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Weekly Trader’s Outlook

Bulls charge higher, but have we moved too far too fast?

Weekly Market Review:

U.S. equity markets are opening up at record highs this morning following encouraging trade comments from White House economic adviser Larry Kudlow. Kudlow said that the two sides have been in discussions every day and that a trade deal is close, but “not done yet”. While trade remains an important issue for the markets, earnings have been respectable, the Fed has moved to the sidelines for now and the technicals have been emanating bullish signals. Toss in November/December’s bullish seasonality and you have a recipe for higher equity prices.

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Probability of Fed Rate Hike (11/15/19):

There weren’t a lot of surprises out of Fed Chairman Jerome Powell’s speech before the U.S. House of Representatives, he essentially reiterated his message conveyed back on October’s FOMC meeting – U.S. growth remains steady, inflation remains below target and policy will remain data dependent. As it stands today, Bloomberg’s probability of a rate cut is a scant 1.7%, so it appears that the Fed will be taking a backseat to trade, at least for the remainder of the year.

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

Past performance is no guarantee of future results.

This Week’s Notable 52-week Highs:

Apple Inc. (AAPL + $1.79 to $264.43)

Advanced Micro Devices Corp. (AMD + $0.71 to $39.07)

Applied Materials Inc. (AMAT + $5.80 to $62.76)

Air Products & Chemicals Inc. (APD + $1.47 to $239.65)

CarMax Inc. (KMX + $0.33 to $97.17)

Cirrus Logic Inc. (CRUS + $1.02 to $73.28)

Epam Systems Inc. (EPAM - $1.92 to $205.74)

Fiserv Inc. (FISV + $0.45 to $114.56)

Fortinet Inc. (FTNT + $0.92 to $101.04)

Global Payments Inc. (GPN + $1.33 to $178.84)

Insulet Corp. (PODD + $2.27 to $179.15)

Lululemon Athletica Inc. (LULU + $1.38 to $214.61)

Microsoft Corp. (MSFT + $1.68 to $149.74)

Ryanair Holdings PLC (RYAAY + $0.24 to $85.60)

Seattle Genetics Inc. (SGEN + $0.11 to $113.40)

Sysco Corp. (SYY - $0.19 to $81.31)

Teradyne Inc. (TER + $1.23 to $66.80)

Tyson Foods Inc. (TSN + $0.32 to $90.66)

Ubiquiti Networks Inc. (UI - $1.10 to $186.77)

Wal-Mart Stores Inc. (WMT - $1.20 to $119.45)  

Walt Disney Co. (DIS - $1.20 to $145.95)

Q3 Corporate Earnings

Third quarter earnings are wrapping up and out of the 461 S&P 500 companies that have reported thus far, 58% have beaten estimates on the top line while 79% have beaten on the bottom line. This compares to the respective 56% and 76% seen in the prior quarter. Here are some of the higher-profile names that reported this week:  

 

Ticker Symbol

Reported EPS

Consensus EPS Estimate

Difference

TME

$0.74

$0.65

+$0.09

FNV

$0.54

$0.45

+$0.09

TSN

$1.21

$1.27

($0.06)

ROK

$2.01

$1.93

+$0.02

DHI

$1.35

$1.25

+$0.10

SE

($0.40)

($0.45)

+$0.11

CBS

$0.95

$0.93

+$0.02

SWKS

$1.52

$1.50

+$0.07

LK

($0.32)

($0.38)

+$0.06

GOOS

$0.57

$0.43

+$0.02

ENR

$0.93

$0.81

+$0.12

CSCO

$0.84

$0.81

+$0.03

NTAP

$1.09

$0.94

+$0.15

WMT

$1.16

$1.09

+$0.07

WB

$0.77

$0.73

+$0.04

WIX

$0.41

$0.32

+$0.09

CGC

($1.08)

($0.49)

($0.59)

NVDA

$1.78

$1.57

+$0.21

AMAT

$0.80

$0.76

+$0.04

WPM

$0.16

$0.16

--

 

Next week we’ll be getting a good read on the retail sector with several big names set to report. I’ve identified some of those names in bold below.

Monday (18th): MANU, QD (before market open); ZTO, ASH (after market close)

Tuesday (19th): HD, MDT, TJX, KSS (before market open); PAGS, URBN (after market close)  

Wednesday (20th): LOW, TGT, PDD (before market open); NTES, LB, NUAN, SQM JACK (after market close)

Thursday (21st): PLAN, M (before market open); INTU, ROST, SPLK, GPS, JWN (after market close)

Friday (22nd): SJM, FL

Volatility:

The CBOE Volatility Index (VIX -0.76 to 12.29) has been in a steady downtrend since early October and is down over 5% today as equity markets push up to record highs. The drop in the VIX, which often conveys demand for protection via SPX puts, is also likely being impacted by the fact that the SPX hasn’t had an intraday range greater than 20 points this month. Therefore I’d expect the VIX to continue to remain subdued as long as markets continue to claw higher, though it does appear that there has essentially been a floor at the 12.00 level this year.  

Technical Outlook:

Dow/S&P/NASDAQ: All of these indices are breaking out to new all-time highs this morning, which is bullish, but I’d point out that the Relative Strength Index (RSI) is currently 74 on the Dow, 73 on the S&P and 70 on the NASDAQ, which suggests that we may encounter some consolidation (i.e. a pull back) soon.

