Day Traders Diary

8/17/16

The stock market ended the midweek affair on a flat note as market participants walked back recently-adjusted rate hike expectations for the year. The change in thinking followed some dovish remarks from St. Louis Fed President Bullard (an FOMC voter) and less hawkish-than-feared minutes from the FOMC's July meeting. The S&P 500 (+0.2%) settled above its flat line, recovering from a 0.5% loss intraday.

The future path of interest rate normalization remained in focus as investors looked to substantiate yesterday's somewhat hawkish remarks from New York Fed President Dudley (an FOMC voter) and Atlanta Fed President Lockhart (not an FOMC voter). The two fed officials pushed forward rate hike expectations, signaling that at least one rate hike remains possible before the end of the year.

The prospect of a sooner-than-expected rate hike was enough to keep buying interest under wraps through the first half of trade. Vacillating oil prices, some strengthening in the dollar, and weakness in the heavily-weighted consumer discretionary (-0.2%) and technology (-0.1%) sectors also helped keep the broader market in check.

The market shifted gears shortly after midday as reports indicated that German Chancellor Merkel signaled that there would be some scope for tax cuts in the Germany's next legislative session. That headline seemed to stoke some risk appetite as investors eyed potential fiscal stimulus measures, which have been lacking in the midst of very aggressive monetary policy accommodations.

St. Louis Fed President Bullard (an FOMC voter) also helped elicit some buying interest after he suggested that the Fed may only be likely to raise rates one time between now and late 2018. The comments echoed remarks made by Mr. Bullard in the past, citing trend growth remaining under 2.0%.

The Fed minutes for July also helped to brush away lingering rate hike angst.

The minutes indicated that the Federal Open Market Committee was split on whether or not an interest rate hike would be appropriate in the coming months. The committee agreed that economic data and labor markets had improved, but the sustainability of hiring and inflation continuing to run below the two percent objective worried some members. Several members said they preferred to defer another increase in the fed funds rate until they were more confident that inflation was moving closer to two percent on a sustained basis.

The market's initial impression of the minutes skewed toward the dovish side of things, evidenced by a downturn in the CBOE Volatility Index (VIX 12.21, -0.43, -3.4%), a dip in the U.S. Dollar Index (94.75, -0.05, -0.05%), an uptick in Treasury prices across the curve, and an upturn in the S&P 500 utilities sector (+1.5%) after their release.

The S&P 500 finished the session near its high, finding technical support near the 2168 price level, which marked a rising 20-day moving average.

Seven sectors ended in the green with industrials (+0.3%), financials (+0.4%), and utilities (+1.4%) leading the advance. The heavily-weighted health care sector (+0.2%) performed in-line with the market, but got a boost from M&A speculation. Medivation (MDVN 66.48, +1.26) jumped 1.9% after the company confirmed that it received indications of interest from several parties. Biotechnology heavyweight Gilead Sciences (GILD 80.70, +1.45) climbed 1.8%, trimming its post-earnings loss to 8.9%.

In the consumer discretionary space (-0.2%), retail names underperformed as Lowe's (LOW 76.88, -4.60) and Target (TGT 70.63, -4.58) declined by 5.6% and 6.4%, respectively. The two came under pressure after disappointing investors with their quarterly results and/or guidance. Wal-Mart (WMT 72.93, +0.04) ended higher by 0.1% ahead of tomorrow morning's earnings report.

The technology sector (-0.1%) ended the day modestly lower as Dow component Cisco Systems (CSCO 30.72, -0.40) pressured the group. Cisco fell 1.3% after reports indicated that the company might be planning to layoff between 9,000 and 14,000 employees. The company is scheduled to report earnings after today's close. The high-beta chipmakers finished the day flat as Analog Devices (ADI 64.20, -0.68) weighed on the PHLX Semiconductor Index (UNCH). The stock fell 1.1% despite beating quarterly estimates and issuing in-line guidance for the fourth quarter.

Treasuries ended the day on a higher note, enjoying a decent bid across the complex. The yield on the 10-yr note slipped two basis points to 1.55%.

Today's participation was below the recent average as fewer than 766 million shares changed hands at the NYSE floor. 

Today's economic data included the weekly MBA Mortgage Index: 

• The MBA Mortgage Index showed that mortgage applications fell 4.0% in the week ending August 13 after a 7.1% increase in the prior week. 

Tomorrow's economic data will include weekly initial claims (Briefing.com consensus 265k) and the Philadelphia Fed Survey for August (Briefing.com consensus 0.5), which will each be released at 8:30 a.m. ET. The Leading Indicators report for July (Briefing.com consensus 0.4%) will conclude the day's data, crossing the wires at 10:00 a.m. ET. 

• Russell 2000 +8.1% YTD
• S&P 500 +6.8% YTD
• Dow Jones +6.6% YTD
• Nasdaq Composite +4.4% YTD