyclicals did outperform), it wasn’t overall compelling outperformance. The major indices all finished with similar gains (there was no Russell 2000 or Nasdaq outperformance).

From a sector standpoint, there was cyclical outperformance as financials (XLF) and energy (XLE) both rallied more than 1% while utilities dipped 0.25%. However, it wasn’t a true out-of-safety, into-cyclicals rotation, as consumer staples had a decent day, up 0.40%, and REITs rose 1.33%. Finally, healthcare traded well to start the year, with XLV up 1.3%. The sector remains one of my contrarian ideas for 2016 due to negative sentiment and overblown political fears.

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S&P 500 Chart

Stocks spent virtually all of Thursday near unchanged in quiet holiday-like trade, as markets ignored economic data and geopolitical news (Russian sanctions). The S&P 500 dipped a slight 0.03%.

The S&P 500 pulled back for a second day yesterday but importantly held our initial support level at 2246 mentioned on pg. 5 of the Sevens Report.

As was to be expected, trading was very quiet yesterday as the S&P 500 moved in just a 10-point range peak to trough. There were multiple economic reports out yesterday morning and they were mixed, but markets aren’t worried about economic data this week, and stocks opened slightly higher initially on a bounce back from Wednesday’s weakness. That initial rally lasted only 60 minutes, and shortly after 10:30 a.m. stocks were negative once again.  View the S&P Chart below.

s&p-500-chart

S&P Chart

There was no real catalyst for the selling, and instead it was just a continuation of the profit taking we saw on Wednesday. Stocks continued to drift lower in quiet trade trough lunch time, and the S&P 500 did make fresh two-week intraday lows.

Unlike Wednesday, the selling dissipated below 2245 and stocks traded sideways for the remainder of the afternoon.

News of the Russian sanctions was the only notable headline in the afternoon, but those were more targeted at individuals and won’t have any real economic implications, so the markets largely ignored them.  As mentioned, given the looming administration change, we don’t see poor Russian/US relations as a major macro influence in 2017 as they will likely improve in early Q1 ‘17.  Stocks closed quietly with slight losses.

Trading Color

On Thursday, there was clear profit taking in the “out of safety/into cyclicals” trade that’s outperformed since the election, as cyclical sectors badly underperformed safety and higher-yielding sectors.

Of the nine SPDRs we track only three were down yesterday: Financials/XLF (-0.75%), energy/XLE (-0.37%), and consumer discretionary/XLY (-0.13%). Banks also were down more than 1%.

Conversely, of the six SPDRS that were up, utilities/XLU outperformed, rising 1.4% while consumer staples/XLP rose 0.5%.  Most of the other sectors were little changed.

Given the sector laggards yesterday were the best performers since the election, and the outperformers were the sectors that have fared the worst since the election, it’s not hard to determine we’re seeing some profit taking in that trade.

Given how elevated expectations are for growth in early 2017, continuation of a short-term reversal in the out of safety/into cyclicals trade may well continue in early 2017, although longer term the outlook for bond proxy sectors like utilities and REITs is still challenging. Meanwhile, the outlook for cyclicals/value stocks is more attractive. Point being, the longer-term trend is still towards cyclical outperformance over income-oriented sectors like utilities and REITs.

Finally, continuing the week-long trend, gold and gold stocks surged yesterday with GDX rallying more than 6% mostly on short covering, but also on gold strength. If we see a short-term pullback in the dollar to start 2017, gold and gold stocks will benefit the most and may be of interest for those with a trading bent.

 

 

 

Stock Market Update: 12/28/16

stock market update

Here is an excerpt Stock Market Update from The Sevens Report.  Stocks rallied in quiet trade to start the final week of the year yesterday, as the Nasdaq reached a new all-time high. The S&P 500 gained 0.22% on the day.

Futures were flat early yesterday, but once the bell rang stocks jumped higher out of the gate thanks to economic data that showed an increase in home prices and a spike in consumer confidence.

But with attendance so low between Christmas and New Year’s holidays, and as Hanukah continues, the rally failed to gain any traction and the benchmark averages began to slip from early highs into the lunch hour.

News flow remained extremely quiet, volumes were down and attendance was thin, which allowed stocks to continue to bleed lower into the afternoon until they closed basically in the middle of the day’s trading range.

Technically speaking, the Nasdaq composite hit new highs; however, Dow 20,000 remained elusive for another day despite a run to within 20 points of the psychologically significant level.

Trading Color

Yesterday was slow from both a macro and micro standpoint, as both index and sector movements could best be characterized as drifts. The Russell 2000 and Nasdaq both outperformed the S&P 500, but only slightly, up 0.5% to the S&P 500’s 0.22%.

Internally, the rally was broad as all nine SPDRs we track finished higher, although none came close to rising more than 1%. Basic materials and tech were the two outperformers, up 0.5% and 0.45%, respectively. Materials

were up on the general lift in the commodity complex, while tech rose thanks to preliminary indications of strong holiday sales. AMZN in particular rallied more than 1.5% on reports of strong Amazon branded product sales (Alexa in particular). NFLX also was nearly 2% higher on news of strong holiday subscription sales.

More broadly, there was slight cyclical outperformance yesterday as consumer staples and utilities finished basically unchanged on the day while the aforementioned materials and tech sectors outperformed. But again, the moves were minimal and can be chalked up to random trading noise.

Bottom line, Tuesday was a quiet day in the markets, and with a barren calendar looming for the remainder of the week we can expect more of the same going forward.

Bottom Line: 4 Events To Watch in Q1 2017

In Monday’s issue, I pointed out four policy errors that could adversely affect markets in 2017. With that in mind, I wanted to point out specific events and dates that will give us color on those potential policy errors.

To a point, this is a preliminary catalyst list for Q1 2017, although obviously we will be adding to it as the weeks go by. As we start 2017, though, these are four key dates/events to watch.

1) Trump’s Policies – Will They Meet Very Lofty Expectations (Jan. 20)? Don’t be surprised if we see a “Buy the president-elect, sell the president” market reaction in 2017, as investors could book profits once Trump assumes office. That’s because the single biggest question for markets is whether the actual policies put forward by the new government will meet the very lofty market expectations, and there is serious risk of a disappointment.

We’ll be focused on leading indicators that will tell us whether these policies look likely, because if they don’t, stocks could drop sharply after the inauguration.

2) Fed Meeting (Jan. 31). It’s not a coincidence the hawkish December Fed meeting basically arrested the post-election rally. By the time the January Fed meeting occurs, we’ll have a lot more information on inflation and growth, and it’s entirely possible that the Fed signals another rate hike is coming. If that happens, the 10-year Treasury yield could surge to 3%, and that will hit stocks, regardless of what Trump is doing.

3) Semi-Annual Currency Report (March/April). What if Trump starts a trade war with China? I’m not saying it’s going to happen, but the market is so enamored with potential pro-growth policies that it’s largely ignoring the fact that Trump wants to take a hardline stance on trade. Last week, Trump appointed Peter Navarro, author of the book Death by China, to head a new trade council.

If the Treasury Department labels China a currency manipulator in this Currency Report, automatic tariffs are imposed and a trade conflict could easily ensue.

4) Fed Meeting, (March 15). At this point, we’ll know a lot more about the policies coming out of Washington, and if we’re going to see a lot more fiscal stimulus, then Yellen herself has said the Fed will react with higher rates to prevent inflation.

This March Fed meeting is the first of 2017 with an updated “dot plot,” so if the Fed wants to communicate more hikes in 2017, this is the first opportunity to do so. That will send the dollar and bond yields sharply higher, which will be a headwind on stocks.