Download the Schwab app from iTunes®Get the AppClose

Weekly Trader’s Outlook

Outlook Partly Cloudy, Trade Back in Focus

Weekly Market Review:

Stocks are modestly higher early in today’s trading session on this “Quadruple Witching” Friday, which means the quarterly expiration of stock-index futures, single-stock futures and options on stock-index futures and individual stocks. Although we had a ~15% spike in oil prices on Monday due to an attack on Saudi Arabia’s oil facilities (followed up with a subsequent 6% drop on Tuesday) and a FOMC meeting on Tuesday-Wednesday, markets appear to be on track to close out the week relatively flat. The issues that were driving volatility back in August (i.e. trade escalation and plummeting interest rates) appear to be settling down as the U.S. & China now appear to be moving towards resolution (vs. escalation) and yields on 10-year treasury notes have rallied over 30 basis points this month. While we aren’t out of the woods yet in regards to trade, the Fed appears to be managing the balance between accommodation & discipline, economic data has been healthy and equity markets are essentially 1% off all-time highs.

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Probability of Fed Rate Hike (9/20/19):

As expected, the Fed lowered the target range for the Fed funds rate by 25 basis points and acknowledged continued geopolitical uncertainties which leaves the door open for additional accommodation/easing in the future. However, based on the negative market reaction following the announcement perhaps the Fed was not as dovish as market participants were expecting. The consensus still appears to be that the Fed will initiate another 25 basis point cut by the end of the year, but it’s no slam dunk. Bloomberg probabilities currently put the chance of a cut at the October FOMC meeting at 43%, followed by a 69% chance of a cut at the December meeting if we don’t get one in October.  

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

This Week’s Notable 52-week Highs:

American International Group (AIG + $0.36 to $58.25)

Applied Materials Inc. (AMAT + $0.26 to $51.95)

ASML Holdings PLC (ASML - $1.40 to $248.19)

Cypress Semiconductor Inc. (CY + $0.10 to $23.35)

Danaher Corp. (DHR + $1.13 to $146.88)

D.R. Horton Inc. (DHI + $0.22 to $51.10)

Essex Property Trust Inc. (ESS - $2.22 to $324.71)

Hartford International Group (HIG + $0.10 to $60.74)

K.B. Home Inc. (KBH + $0.23 to $31.45)

Lam Research Corp. (LRCX + $1.37 to $238.21)

Medtronic Inc. (MDT + $0.28 to $111.29)

Microsoft Corp. (MSFT - $0.71 to $140.36)

Oneok Inc. (OKE + $0.40 to $75.49)

Prologis Inc. (PLD - $0.01 to $85.01)

Restoration Hardware Inc. (RH - $0.87 to $168.62)

Southern Company Inc. (SO - $0.23 to $60.83)

Sysco Corp. (SYY - $0.18 to $78.20)

Teradyne Inc. (TER + $0.05 to $58.79)

Vulcan Materials Company (VMC - $0.25 to $150.05)

ZTO Express Inc. (ZTO - $0.37 to $21.80)

Today’s Unusual Option Activity:

Calls:

Mylan N.V. (MYL + $0.02 to $21.03): Calls outpacing puts 33:1; option traders primarily targeting January 2020 27.50 call

Tapestry Inc. (TPR + $0.10 to $25.37): Calls outpacing puts 20:1; option traders primarily targeting September 27th 26.00 call

 

Puts:

Cerner Corp. (CERN + $0.26 to $67.95): Puts outpacing calls 25:1; option traders primarily targeting September 20th 67.50 put

Itau Unibanco Holdings (ITUB + $0.08 to $8.39): Puts outpacing calls 21:1; option traders primarily targeting March 2020 8.00 put

 

Heavy Option Volume:

Apollo Global Management Inc. (APO - $0.26 to $40.62): 20x average daily option volume of 746 contracts; option traders primarily targeting January 2021 25.00 put & 40.00 put

Estee Lauder Co. (EL + $0.08 to $8.39): 9x average daily option volume of 746 contracts; option traders primarily targeting October 18th 185.00 put & 190.00 put

Q2 Corporate Earnings

Nearly all of the S&P 500 companies have reported earnings and 56% have beat estimates on the top line while 76% beat on the bottom line (slightly below the respective 57% and 77% seen last quarter). Here are some of the higher-profile names that reported this week:  

Ticker Symbol

Reported EPS

Consensus EPS Estimate

Difference

CBRL

$2.70

$2.49

+$0.21

APOG

$0.72

$0.63

+$0.09

ADBE

$2.05

$1.97

+$0.08

FDX

$3.05

$3.16

($0.11)

CHWY

($0.21)

($0.10)

($0.10)

GIS

$0.79

$0.77

+$0.02

MLHR

$0.84

$0.78

+$0.06

DRI

$1.38

$1.36

+$0.02

 

Next week we still have several big cap names reporting, namely AZO and NKE on Tuesday, KBH on Wednesday, followed by MU on Thursday after the close.

