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Trader’s Outlook for April 20, 2018: Rising yields might dictate market direction next week

Weekly Market Review:

U.S. equity markets are modestly lower early Friday morning but are up roughly 1% on the week. Easing concerns around geopolitical risks and relatively benign earnings appear to be the drivers for this week’s overall bullish bias. However, stocks encountered some late-week selling pressure as investors turned their focus to rising treasury yields, which continue to be in the spotlight this morning. The 10-year yield is up 0.24% to 2.938% at the time of this writing (10:10 ET) which is just below the four-year closing high of 2.943% that was hit back on February 21st.  

Source: Schwab StreetSmart Edge®

Probability of Fed Rate Hike (4/20/18):

The Fed attempted to ease concerns that warmer inflation data would translate into a quicker tightening pace in last week’s March Fed meeting minutes, but markets appear to be taking their cue from the bond market. In addition to the 10-year yield pushing up towards four-year high this week, two-year yields hit their highest level since September of 2008 (2.431%). Additionally, the 10-year/2-year spread hit the narrowest level since 2007 (41.141 basis points) on Wednesday. Turning to Bloomberg’s rate hike probabilities, the hike probability for May moved from 27.8% to 29.9% while June jumped to 91.6% from 88.6% week-over-week:

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

This Week’s Notable 52-week Highs:

Adobe Systems Inc. (ADBE - $2.59 to $225.03)

Alcoa Inc. (AA - $2.32 to $57.90)

Anadarko Petroleum (APC - $0.20 to $65.88)

Core Laboratories (CLB - $1.04 to $120.76)

Continental Resources (CLR - $0.85 to $63.19)

Conoco Phillips (COP - $0.74 to $65.57)

Domino’s Pizza (DPZ - $1.00 to $239.69)

First Solar Inc. (FSLR - $1.42 to $75.54)

Hess Corp. (HES - $0.66 to $57.54)

Humana Inc. (HUM - $1.28 to $293.72)

Intel Corp. (INTC + $0.08 to $53.69)

Intuit Inc. (INTU - $0.83 to $51.39)

Intuitive Surgical Inc. (ISRG - $6.06 to $456.65)

Lululemon Athletica Inc. (LULU + $0.60 to $95.89)

Netflix Inc. (NFLX + $1.81 to $334.51)

Transocean Inc. (RIG - $0.38 to $12.16)

Textron Inc. (TXT - $0.07 to $65.41)

Urban Outfitters Inc. (URBN - $0.84 to $38.60)

Valero Inc. (VLO - $0.25 to $107.95) Ltd. (WIX - $0.10 to $86.35)

Yum! Brands Inc. (YUM - $0.10 to $86.34)

Q1 Earnings Season

Roughly 10% of the S&P 500 companies have released their Q1 earnings reports so far and although it’s early, 79% have beat analyst’s EPS estimates while 83% have beat on the top line. For reference, last quarter 74% of companies beat the EPS estimates and 70% beat the revenue estimates. Here are some of the notable earnings reports that came out this week:

Ticker Symbol

Reported EPS

Consensus EPS Estimate































































































Next week is going to busy on the earnings front, below are some of the higher-profile names worth monitoring next week:







The VIX hit a one-month intraday low of 14.57 on Monday but there has been a modest uptick in expected volatility since then. Given the uncertainty around geopolitics and rising yields it appears that the VIX is settling into a trading range of approximately 15.00-25.00. While the index is up over 5% this morning it remains at the lower end of this potential channel:

Source: Schwab StreetSmart Edge®

Technical Outlook:

S&P 500 Index ($SPX): In the first half of the week the SPX broke out above its 50-day SMA (currently 2,686), which appeared to be a bullish indicator, but as of this writing the index has dropped back below it, which is still subject to interpretation based on where it closes today. Taking a more intermediate-term view of the chart, it appears that a symmetrical triangle has been forming over the past two months which would indicate that we are setting up for a breakout in one way or the other sometime over the next two to three weeks:

