Day Traders Diary

5/19/16

The stock market trades on a lower note at midday as investors continue to respond to the possibility of a sooner than expected fed funds rate hike. Other contributing factors for today's decline have included a leg lower in oil, strength in the dollar, and the underperformance of the heavyweight industrial (-1.5%), financial (-1.4%), and health care (-1.3%) spaces. The Nasdaq Composite (-1.1%) trades behind both the Dow Jones Industrial Average (-1.0%) and the S&P 500 (-0.9%).

Global bourses tilted to the downside this morning as investors ruminated over hawkish commentary contained in the FOMC Minutes from the April meeting. The minutes revealed that a majority on the committee believed that a potential June rate hike could be supported if incoming data remains consistent with a pick-up in economic activity in the second quarter.

The major averages extended their losses, moving lockstep with oil. However, the broader market reached a session low following hawkish remarks from New York Fed President and FOMC voter William Dudley. President Dudley disrupted markets when he reaffirmed the idea that a rate hike at the June meeting was within the realm of possibilities. Furthermore, the Fed speaker contended that the market had previously underestimated the probability of further policy tightening this year.

The S&P 500 (-0.9%) has floated higher in recent action as crude oil trims its loss to 1.1% ($48.27/bbl). In front of the pack, utilities (+0.4%) and consumer staples (+0.2%) outperform while industrials (-1.5%), financials (-1.4%), and health care (-1.3%) round out the board.

The industrial sector (-1.5%) demonstrates broad-based weakness as it trims its 2016 gain to 1.9%. In the group, airlines underperform with American Airlines (AAL 31.77, -0.83) and United Continental (UAL 43.87-1.40) losing 2.6% and 3.1%, respectively. Meanwhile, rail names also underperform after Credit Agricole initiated coverage on the group with ratings ranging from "Underperform" to "Sell."

In the financial sector (-1.4%), Dow component Goldman Sachs (GS 154.70, -5.24) is the worst performer in the price-weighted index as it pulls back from yesterday's 3.4% gain. Money center banks are also seeing a pullback with Bank of America (BAC 14.46, -0.23) losing 1.6% after gaining 4.9% yesterday. Elsewhere, rate-sensitive real estate investment trusts (REITs) continue to underperform as the odds of an interest rate hike in the short term increase.

Biotechnology underperforms in the health care space (-1.3%), evidenced by the 2.1% decline in the iShares Nasdaq Biotechnology ETF (IBB 257.15, -5.62).

The consumer staples sector (+0.2%) has outperformed today as the sub-group responds to a better than expected quarterly report from Wal-Mart (WMT 68.70, +5.55). The company has gained 8.8% after beating analysts' estimates for the quarter and raising its guidance for the second quarter. Suppliers for the big box retailer have also seen a bid.

The U.S. Dollar Index (95.28, +0.20) trades off its high as the euro trims its loss against the greenback. The euro/dollar pair trades lower by 0.1% (1.1203) after ticking off the 1.1230 level. Separately, the safe haven yen has enjoyed a bid as the dollar loses 0.4% against the yen (109.80).

The Treasury complex trades on a modestly higher note as the yield on the 10-yr note slips one basis point to 1.84%.

Today's economic data included weekly initial claims, the Philadelphia Fed Survey for May, and April Leading Indicators:

Initial claims for the week ending May 14 decreased by 16,000 to 278,000 (Briefing.com consensus 278,000).

The four-week moving average for initial claims increased by 7,500 to 275,750.

There were reportedly no special factors influencing initial claims, which stayed below 300,000 for the 63rd straight week -- a streak not seen since 1973.

Continuing claims for the week ending May 7 decreased by 13,000 to 2.152 million.

The four-week moving average bumped up slightly to 2.143 million, yet that remains within a few hairs of the lowest level for that average since November 2000.

The Philadelphia Fed Index registered a reading of -1.8 for May (Briefing.com consensus 2.7).

That was a slight deterioration from the April reading of -1.6 and marked the eighth negative reading in the last nine months.

A number below zero for this regional manufacturing survey connotes contraction

The survey's indicators for general activity, new orders, shipments, and employment all remained negative.

The diffusion index for future general activity, meanwhile, fell from a 15-month high of 42.2 in April to 36.1 in May.

The Conference Board's Leading Economic Index increased 0.6% in April after a downwardly revised unchanged reading (from +0.2%) for March.

That April number was comfortably above the Briefing.com consensus estimate of 0.3% and was the largest monthly increase since April 2015.

The uptick was fueled by positive contributions from all indicators, with the exception of consumer expectations. The latter subtracted 0.05 percentage points.

The biggest contributors in April were the average workweek (0.13 percentage points), average weekly initial claims (0.11 percentage points), building permits (0.11 percentage points), and stock prices (0.10 percentage points).

Positive contributions were estimated for both manufacturers' new orders for consumer goods and materials (0.01 percentage points) and nondefense capital goods orders excluding aircraft (0.04 percentage points).

Notably, growth in the Leading Economic Index for the six-month period ending April 2016 moderated to 0.6% from the 1.3% growth rate seen over the previous six months; however, the Conference Board clarified that the strengths among the leading indicators have become more widespread than the weaknesses.

The Coincident Economic Index increased 0.3% in April after being unchanged in March while the Lagging Index increased 0.3% on the heels of a 0.5% increase in March.