Monday (23rd): CMD (before market open)

Tuesday (24th): AZO, KMX, JBL, BB (before market open); NKE, CTAS (after market close)

Wednesday (25th): DAVA, WOR (before market open); KBH (after market close)

Thursday (26th): ACN, CAG (before market open); MU, MTN (after market close)

Friday (27th):

Volatility:

The VIX (-0.51 to 13.54), which hit a six-week low of 13.31 yesterday, has been in a steady near-term downtrend as markets have recovered, primarily due to improved sentiment around trade. Beyond that there isn’t a lot to report on the volatility front, but it’s probably worth pointing out that we still don’t have a trade resolution between the U.S. and China (although we’ve seen some recent improvement) and historically markets tend to see above-average volatility in October, so one could make the case that the VIX is currently undervalued.  

Technical Outlook:

S&P 500 Index ($SPX + 4 to 3,011): The SPX has been drifting higher this month and remains roughly 0.5% below the all-time high of 3,027 which was hit back on July 26th. Beyond that there doesn’t appear to be a lot of technical developments to point out other than the next near-term resistance level (3,027) and support level (2,950):

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Dow Jones Industrial Average ($DJI + 55 to 27,150): Similar to the S&P 500, with the next near-term resistance level being the all-time high (~27,398) and the next support level being the 50-day SMA (~26,623).

NASDAQ Composite ($COMPX - 23 to 8,159): Similar to the S&P 500 & Dow, with the next near-term resistance level being the all-time high (~8,339) and the next support level being the 50-day SMA (~8,060).

Russell 2000 Index ($RUT + 7 to 1,568): The Russell has reclaimed a lot of lost ground from August, helped in part by the rally in financials, but it still has some near-term congestion (resistance levels) to transcend before the chart gets more bullish. Specifically, the next near-term resistance level appears to be 1,600, followed by 1,620 while intermediate support remains at 1,460.   

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

10-Year Treasury Note ($TNX - 0.03 to 17.68): Back in August it looked as if 10-year yields were on a trajectory to test the 2016 low of ~1.35% but there has been quite a reversal this month. After hitting a low of 1.429% on September 3rd yields rallied all the way to 1.903% by September 13th and have pulled back to the 50-day SMA which appears to be providing support. I believe the reversal in yields (or sell-off in bounds) has helped quiet the deflationary pundits and subsequently boost equity markets and investor sentiment. Lower yields can help make risk assets more attractive on a relative basis (which can help equities to an extent), but overall it would be much healthier for the economy and growth if yields move higher, which would help steepen the yield curve. It appears like they’ve at least stabilized for now, but it would probably be best for the bull case if they could move back into a positive, upward trajectory.      

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Economic Recap:

This week’s batch of economic data has a definitive bullish-bias, which was highlighted by robust housing and industrial production data. Here’s a recap of the individual reports that were released this week:

Better than Estimates:

  • Capacity Utilization: 77.9% vs. 77.5% est
  • Industrial Production: 0.6% vs. 0.1% est
  • NAHB Housing Market Index: 68 vs. 66 est
  • Building Permits: 1419K vs. 1300K est
  • Housing Starts: 1364K vs. 1255K est
  • Existing Home Sales: 5.49M vs. 5.36M est
  • Initial Jobless Claims: 208K vs. 213K est
  • Philadelphia Fed Index: 12.0 vs. 8.0 est
  • Current Account Balance: -$128.2B vs. -$135.0B est

Worse than Estimates:

  • Empire State Manufacturing: 2.0 vs. 5.5 est
  • Leading Indicators: 0.0% vs. 0.1% est
  • EIA Crude Inventories: +1.1M barrels vs. -2.0M barrels est

Key takeaways from this week’s data:

  • Building permits (1419K) and housing starts (1364K) hit the heist levels in 12 years this week
  • This week’s 0.6% increase in U.S. industrial production is the largest gain in a year
  • This week’s 77.9% capacity utilization is the highest rate since March
  • EIA crude inventories rose for the first time in five weeks

Here’s a look at next week’s line-up:

  • Monday (23rd):
  • Tuesday (24th): Consumer Confidence, FHFA Housing Price Index, S&P Case-Shiller Home Price Index
  • Wednesday (25th): EIA Crude Oil Inventories, MBA Mortgage Applications Index, New Home Sales
  • Thursday (26th): Advanced International Trade in Goods, Advanced Retail Inventories, Advanced Wholesale Inventories, Continuing Claims, EIA Natural Gas Inventories, GDP – 3rd Estimate, GDP Deflator – 3rd Estimate, Initial Jobless Claims, Pending Home Sales
  • Friday (27th): PCE Price Index, Core PCE Price Index, Durable Goods, Durable Goods ex-transportation, Personal Income, Personal Spending, University of Michigan Consumer Sentiment - Final

Not to down-play the importance of some of next week’s housing data (i.e. Wednesday’s New Home Sales and Thursday’s Pending Home Sales) but I’m keeping my eye on Tuesday’s Consumer Confidence report and Friday’s batch of reports which covers inflation data (via the PCE price index), durable goods, and the health of the consumer.  

