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Trader’s Outlook for November 17, 2017: Uptrend still intact but near-term outlook partly cloudy

Weekly Market Review

If you read last week’s blog you know that my overall outlook was slightly bullish as I expected some weakness in the early part of the week, but expected dip buyers to step in and push markets back to the upside. U.S. equities largely remained under pressure for the first half of the week, which appeared to be brought on by continued weakness in overseas markets, tax reform uncertainty and a flattening yield curve.

However, buyers came back in a big way yesterday as the SPX and DJI both rallied more than 0.80% and the NASDAQ and Russell 2000 tacked on gains in excess of 1.25% (the NASDAQ registered a new all-time high yesterday). As of early Friday morning markets are giving back some of yesterday’s gains and the SPX is now essentially exactly where it closed last Friday (2,582.30):

Source: Schwab StreetSmart Edge®

Probability of a Fed rate hike:

This morning’s probability of a December Fed rate hike is exactly where it was last week so everything appears to be on track for a third rate hike this year. However, one thing that might influence future Fed policy is the flattening yield curve. Shorter-term yields have been rising due to Fed guidance while longer-term yields have softened due to subdued inflation expectations. If the Fed is too aggressive in their rate hike projections this could push short-end yields even higher which hurts profits within the financial sector and could slow economic growth.

The Fed doesn’t want yields to invert (short-term yields higher than longer-term) as this historically has signaled an economic recession. The Fed knows this and December’s policy statement will likely need to convey a slow-and-steady pace in 2018 as a result, but equity investors will certainly keep a close eye on yields in the meantime. For context, the 2-year/10-year spread started 2017 at 125 basis points and is currently 72 basis points.

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

This Week’s Notable 52-week Highs:

Agilent Technologies Inc. (A + $0.25 to $68.99)

Autodesk Inc. (ADSK + $0.02 to $127.02)

Applied Materials Inc. (AMAT - $0.62 to $57.22)

Arista Networks Inc. (ANET + $1.84 to $233.61)

Dollar General Corp. (DG - $0.02 to $84.89)

Five Below Inc. (FIVE + $0.57 to $59.72)

Grubhub Inc. (GRUB + $0.20 to $64.71)

Hilton Inc. (HLT + $0.30 to $74.32)

KB Home Inc. (KBH + $0.34 to $28.72)

Lam Research Corp. (LRCX - $2.01 to $211.21)

Michael Kors Holdings Ltd. (KORS + $0.62 to $56.38)

NetApp Inc. (NTAP + $0.60 to $53.71)

Micron Corp. (MU + $0.15 to $46.33)

Owens Corning Inc. (OC + $1.87 to $85.66)

PayPal Inc. (PYPL - $1.69 to $76.01)

Pultegroup Inc. (PHM + $0.42 to $32.32)

RH Inc. (RH + $0.27 to $105.08)

Salesforce.com Inc. (CRM + $0.01 to $107.04)

Splunk Inc. (SPLK + $11.13 to $80.43)

Square Inc. (SQ + $3.62 to $45.52)

Roku Inc. (ROKU - $0.13 to $39.65)

Tyson Foods Inc. (TSN + $0.55 to $77.81)

Wal-Mart Stores Inc. (WMT - $2.93 to $96.79)

Q3 Earnings Season

Over 91% of the S&P 500 companies have released their Q3 earnings reports and so far 72% have beaten analysts’ EPS estimates while 67% have beaten on the top line. Compared to Q2 results the EPS beat is in-line (72% vs. 72%) but revenue is tracking slightly lower (67% vs. 68%). Here are some of the key earnings reports that came out this week:

We are at the tail end of third quarter earnings season and next week is shorter due to Thanksgiving, but there still are some higher profile names up on the docket:

Monday: A, PANW, URBN

Tuesday: MDT, LOW, ADI, CPB, SIG, DSW, CRM, HPQ, HPE, GME, GES

Wednesday: DE

Thursday:  

Friday:

Sector Performance:

This week was led by consumer discretionary consumer staples and information technology while industrials and energy lagged behind. Consumer discretionary was boosted by strong earnings out of multiple big name retail stocks while energy stocks followed oil prices to the downside (although oil prices are rebounding today +2.3%).

Source: Schwab StreetSmart Edge®

Volatility:

Last Friday we were experiencing a near-term spike in the VIX and I suggested that the recent move was likely another short-lived phenomenon like we’ve seen throughout the year. However, this week the VIX spiked even higher with the index hitting an intraday high of 14.51 on Wednesday, which represents a two-month high.

However, yesterday’s stock market rally helped stabilize markets and the VIX ended up closing below 12.00. The VIX is down again today, even though the SPX is also trading slightly to the downside, which suggests VIX traders feel a little more comfortable about the near-term stability in the SPX:  

Source: Schwab StreetSmart Edge®

Technical Outlook:

S&P 500 Index ($SPX): Last week I suggested that the SPX was likely going through a consolidation phase in a longer-term uptrend. While the index may have experienced a larger drop than I expected, yesterday’s sharp rebound tells me that the underlying bid support, along with the underlying fundamentals are still intact.

