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Valuation Support in the S&P (Updated)

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What’s in Today’s Report:

  • How Intense Was the Selling Yesterday?
  • Valuation Support and Technical Update: S&P 500

Stock futures enjoyed a “relief rally” overnight but have since returned to the flat mark as yields continue to bleed lower amid coronavirus fears however there were no materially negative developments regarding the outbreak since yesterday’s close.

There were no market-moving economic reports overnight.

While investor focus will continue to be on the COVID-19 outbreak, there are a handful of additional catalysts on the calendar today that could move markets.

First, there are four economic reports to watch: S&P CoreLogic Case-Shiller HPI (E: 0.5%), FHFA House Price Index (E: 0.3%), Consumer Confidence (E: 132.5), and the Richmond Fed Manufacturing Index (E: 13). Two Fed officials are also scheduled to speak during market hours: Kaplan (9:45 a.m. ET) and Clarida (3:00 p.m. ET).

Finally, the U.S. Treasury will hold a 2-Yr Note Auction at 1:00 p.m. ET. This could be an important event to watch as the results of the auction could shed further light on the market’s expectations for rate cuts in the months ahead (which have risen significantly this week) and potentially compress the 10s-2s yield curve spread to fresh multi-month lows which could further stoke fears of a global slowdown.

Pullback – Why Stocks Are Down 2%

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What’s in Today’s Report:

  • Pullback – Why Stocks Are Dropping and Is This the Start of a Correction?
  • Weekly Market Preview:  Focus on politics and growth.
  • Weekly Economic Cheat Sheet:  Durable Goods and inflation will be in focus this week.

Futures are down more than 2% as an increase in COVID 19 cases in new places (South Korea and Italy), combined with a big Sanders victory in the Nevada Caucus are adding to the growth concerns following Friday’s soft flash PMI.

Politically, Sanders won the Nevada Caucus with more than 40% of the vote, implying his base is bigger than thought, meaning he might be a more formidable opponent to Trump than what the market was previously thinking.

Economic data was sparse as the German Ifo Business Expectations survey beat estimates (93.4 vs. (E ) 92.1), but that number obviously isn’t moving markets.

Today there are no economic reports and just one Fed speaker,  Mester (3:00 p.m. ET), so focus will be on any COVID 19 updates (and anything that hints at a slowing of transmission will help stocks bounce).  From a fundamental support standpoint, 3,219 is 18.5X next year’s earnings so we’ll be interested to see if that can hold in the near term.

What Caused Stocks to Drop (And Recover?)

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What’s in Today’s Report:

  • Why Stocks Dropped and Recovered Yesterday
  • Yield Curve Update:  Why is 10’s-2’s At A Multi-Month Lows?

Apologies for the slightly delayed send, it was user error (I typed in the wrong address at 7:00 a.m. this morning).

Futures are modestly lower despite better than expected economic data, as markets digest yesterday’s decline.

Global Manufacturing PMIs were better than expected in Feb as the EU PMI rose to 49.1 vs. (E) 47.5, while the UK PMI increased to 51.9 vs. (E) 49.6 and the solid data is helping to reduce worries about COVID-19’s impact on the global economy.

COVID-19 headlines were slightly negative overnight as cases rose in China, Japan and South Korea and really the spread of the disease in Asia is the focus of the market right now.  Any headlines that imply the spread is accelerating in Asia will hit sentiment.

Today the key number is the February Flash Manufacturing PMI (E: 51.4), and if that beats expectations that will further reduce concern that COVID-19 virus will be a major headwind on U.S. economic growth (and that will be a fundamental positive for stocks).   We also get Existing Home Sales (E: 5.45M) and have four Fed speakers today:  Bostic & Brainard (10:00 a.m. ET), Clarida & Mester (1:30 p.m. ET).

How to Recognize a Blow Off Top

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Good Morning,

 

Today’s Report is attached as a PDF.

What’s in Today’s Report:

  • How To Recognize a Blow Off Top
  • Don’t Sleep on Inflation?  (PPI Just Hit a Multi-Year High)

Futures are slightly lower as markets digest yesterday’s rally following a mostly quiet night of news.

News on COVID-19 was mixed as China did another “diagnostic change” and the number of COVID 19 cases fell, while in South Korea the number of infections rose.  But, markets still view the transmission rate of the disease  as peaking (and this assumption is what’s driving markets higher – and it’s also the greatest source of near term risk for stocks if the situation changes).

Economic data was sparse but German GfK Consumer Climate and British Retail Sales both beat estimates, although neither is moving markets.

