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Trader’s Outlook for April 12, 2019: Will earnings push stocks to new highs next week?

Markets appear to be closing out the week on a strong note, buoyed by strong data out of China and positive earnings commentary. Earnings will help dictate direction next week, but the near-term bias appears to be tilted in favor of the bulls

Weekly Market Review:

Stocks are gapping up across the board early Friday morning which is being driven by multiple bullish catalysts:

  • Strong data out of China (exports jumped 14.2% year-over-year; March new loans were 1.69T yuan (above the 1.2T est.); March M2 money supply increased 8.6%, representing a 13-month high (above the 8.2% est.); total bank lending in Q1 2019 hit a record 5.81T yuan.
  • Upbeat unofficial start to Q1 earnings season as JP Morgan posted record revenue and earnings that beat on both the top and bottom line.
  • Dow-component Walt Disney is rallying ~9% to an all-time high after revealing details pertaining to the company’s new online streaming service during yesterday’s Investor Day (the service will cost $6.99/month and is set to launch November 12th)

 

As for this week’s prior four days, I’d probably describe them as a shorter-term consolidation period in an overall intermediate term (~4-5 months) upward trend. There are always some potential risks out there at all times, but it feels like investors are fairly comfortable being in the current market environment which could be characterized as “reasonably valued, low-to-moderate growth, with low-interest rates”. Furthermore, given investor’s tempered earnings expectations, if corporate guidance surprises to the upside markets could be back at all-time highs in short order.      

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Probability of Fed Rate Hike (4/12/19):

This week’s FOMC Minutes reinforced a dovish Fed stance, as the majority of the members see no change in rates this year. We also received mixed inflation data, in the form of relatively a cooler CPI report and a stronger-than-expected PPI report (see “Economic Recap” section below) which doesn’t really move the needle in terms of the outlook on interest rates. In case you were wondering, the Bloomberg probability of a rate cut anytime in 2019 has dropped from last Friday’s 54% to ~43% this morning. Translation: the influence of the Fed on the markets, at least in the near-term, will likely take a back seat to earnings, trade negotiations, global economic data, etc. 

Current Probabilities:

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

This Week’s Notable 52-week Highs:

Autodesk Inc. (ADSK + $0.12 to $172.00)

Ally Financial Inc. (ALLY + $0.25 to $29.23)

Arista Networks Inc. (ANET + $2.27 to $324.50)

Broadcom Ltd. (AVGO + $4.77 to $314.18)

Cree Inc. (CREE + $1.08 to $64.41)

Estee Lauder Companies (EL + $0.33 to $168.37)

Dollar Tree Inc. (DLTR + $1.02 to $106.65)

Dover Corp. (DOV + $0.02 to $96.91)

Hilton Inc. (HLT - $0.13 to $88.40)

Hilton Inc. (HLT + $0.50 to $87.81)

McDonald’s Corp. (MCD + $3.10 to $191.98)

Marvell Technology Group (MRVL + $0.48 to $23.12)

Microsoft Corp. (MSFT + $0.40 to $120.73)

Norfolk Southern Corp. (NSC + $1.73 to $194.91)

Starbucks Corp. (SBUX + $0.67 to $76.54)

Tractor Supply Corp. (TSCO + $1.13 to $104.08)

Xilinx Inc. (XLNX + $1.28 to $133.35)

Xerox Corp. (XRX + $0.14 to $34.39)

Zebra Technologies Inc. (ZBRA + $5.45 to $232.15)

 

Corporate Earnings

First Quarter earnings season has unofficially kicked off this morning and after seeing results from some of the large financial institutions, many bulls might be thinking “so far so good”. It’s not just that JPM posted a record quarter, beating on both the top and bottom line, but also the positive commentary we heard from CEO and well-respected veteran Jamie Dimon. Dimon said that the current economic expansion could go on for years, stating, “If you look at the American economy, the consumer is in good shape balance sheets are in good shape, people are going back to the workforce, companies have plenty of capital”. While one company’s results do not make a trend, it certainly is welcome rhetoric given the recent concerns around slowing global growth.     