Putting the longer-term uptrend aside, from a shorter-term perspective you can use ~2,560 (where the SPX reversed on Wednesday) as your near-term support and ~2,595 (all-time closing high) as resistance:

Source: Schwab StreetSmart Edge®

Russell 2000 Index ($RUT): The Russell started off the week on a bearish note as the index closed below its 50-day Simple Moving Average (SMA) on Monday and hit a six-week intraday low of 1,454 on Wednesday. However, yesterday the index rallied nearly twice as much as the SPX (+1.5% vs. +0.80%) which put it back above its 50-day SMA.

The index is up for the second day in a row (+0.45%) even as the other major indices are lower, which should be an encouraging sign for the bulls:

Source: Schwab StreetSmart Edge®

Dow Jones Transportation Average ($DJT): On the plus side, the DJT rallied 1.5% yesterday and pivoted from the RSI level of 30 that I mentioned last week. However, it’s down 1% today and it’s still trading well below its 50-day SMA which it dropped below at the beginning of November. Given the sporadic action it’s unclear whether the next 1-2% will be higher or lower for the DJT, but I’ll be more concerned if it breaks Wednesday’s low of 9,440:

Source: Schwab StreetSmart Edge®

Better than Consensus Estimates:

  • Producer Price Index (PPI): 0.4% vs. 0.1% est
  • Core Producer Price Index (PPI): 0.4% vs. 0.2% est
  • Retail Sales: 0.2% vs. 0.1% est
  • Capacity Utilization: 77.0% vs. 76.3% est
  • Industrial Production: 0.9% vs. 0.5% est
  • Building Permits: 1297K vs. 1243K est
  • Housing Starts: 1290K vs. 1198K est

In-Line with Consensus Estimates:

  • Business Inventories: 0.0% vs. 0.0% est
  • Consumer Price Index (CPI): 0.1% vs. 0.1% est
  • Core Consumer Price Index (CPI): 0.2% vs. 0.2% est

Worse than Consensus Estimates:

  • Empire Manufacturing: 19.4 vs. 26.0 est
  • Retail Sales (ex-auto): 0.1% vs. 0.2%
  • Initial Jobless Claims: 249K vs. 234K est
  • EIA Crude Inventories: +1.9M barrels vs. -2.1M est
  • Philadelphia Fed Index: 22.7 vs. 24.6  est

Key takeaways from this week’s data:

  • The Producer Price Index increased 2.8% over the last 12 months (through October) which represents the largest increase since February 2012
  • Initial Jobless Claims have come in under 250K for 6 straight weeks, but this is the second week in a row that they have come in worse than expected
  • October housing starts hit a one-year high

Here’s a look at next week’s line-up:

  • Monday (20th): Leading Indicators
  • Tuesday (21st): Existing Home Sales
  • Wednesday (22nd): Continuing Claims, Crude Inventories, Durable Goods Orders, Durable Goods Orders (ex-transportation), FOMC Minutes, Initial Jobless Claims, MBA Mortgage Applications Index, Michigan Sentiment (Final), Natural Gas Inventories
  • Thursday (23rd):
  • Friday (14th):

Next week is a holiday-shortened week and the amount of economic data will be limited as a result but there are still a couple of nuggets you may want to monitor. U.S. economic data has largely been robust lately so investors likely expect the trend to continue, but I’ll be keeping an on Monday’s leading indicators report (which missed estimates last month) along with Wednesday’s Durable Goods Orders (where shipments have increased for eight straight months) and the FOMC Minutes later in the afternoon.

Market Performance Thanksgiving Week:

Holiday-shortened weeks tend to exhibit relatively light volume which can, but not always, lead to higher volatility. From the table below you can see that there have been SPX moves of greater than 1.0% over the week of Thanksgiving in 5 out of the last 10 years. However, the index has been relatively flat on nearly all of the other occasions over that timeframe:

Summary:

Markets are a little more volatile this week but the uptrend is still intact. However, I’m going with a neutral stance next week as the current set-up doesn’t seem to be providing a clear signal on direction.     

Equity markets are trading near the lows of the day at the time of this writing (2:40 PM ET) as the Dow Jones Industrial Average (DJI) is currently down 94 to 23,364, the S&P 500 (SPX) down 4 to 2,581 and the NASDAQ Composite (COMPX) is off by 6 to 6,786 after being in positive territory earlier in the day. Markets are closed next Thursday for Thanksgiving and close at 1:00 PM ET on

Friday so volume is expected to be light as many traders go on vacation. Earnings and economic data continue to support an underlying bullish tone to the markets but today’s pullback makes yesterday’s rally, and the near-term outlook, a little more questionable. I’m a little more cautious today than I was last Friday but I think today’s weakness is likely due to traders lightening up on positions before the weekend. I don’t provide a neutral outlook very often, but that seems to be the most likely scenario in my view.

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