The Sun Rises on Wall Street
We didn’t expect the kind of market strength we saw on Thursday as yields and oil fell. The big question now: Can it keep up?
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What to make of this. We knew that there had been no volume-based confirmation of a bearish reversal of trend. We knew that market-wide breadth had been surprisingly strong for a “red candle” day on Wednesday. The market was set up for a relief rally on Thursday. This much we understood. What I do not think we, or at least I, understood was that the market was capable on Thursday of producing a rally exhibiting the kind of strength that it did.
On top of that, U.S. equity index futures have continued to rally through the overnight session into Friday morning. Can that continue? One thing that I have learned over the last five decades (next year will be 50 years, yes I’m in my early 60s) trading my own book is that I don’t get to tell the markets what to do. I may be able to figure out where the bus stops are and which direction the bus will most likely move, but short-term? This is the reason why technical analysis has become as important to traders (if not more so) as fundamental and economic / political analysis is to investors.
Resolution and Independence
There was a roaring in the wind all night;
The rain came heavily and fell in floods;
But now the sun is rising calm and bright;
The birds are singing in the distant woods;
Over his own sweet voice the Stock-dove broods;
The Jay makes answer as the Magpie chatters;
And all the air is filled with pleasant noise of waters.
– William Wordsworth, 1807
What Now?
Very interestingly, the day after the nation’s central bank increased its target range for the benchmark overnight interest rate and signaled further rate hikes, Treasury yields dropped like stone plunging through water. By day’s end, the all-important U.S. Ten-Year Note paid “just” 4.93%, down 9 basis points on the session.
The more “Fed-Funds” sensitive Two-Year Note saw its yield drop 6 basis points to 4.67%. Both of those series have given back a portion of those gains overnight, but as long as the Ten-Year Note enjoys continued support at the 5% level, the slope of the curve will flatten. That does not create an especially fertile environment for economic activity, for bankers, net interest margins will compress.
This could force more scrutiny into decisions by bankers on whether or not to extend credit. That said, the Atlanta Fed’s GDPNow model is currently showing the U.S. economy growing at an incredible 5.1% annualized rate for the third quarter. Is that number realistic? Well, maybe. Is it truly positive though? That will be dateable.
The recent tweaks to the model have been to increase the inputs for real personal consumption expenditures and real government expenditures. The boost to the input for personal consumption expenditures came in response to the August retail sales report. While that report was indeed solid, it was oversized due to the fact that the good people of the U.S. are paying way too much for gasoline. Not necessarily the kind of growth that helps.
On That Note…
Front-month crude prices have fallen precipitously since apexing on Tuesday. That day, the sweet stuff (West Texas Intermediate) traded above $106.50 per barrel. Overnight, these futures traded with a $99 handle. The cause behind this selloff is twofold. While there does appear to be a renewed diplomatic effort underway to resolve the conflict in Iran, the Kingdom of Saudi Arabia appears to be successfully shifting oil through the Strait of Hormuz using local shuttle vessels.
It should be noted that October is the current front-month for WTI Crude. If one looks out just two months, WTI Crude for December delivery is trading with a $91 handle (per barrel). Simply put, commodities traders see this crisis abating as the year winds down. Of course that can all turn on a dime. Still, it’s far better than these traders anticipating a move in the other direction.
Wild Thursday
The “take ’em” boys rode in on horseback on Thursday and paid up for everything they could stuff into their saddlebags. Lower oil prices took some of the pressure off of Treasury debt securities. Equities had themselves one heck of a rally. The S&P 500 gained 1.14% on the session as the Nasdaq Composite ran 1.69% thanks to a 3.14% rampage by the Philadelphia Semiconductor Index. Even the small caps participated, though to a lesser degree.
Semiconductor stocks were led by Arm Holdings (ARM), Intel (INTC), and Advanced Micro Devices (AMD). Those names were up 8.6%, 7.7% and 6.4% respectively. Both Intel and AMD are Top 10 holdings in the Sarge-folio. I have written in support of both names recently, lifting my target price for INTC to $134 last week and reiterating my $700 target on AMD in late August. Rah!
Breadth
Nine of the 11 S&P sector SPDR ETFs rallied on Thursday with tech (XLK) obviously way out in front. The discretionaries (XLY) also had a nice day. Only communication services (XLC) and the financials (XLF) closed out the regular session in the red. There was no real pattern to what kind of sectors did well on Thursday and which ones did not. Growth and cyclical sectors populated the top and bottom of the daily performance tables with the more defensive sectors in the middle.
Winners beat losers by an 11-to-six margin at the NYSE and by a rough 17-to-eight at the Nasdaq. Advancing volume took an impressive 66.45 share of composite NYSE-listed activity and a commanding 77.5% share of composite Nasdaq-listed trade. While that makes for a robust market, does it make for a bullish reversal of trend?
On the one hand, this week’s attempt to create a bearish reversal of trend is now dead. Thursday’s rally completely wiped out three days of losses for the Nasdaq Composite and nearly did so for the S&P 500. Any renewed selling would be a new attempt. Importantly, however, trading volumes ebbed somewhat from Wednesday’s levels. Across NYSE-listings, across Nasdaq-listing and across the membership of the S&P 500. So, no, Thursday, while this >< close, was not technically a “day one.” That doesn’t mean that this is not an excellent environment for traders. Enjoy the ride, gang. Notice the flowers.
Economics (All Times Eastern)
09:15 – Industrial Production (Aug): Expecting 0.2% m/m, Last 0.2% m/m.
09:15 – Capacity Utilization (Aug): Expecting 76.4%, Last 76.3%.
10:00 – CB Leading Indicators (Aug): Expecting 0.2% m/m, Last 0.2% m/m.
1:00 p.m. – Baker Hughes Total Rig Count (Weekly): Last 591.
1:00 – Baker Hughes Oil Rig Count (Weekly): Last 450.
The Fed (All Times Eastern)
09:30 – Speaker: Reserve Board Gov. Michelle Bowman.
11:45 – Speaker: Kansas City Fed Pres. Jeffrey Schmid.
Today’s Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings scheduled.
At the time of publication, Guilfoyle was long INTC, AMD equity.