Next week is going to be busy on the earnings front as we get results from a wide spectrum of industries. Here are some stand-outs you might want to keep an eye on:

Monday (15th): C, GS, MTB (before market open); JBHT (after market close)

Tuesday (16th): JNJ, BAC, UNH (before market open); NFLX, IBM, CSX, UAL (after market close)

Wednesday (17th): PEP, ABT, MS, TXT, KSU (before market open); CCI, LVS, KMI, URI, AA (after market close)

Thursday (18th): PM, UNP, HON, DHR, AXP, SLB, BBT, TRV (before market open); ISRG (after market close)

Friday (19th): --

Volatility:

The downtrend in the VIX continued this week and the index hit a fresh year-to-date low of 12.11 earlier today. With the Fed basically off the table, positive momentum in trade negotiations and subdued interest rates, investors comfort level has increased and demand for protection has dwindled. When the VIX falls to new multi-month lows its worth considering whether investor complacency is a concern, but keep in mind that the VIX hovered around the 12 level for much of 2018 so it doesn’t really raise any orange flags in my mind.   

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Technical Outlook:

The S&P, Dow and NASDAQ are in a similar (near-term bullish) situation so I’ll just provide a brief summary of each and provide charts on those whose set-up is a little less clear.

S&P 500 Index ($SPX + 15 to 2,903): New six-month (intraday) high of 2,910 today; roughly 1% below all-time high of 2,940; bullish uptrend intact.

Dow Jones Industrial Average ($DJI + 33 to 26,475): Roughly 100 points below the five-month (intraday) high of 26,487 hit last Friday (BA’s early week sell-off hindering DJI performance); roughly 2% below all-time high of 26,95; bullish uptrend intact.

NASDAQ Composite ($COMPX + 26 to 7,973): New six-month (intraday) high of 7,992 today; roughly 2% below all-time high of 8,133; bullish uptrend intact; note: semiconductor sector is at all-time highs today.

Russell 2000 ($RUT + 5 to 1,584): The RUT moved above its 200-day SMA this week, which is a bullish technical event, but in my opinion the index really needs to clear the intraday high of 1,602 from back on February 25nd in order to clear resistance. Keep in mind that financials are rallying today (+1.74%) and make up 17% of the Russell, and the RUT is still up only 0.34%, lagging all of the other major indices. For reference, the Russell is roughly 9% below its all-time high of 1,742 hit last August, versus just 1-2% for the other major indices. 

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Dow Jones Transports ($DJT): The DJT is hitting four month highs today and appears to be clearing the neckline from a (bullish) inverse head-and-shoulders pattern. All in all the set-up look bullish but it’s worth pointing out that there is potential near-term resistance at the 11,000 level, where the index reversed course back in early December:

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

S&P Banks Index ($BIX): JP Morgan is giving a boost the overall financial sector and it feels like the sector is on the verge of breaking out. The concern over the 10-year/3-month yield curve inversion appears to be behind us (at least for now) and if we get more steepening of the curve this year this could serve to be a catalyst for the sector. Having said that, the BIX is pushing right up against resistance around its 200-day SMA which it hasn’t closed above since last September. On Monday before the market open we’ll get earnings from Goldman Sachs and Citigroup and on Tuesday we’ll hear from Bank of America, so the next couple trading days could be significant for this sector:

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Looking for a list of index symbols?

On the financial sector reference above I selected the S&P Bank Index ($BXI), but keep in mind that there are several other financial indices, such as $BKX or $BANK, and I thought it might be a good idea to show you where to find a list of index symbols for reference. I hope you find this helpful:

http://help.streetsmart.schwab.com/edge/1.24/Content/Index%20Symbols.htm

Tracking the Yield Curves: Since I’ve been commenting on the yield curve the last couple of weeks I’ll briefly mention that the differential between the 10-year/3-month spread is currently +12 basis points and an even wider +16 basis points on the 10-year/2-year. Apologies to you chartists out there but no images are included this week since an inversion on either appears to be in the rear-view mirror.