Source: Schwab StreetSmart Edge®

NASDAQ Composite ($COMPX): The technical picture on the NASDAQ is a little less clear, but like the SPX, it broke out above its 50-day SMA and is back below it at the time of this writing. Therefore, the 50-day appears to be the first area of resistance, followed by 7,300, 7,500 and finally 7,600 (note: the all-time closing high is 7,588). On the downside it appears that the 100-day SMA (7,141) is the first area of support (represented by the orange line below), followed by the 200-day SMA:

Source: Schwab StreetSmart Edge®

Russell 2000 Index ($RUT): The Russell is probably holding up the best among the major indices as the index remains above its 50,100 and 200-day SMA’s. However, this week’s reversal around the 1,580 level sets another consecutive lower high which establishes more resistance levels on the upside: 

Source: Schwab StreetSmart Edge®

10-Year Treasury Yields ($TNX): Higher yields appear to be driving sentiment over the past couple of days and this will likely be the focus next week. Earlier this morning the TNX hit an intraday high of 2.943%, which exactly matches the four-year high hit back on February 21st, but has subsequently backed off (at least at the time of this writing):

Source: Schwab StreetSmart Edge®

Economic Recap:

There was a healthy amount of economic data for investors to chew on this week and strong retail sales and housing data highlight a relatively bullish batch of reports. Let’s walk through the individual data points:

Better than Consensus Estimates:

  • Retail Sales: 0.6% vs. 0.4% est
  • Building Permits: 1354K vs. 1315K est
  • Capacity Utilization: 78.0% vs. 77.8% est
  • Housing Starts: 1319K vs. 1268K est
  • Industrial Production: 0.5% vs. 0.3% est
  • Philadelphia Fed: 23.2  vs. 21.0 est

In-Line with Estimates:

  • Business Inventories: 0.6% vs. 0.6% est
  • Retail Sales (ex-auto): 0.2% vs. 0.2% est

Worse than Consensus Estimates:

  • Empire Manufacturing: 15.8 vs. 20.0 est
  • NAHB Housing Market Index: 69 vs. 70 est
  • EIA Crude Inventories: -1.1M barrels vs. -1.4M est
  • Initial Jobless Claims: 232K vs. 226K est
  • Leading Indicators: 0.3% vs. 0.4% est

Key takeaways from this week’s data:

  • The March Retail Sales increase of 0.6% represents the highest jump since November
  • The Capacity Utilization rate of 78.0% represents the highest level in three years
  • The Empire Manufacturing figure represents the fifth month/month decline over the past six months
  • The Leading Indicators increase of 0.3% represents the smallest increase since last September

Here’s a look at next week’s line-up:

  • Monday (23rd): Existing Home Sales
  • Tuesday (24th): Consumer Confidence, FHFA Housing Price Index, New Home Sales, S&P Case-Shiller Home Price Index
  • Wednesday (25th): Crude Inventories, MBA Mortgage Index
  • Thursday (26th): Continuing Claims, Durable Orders, Initial Jobless Claims, Natural Gas Inventories,
  • Friday (27th): Chain Deflator (Advanced), Chicago PMI, Employment Cost Index, GDP (Advanced), Michigan Sentiment - Final

We’re going to get a relatively heavy dose of economic reports next week. Inflation and interest rates will continue to be in focus in the coming weeks and therefore Friday’s Employment Cost index will likely garner a lot of attention from market participants.


Q1 earnings are off to a good start but markets appear to be taking their cue from treasury yields. Traders might want to wait and see how markets react if and when the 10-year breaks out above the 2.94% level.      

Equity markets are recovering off the day lows at the time of this writing (11:52 AM ET) as the Dow Jones Industrial Average (DJI) is currently down 174 to 24,490 (after being down as much as 242), the S&P 500 (SPX) down 18 to 2,674, and the NASDAQ Composite (COMPX) lower by 79 to 7,158. The mid-morning recovery in the indices appears to have coincided with the 10-year backing off that 2.943% level so this will likely drive action next week. Investors are likely comfortable with a gradual ascent in rates but when yields break out into new high territory it’s not uncommon to have a jittery reaction in equity markets. I’m not sure whether the 10-year will notch a fresh four-year high later this afternoon or next week but given the tentative technical assessment in the SPX and COMPX I am taking a cautious stance. Therefore, my outlook for next week is slightly bearish.

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