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Trader’s Outlook for June 15, 2018: Bulls charge on next week, despite trade concerns?

Weekly Market Review:

It’s been a common theme this year but U.S. equity markets are once again selling off this morning due to concerns over a potential escalation of a trade war. Earlier this morning the U.S. announced a 25% tariff on $50B worth of Chinese imports and China said that it will retaliate with $50B of its own tariffs against the U.S. Investors have had a lot to chew on this week with a slightly more hawkish tone coming from the Fed on Wednesday, the ECB providing a more dovish tone on Thursday, and a slew of U.S. economic data that was highlighted by stronger inflation data and retail sales. However, market direction has mostly been sideways for the S&P 500 this week up until this morning’s sell off:   

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Probability of Fed Rate Hike (6/15/18):

As expected the Federal Open Market Committee (FOMC) hiked the federal funds rate 0.25% on Wednesday and Fed Chairman Jerome Powell carried a slightly more hawkish tone during his follow-up press conference. In short, the committee conveyed that it intends to raise rates four times this year instead of three (which puts the September and December FOMC meetings in play), but will ultimately raise rates the same number of times overall and maintained the longer-term fed funds rate projection of ~3.00%. In addition, Powell also said that there will be a press conference held after every FOMC meeting starting next January. The rate hike probabilities re-set following the commentary and as you can see there is currently an 84% chance that we’ll see another hike in September.

Current Probabilities:

Source: Used with permission of Bloomberg Finance L.P.

This Week’s Notable 52-week Highs:

Adobe Systems Inc. (ADBE - $4.84 to $253.26)

Advanced Micro Devices Inc. (AMD + $0.08 to $16.34)

Akamai Technologies Inc. (AKAM + $0.41 to $81.27)

Amazon.com Inc. (AMZN - $5.82 to $1,718.04)

Boston Scientific Corp. (BSX - $0.06 to $32.45)

Canada Goose Holdings Inc. (GOOS + $12.21 to $58.07)

Canadian Pacific Railway (CP + $0.74 to $195.05)

Decker’s Outdoor Corp. (DECK + $0.21 to $119.31)

Etsy Inc. (ETSY + $0.68 to $42.33)

Facebook Inc. (FB - $0.81 to $196.00)

Fossil Group Inc. (FOSL + $0.81 to $29.66)

Intuit Inc. (INTU - $0.34 to $208.74)

Illumina Inc. (ILMN - $2.41 to $287.75)

Lululemon Athletica Inc. (LULU + $2.21 to $128.09)

Las Vegas Sands Inc. (LVS - $0.95 to $79.66)

Netflix Inc. (NFLX + $4.26 to $397.11)

Nutanix Inc. (NTNX - $0.17 to $62.46)

NVIDIA Corp. (NVDA - $0.16 to $266.75)

RH Inc. (RH + $3.11 to $157.50)

Salesforce.com Inc. (CRM + $0.22 to $138.62)

Square Inc. (SQ + $0.11 to $64.00)

Sarepta Therapeutics Inc. (SRPT + $0.24 to $99.02)

Take Two Interactive Inc. (TTWO + $0.29 to $122.13)

Twitter Inc. (TWTR + $0.30 to $47.06)

Urban Outfitters Inc. (URBN + $0.30 to $46.29)

Veeva Systems Inc. (VEEV + $0.11 to $83.14)

Wayfair Inc. (W + $0.21 to $109.71)

Q1 Earnings Season

Q1 earnings season is essentially wrapped up and an impressive 81% beat analyst’s EPS estimates while 74% have beat on the top line. For reference, in Q4 78% of companies beat the EPS estimates and 76% beat the revenue estimates. Here are some of the remaining notable earnings reports that were released this week:

Ticker Symbol

Reported EPS

Consensus EPS Estimate

Difference

RH

$1.33

$1.02

+$0.31

PLAY

$1.04

$0.92

+$0.12

PVTL

-$0.10

-$0.13

+$0.03

HRB

$5.43

$5.27

+$0.16

KFY

$0.80

$0.70

+$0.10

TLRD

$0.50

$0.48

+$0.02

MIK

$0.39

$0.38

+$0.01

ADBE

$1.66

$1.54

+$0.12

JBL

$0.46

$0.44

+$0.02

FNSR

$0.05

$0.12

-$0.07

GOOS

$0.09

-$0.08

+$0.17

There are still a few high-profile names you might recognize that are set to report next week:

Monday:

Tuesday: ORCL, FDX

Wednesday: MU

Thursday: KR, DRI, RHT

Friday: KMX, BB

Volatility:

Although the potential for an escalating trade-war is a threat to global economic activity, you can get a sense of how concerned market participants appear to be by looking at this morning’s muted response in the VIX. The VIX hit a high of 13.16 earlier in the morning but is barely positive around the mid-day mark today, even with the SPX lower by roughly 0.5%. Contrast this with the market correction and 40+ VIX that we saw back in early February when the initial trade-war concerns were ignited and you could likely make the case that investors are being too complacent about the potential for an escalation. Admittedly, there were other factors that contributed to February’s VIX spike (such as heavy exposure on the “short vol” trade), but a VIX that is up only 1% on a day like today says a lot in my opinion:

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Technical Outlook:

S&P 500 Index ($SPX): The S&P 500 had been on a fairly nice run since May 29th when it tested its 50-day Simple Moving Average (SMA), but appears to be stalling out this week as it has run up against resistance around 2,790. The SPX uptrend is still intact and it’s encouraging to see the slope of the 50-day SMA turn back to the upside, but the near-term outlook (i.e. next week) for the SPX looks a little iffy. If the SPX can manage to break-out firmly above 2,790 then that would put the old time high (2,872) in play.

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

NASDAQ Composite ($COMPX): Technology has regained its leadership role as represented by the multiple new all-time highs that the NASDAQ has established over the past couple of weeks. Although the RSI on the NASDAQ is currently above 70 (which can signal an overbought status), there have been some slight periods of consolidation on the way up and this strong of a trend has a tendency to overshoot on the upside, so there’s nothing to be concerned about in the near-term in my mind.    

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Russell 2000 Index ($RUT): U.S. based small caps have also been attracting money flow and like the NASDAQ, the Russell has been setting fresh all-time highs over the past couple of weeks:

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

10-Year Treasury Yields ($TNX): The 10-year yield has been fairly stubborn this week, even with hotter-than-expected inflation data and a slightly more hawkish tone from the Fed. The likely explanation for the subdued response is that bond traders are keeping the 10-year around the longer-term 3.0% fed funds rate projection. On the contrary, 2-year treasury yields touched the highest levels since 2008 on Wednesday which is flattening the yield curve and explains the underperformance in the financial sector over the past couple of months.

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

U.S. Dollar ($USDUPX): A strong currency is not necessarily a bad thing for U.S. equity markets, but if it rises too quickly then this will likely get some press and impact multi-nationals:

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Economic Recap:

This week’s batch of data was robust, highlighted by hotter-than-expected inflation and strong retail sales. Let’s walk through the individual data points:

Better than Consensus Estimates:

  • Consumer Price Index (CPI): 0.2% vs. 0.3% est
  • Initial Claims: 218K vs. 223K est
  • Retail Sales: 0.8% vs. 0.4% est
  • Retail Sales (ex-auto): 0.9% vs. 0.5% est
  • EIA Crude Inventories: -4.1M barrels vs. -2.7M est
  • Empire Manufacturing:  25.0 vs. 20.0 est
  • University of Michigan Consumer Sentiment (preliminary): 99.3 vs. 99.0 est

In-Line with Estimates:

  • Core Consumer Price Index (CPI): 0.2% vs. 0.2% est
  • FOMC Rate Decision: 1.875% vs. 1.875% est

Worse than Consensus Estimates:

  • Producer Price Index (PPI): 0.5% vs. 0.3% est
  • Core Producer Price Index (PPI): 0.3% vs. 0.2% est
  • Capacity Utilization:  77.9% vs. 78.1% est
  • Industrial Production:  -0.1% vs. 0.2% est

Key takeaways from this week’s data:

  • Continuing Claims dropped 49K to 1,697K, which represents the lowest level since December 1973
  • This week’s 0.8% jump in Retail Sales represents the biggest jump since November 2017
  • The yearly rate of the Producer Price Index (PPI) increased to 3.1%, which represents a six-year high

Here’s a look at next week’s line-up:

  • Monday (18th): NAHB Housing Market Index
  • Tuesday (19th): Building Permits, Housing Starts
  • Wednesday (20th): Crude Inventories, Current Account Balance, Existing Home Sales, MBA Mortgage Index
  • Thursday (21st): Continuing Claims, FHFA Housing Price Index, Initial Jobless Claims, Natural Gas Inventories, Leading Indicators, Philadelphia Fed Index
  • Friday (22nd): --

We’re getting a lighter batch of data next week relative to this week, but I’ll point to Tuesday’s housing data and Thursday’s Leading Indicators as potential market movers.  

Summary:

This morning’s tariff announcements dampen market mood, but I don’t think it will be enough to counter recent economic strength and investor optimism as we move into next week.      

Equity markets have remained firmly in negative territory at the time of this writing (2:11 PM ET) as the Dow Jones Industrial Average (DJI) is currently down 196 to 24,797, the S&P 500 (SPX) down 10 to 2,771, and the NASDAQ Composite (COMPX) lower by 23 to 7,737. Although trade relations remain a risk for markets, the U.S. economy continues to point to signs that it is heating up, but not too much to concern the Fed or investors. Although the headline risk and technical resistance for the SPX are near-term concerns, I suspect that the recent momentum in technology, consumer discretionary, and potentially a reversal in financials (note today’s intraday reversal) could translate into a slightly bullish outlook for next week.

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(0618-8CU3)

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