Today there are two notable economic reports, Jobless Claims (E: 211K) and Philly Fed (E: 12.0), and as remains the case, the stronger the data, the better (markets will especially be looking for confirmation of the strong Empire report from Philly Fed).   There is also one Fed speaker, Barkin at 1:20 p.m. ET, but he shouldn’t move markets.

Please email info@sevensreport.com if you have any trouble downloading today’s Report.

Tom Essaye Quoted in CNBC on February 19, 2020

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The lack of a guidance update can mean “mean the company doesn’t have much of an idea how big…” said Tom Essaye, co-founder of The Sevens Report. He noted, however, the market will look through any earnings disruption as long as it is limited to the first quarter of 2020. Click here to read the full article.

Earnings Still Matter

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What’s in Today’s Report:

  • Earnings Still Matter: What Apple’s Guidance Cut Means for Markets

Stock futures are higher with global shares this morning as new cases of the coronavirus in China continue to fall while hopes for stimulus support tentative risk-on money flows.

China’s government is reportedly connecting IT companies with manufacturing facilities to help supply chain operations return to normal as soon as possible while speculation for more stimulus measures continues to rise.

Looking into today’s session, there are two economic reports to watch: Housing Starts (E: 1.420M) and PPI (E: 0.1%), and a slew of potential Fed catalysts.

The main focus will be the FOMC Meeting Minutes due out at 2:00 p.m. ET however there are also multiple Fed officials schedule to speak: Bostic (8:10 a.m. ET), Mester (8:30 a.m. ET), Kashkari (11:45 a.m. ET), Kaplan (1:30 p.m. ET), and Barkin (4: 30 p.m. ET).

The big risk for the market is any sort of hawkish surprise as investors have priced in a consistently dovish Fed for the foreseeable future and that remains one of the primary support pillars for stocks trading at current multiples.

Tom Essaye Interviewed with Yahoo Finance’s Brian Sozzi on February 11, 2020

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“In the short-term, there are two things holding this market up. One, expectations of a dovish Fed. And it’s the expectation of a global economic rebound. If either one of those come into doubt, the market is going to…” Sevens Report Research founder Tom Essaye said on Yahoo Finance’s The First Trade. Click here to watch the full video.

Tom Essaye Quoted in CNBC on February 11, 2020

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“It’s still an opportunity for a surprise, and given an expected perma-dovish Fed is one of the two pillars of this rally, we need to watch Powell’s…” wrote Tom Essaye, editor of the Sevens Report. Click here to read the full article.

Jerome Powell

What Outperforms If Stocks Trade With a 20X Multiple?

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What’s in Today’s Report:

  • What Outperforms If Stocks Trade With a 20X Multiple?

Global equity markets are rallying as the spread of the coronavirus continues to slow while statistics show that Sanders victory in the New Hampshire primary increases the odds of a “market-friendly” Trump reelection in 2020.

Eurozone Industrial Production was soft in December with the headline falling -2.1% vs. (E) -1.8% but optimism for a 2020 economic rebound is offsetting the poor data point.

There are no notable economic reports today however there are two Fed speakers ahead of the bell: Harker (8:30 a.m. ET) and Daly ( 9:00 a.m. ET), while Powell will testify before Congress for a second day (10:00 a.m. ET).

Outside of the Fed speakers today, the Treasury will hold a 10-Yr Note auction at 1:00 p.m. ET and as has been the case recently, any sizeable moves in the bond market, especially that impact the yield curve, could influence stock trading in the afternoon.

Commodities Update and Powell Preview

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What’s in Today’s Report:

  • Powell Testimony Preview
  • Commodity Bears and a Gold Bull

Stock futures and most international equity markets are higher today as the spread of the coronavirus reportedly slowed to a two week low in China and investors looked ahead to Powell’s testimony before Congress today.

Economically, the NFIB Small Business Optimism Index rose 1.6 points to 104.3 vs. (E) 103.2 in January underscoring continued positive sentiment among U.S. business owners.

Today, there is just one economic report: JOLTS (E: 6.775M) which will leave investors primarily focused on Powell’s Testimony before the House Financial Services Committee at 10:00 a.m. ET and it will be important for the markets that he remains decidedly dovish with his commentary.

In addition to Powell, both Quarles (12:15 p.m. ET) and Bullard (1:30 p.m. ET) will speak in the early afternoon, Wall Street time.

Lastly, there is a 3-Yr Note Auction at 1:00 p.m. today and the results could affect the yield curve (specifically the 10s-2s) and as has been the case over the last 9 months, any significant moves in the curve could impact equity markets.