S&P Health Care Index ($HCX): The health care sector is breaking out to all-time highs this morning and above prior resistance which was encountered last October and December:

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Russell 2000 Index ($RUT + 8 to 1,596): The Russell has gyrated between 1,460 (support) and 1,600 (resistance) for most of 2019 and encountered the 1,600 resistance level this week. If history, and technical analysis, is to serve as a guide, normally one would want to be cautious on this index since it is pushing up against resistance once again. However, I’d point out that in the past the RUT took a relatively sharp, quick reversal from this level (see red arrows in the chart below) but this week it appears to be consolidating just under it. In fact, it appears that we can see a bull flag on the charts so this time might be different. IF this index can firmly break-out above this level this would be a bullish indicator for the overall markets and there doesn’t appear to be resistance until we get to the old all-time high of 1,742 from last September.   

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Dow Jones Transportation Index (DJT + 13 to 10,884): Transports hit a new 52-week high earlier this month, which is a bullish indicator for equities, but it has reversed course which has put it back below the 11,000 resistance level. The bulls would likely want to see the index move back above this level to feel more comfortable about the near-term outlook on this index.   

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

10-Year Treasury Yields ($TNX + 0.017 to 1.833%): In my opinion it appears that yields are in the process of reversing the downtrend which began last November when the yield on the 10-year got as high as 3.24%. Here’s what I’m seeing from a technical perspective:

  • While the 10-year yield hit a low of 1.42% back in early September, it didn’t breach the ~1.35% low from July of 2016
  • A series of higher highs and higher lows has been established since September’s low
  • Yields on the 10-year hit a three-month of 1.97% last Thursday (November 7th), and pulled back this week, but it appears that a (bullish) ascending triangle is in the works

In order to get a bullish confirmation I’d want to see yields make a firm push above the 1.90% level, as early as next week. I think a move above 1.90% and a subsequent gradual elevation of yields would be a bullish sign for stocks.

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

10-year/2-year yield spread: The 10/2 yield curve flattened this week, following the 10-year yield pull back, but still remains positive (+21 basis points) and in an uptrend. If the 10-year yield breaks out to the upside (referenced above) this will likely help steepen the 10/2, which benefits financials and is healthy for the overall market.       

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

Past performance is no guarantee of future results.

Economic Recap:

This week’s batch of economic data had a slight bearish-bias. Here’s a recap of the individual reports that came out this week:

Better than Estimates:

  • NFIB Small Business Survey: 102.4 vs. 102.0 est
  • Consumer Price Index (CPI): 0.4% vs. 0.2% est
  • Producer Price Index (PPI): 0.4% vs. 0.3% est
  • Core Producer Price Index (PPI): 0.3% vs. 0.2% est
  • Retail Sales: 0.3% vs. 0.2% est

In-Line with Estimates:

  • Core Consumer Price Index: 0.2% vs. +0.2% est

Worse than Estimates:

  • EIA Crude Inventories: +2.2M barrels vs. +1.6M barrels est
  • Initial Jobless Claims: 225K vs. 214K est
  • Business Inventories: 0.0% vs. +0.1% est
  • Capacity Utilization: 76.7% vs. 77.1% est
  • Empire State Manufacturing: 2.9 vs. 6.0 est
  • Industrial Production: -0.8% vs. -0.4% est
  • Retail Sales ex-auto: 0.2% vs. 0.4% est

Key takeaways from this week’s data:

  • October’s CPI read of +0.4% represents the largest jump since March
  • EIA crude inventories have shown a build in seven of the last eight weeks
  • Year-over-year retail sales slowed to 3.1% from 4.1% in September, which represents a five-month low

Here’s a look at next week’s line-up:

  • Monday (18th): Net Long-Term TIC Flows
  • Tuesday (19th): Building Permits, Housing Starts
  • Wednesday (20th): EIA Crude Oil Inventories, FOMC Minutes, Mortgage Applications Index
  • Thursday (21st): Continuing Claims, EIA Natural Gas Inventories, Existing Home Sales, Initial Jobless Claims, Leading Indicators, Philadelphia Fed
  • Friday (22nd): University of Michigan Consumer Sentiment

We’ll be getting a decent dose of economic data next week and out of everything that will be released I’ll be keeping an eye on Tuesday/Thursday’s housing data and Friday’s University of Michigan Consumer Sentiment report, to help get a read on sentiment.

Summary:

Bullish technicals, benign earnings & data, along with trade optimism help propel stocks higher. However, the bulls might need to take a breather before the next leg higher.

All of the major U.S. equity indices are holding up around the highs of the day at the time of this writing (3:39 ET) with the Dow Jones Industrial Average up 176 to 27,958, SPX higher by 17 to 3,113 and the NASDAQ tacking on 44 to 8,523. I’m encouraged by the recent technical break-outs that we’ve seen in both the major indices and certain sectors, but I’m also getting the feeling that we may need to consolidate some gains (though the timing of a pullback can be difficult to predict). I’ll note that the semiconductor sector hit an all-time high earlier in the session but has dropped down towards the lows of the day at the time of this writing, so I’m wondering if that’s providing an early signal that some consolidation may be on the near-term horizon. Therefore I’m a little torn on next week’s outlook, so I’ll offer up the following: If we continue to push higher at the beginning of next week, I’d expect stocks to pull back and consolidate in the back-half of the week as RSI’s get further stretched. But if we pull back at the beginning of next week I’d expect buyers to be quick to step back in and recover in the back half of the week.   

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