Summary:

With September’s FOMC meeting in the rear-view mirror, the focus likely turns back to trade, which appears to be a little more uncertain after China trade officials cancelled a planned meeting with U.S. farmers. From a near-term perspective, taking a cautious stance is likely more prudent for traders.  

Just when you think things are improving on the trade front we received some mid-day news that trade officials from China canceled a previously scheduled meeting with the U.S. farm belt. At the time of this writing the reason behind the cancellation is unknown but equity markets experienced a mid-day reversal following the news. As of 1:55 PM ET the Down Jones Industrial Average (DJI) is down 131 to 26,962, the S&P 500 (SPX) is down 15 to 2,991 while the NASDAQ Composite (COMPX) is lower by 80 to 8,102. This variable makes it difficult to predict how markets will play out next week, but I’d imagine it’s fairly likely that we get a negative tweet from President Trump regarding this development which makes me a little more cautious going into next week. At this point the U.S. is still scheduled to meet with trade officials in China in early October but perhaps investor optimism around some sort of a resolution is running a little high. Therefore, I’d prefer to take more of a cautious stance heading into next week and offer up a bearish-bias to next week’s outlook.

What You Can Do Next

  • Schwab clients: Contact a Trading Specialist at 800-435-9050 for questions or log in to the Schwab Learning Center. Are you a Trading Services client? Click here to sign up or login to the Schwab Trading Community to view the full blog. 

  • Not yet a client? Learn more about Schwab Trading Services

Schwab Market Update
Could Negative Bond Yields Come to America?

Important Disclosures:

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. With long options, investors may lose 100% of funds invested. Multiple leg options strategies will involve multiple commissions. Protective puts increase your cost basis in the underlying security. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options."

All stock and option symbols and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Past performance should not be construed as indicative of future results.

Multi-leg options strategies will involve multiple commissions. Spread trading must be done in a margin account. Covered calls provide downside protection only to the extent of the premium received and limit upside potential to the strike price plus premium received. Commissions, taxes and transaction costs are not included in the examples used in this discussion, but can affect final outcome and should be considered. Please contact a tax advisor for the tax implications involved in these strategies.

Schwab does not recommend the use of technical analysis as a sole means of investment research. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. The information presented does not consider your particular investment objectives or financial situation (including taxes), and does not make personalized recommendations.

Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author's opinions may change, without notice, in reaction to shifting economic, business, and other conditions. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

The information presented does not consider your particular investment objectives or financial situation, and does not make personalized recommendations. Any opinions expressed herein are subject to change without notice. 

Please contact a tax advisor for the tax implications involved in the strategies referenced in this article. Supporting documentation for any claims or statistical information is available upon request. Futures trading carries a high level of risk and is not suitable for all investors. Past performance is no guarantee of future results.

Investing involves risks, including loss of principal. Hedging and protective strategies generally involve additional costs and do not assure a profit or guarantee against loss. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

All references to subjects (securities, indexes, futures contracts, and options contracts) were derived based on screens conducted by the writer for certain anomalous activity such as volumes, volatility and other related market data. As needed for brevity, the writer may have applied discretion when choosing among screen outputs for inclusion. Such discretion may have been based on news reports or other considerations of public interest. The views or opinions are those of the writer, and are subject to change without notice. All referenced subjects were chosen for illustrative purposes only and should not be considered recommendations, offers to sell, or solicitations of offers to purchase.

The information provided here is for general informational purposes only. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. (MSCI) and Standard & Poor's. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc. Index used for the 11 market sectors. 

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation. The NASDAQ Composite Index is a broad-based market-capitalization weighted index of 2,630 stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The Dow Jones Industrial Average is a price-weighted index of 30 stocks compiled by Dow Jones as a way to gauge the performance of the industrial component of America’s stock markets. The Russell 2000 Index is a market-capitalization-weighted index comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization.

Schwab Center for Financial Research (“SCFR”) is a division of Charles Schwab & Co., Inc. 

© 2019 Charles Schwab & Co., Inc, All rights reserved. Member SIPC.

(0919-9FWM)

Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.