Economic Recap:

This week’s economic bag of data was essentially mixed, with the employment reports being a bright spot for the bulls. Here’s a recap of the individual reports that were released this week:

Better than Estimates:

  • Factory Orders: -0.5% vs. -0.6% est
  • NFIB Small Business Survey: 101.8 vs. 101.3 est
  • Consumer Price Index (CPI): +0.4% vs. +0.3% est
  • Producer Price Index (PPI): +0.6% vs. +0.3% est
  • Core Producer Price Index (PPI): +0.3% vs. +0.2% est
  • Initial Jobless Claims: 196K vs. 215K est
  • Export Prices: 0.7% vs. +0.2% est 

 

Worse than Estimates:

  • JOLTS – Job Openings: 7.087M vs. 7.565M est
  • Core Consumer Price Index (CPI): +0.1% vs. +0.2% est
  • EIA Crude Inventories: +7.0M barrels vs. +2.5M barrels est
  • Import Prices: +0.6% vs. +0.2% est
  • University of Michigan Sentiment - Preliminary: 96.9 vs. 97.6 est

 

Key takeaways from this week’s data:

  • This week’s 196K Initial Jobless Claims represents the lowest figure since 1969
  • The +2.0% year-over-year increase in the Core CPI represents a one-year low
  • The +2.2% year-over-year increase in the Core PPI represents the largest one-year jump since the 2.5% increase seen in December 2018
  • Import Prices increased for the third straight month

 

Here’s a look at next week’s line-up:

  • Monday (15th): Empire State Manufacturing, Net Long –Term TIC Flows
  • Tuesday (16th): Capacity Utilization, Industrial Production
  • Wednesday (17th): EIA Crude Oil Inventories, Fed’s Beige Book, MBA Mortgage Applications Index
  • Thursday (18th): Business Inventories, Continuing Claims, EIA Natural Gas Inventories, Initial Jobless Claims, Leading Indicators, Philadelphia Fed Index, Retail Sales, Retail Sales ex-auto
  • Friday (19th): Building Permits, Housing Starts
     
    Next week we’ll get a steady dose of economic data, along with a barrage of earnings reports, so stay alert. Out of everything that I see slated on the economic docket I’ll be interested to see how Thursday’s Retail Sales report pans out since they have been sluggish over the past couple of months and the consumer is so important to U.S. economic activity.
     
    Summary:
     
    Markets appear to be closing out the week on a strong note, buoyed by strong data out of China and positive earnings commentary. Earnings will help dictate direction next week, but the near-term bias appears to be tilted in favor of the bulls.        
     
    All of the major U.S. indices remain in positive territory and are largely holding on to the bulk of today’s largest gains, with the Dow Jones Industrial Average currently (as of 2:42 PM ET) up 236 to 26,379, the S&P 500 higher by 16 to 2,904, and the NASDAQ Composite (COMPX) tacking on 32 to 7,979. With a lot of this year’s bearish thesis being based on slowing global growth, I’d guess that over 50% of today’s jump is being attributed to last night’s surprisingly bullish data out of China. Europe still remains a bit of a question mark, but given the recent positive developments in trade negotiations, the Brexit extension, continued dovishness from the Fed and early indications of benign Q1 earnings, I’d be surprised if the SPX doesn’t make a push towards all-time highs in the near-term (even as early as next week). It’s not very often that I do this, but given the current set-up I’ll go out on a limb and provide a full “bullish” outlook for next week. Often times I’ll provide a “slightly” bullish/bearish since we are only talking about a 1-week outlook with this blog, but this feels like one of those times where a bullish outlook is appropriate (of course, this is only my personal opinion).    
 

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