Day Traders Diary

2/3/17

 Friday's economic data gave investors the confidence to finally break the week's sideways trend and push the stock market higher. The major averages hit their session highs within an hour of the opening bell and maintained said levels into the close. The S&P 500 finished with a gain of 0.7%, while the Dow (+0.9%) did modestly better and the Nasdaq (+0.5%) did slightly worse.

The Employment Situation Report for January came in just right; strong enough to keep participants thinking good things about the economy, but not strong enough to convince the market that the Fed is now going to be in a hurry to raise the fed funds rate. The above-consensus 227,000 nonfarm payroll additions (Briefing.com consensus 170,000) and the lower than expected 0.1% increase in average hourly earnings (Briefing.com consensus +0.3%) were the two main metrics driving the optimistic sentiment.

U.S. Treasuries ticked up following the report's release, but squandered all of those gains in the afternoon following comments from the Federal Reserve Bank of San Francisco President John Williams. Mr. Williams reiterated the Fed's expectation of three rate hikes in 2017, but more notably, he expressed his belief that a rate hike in March is on the table. His comments were consistent with remarks made by Chicago Fed President Charles Evans, who said he would be comfortable with three hikes in 2017. Mr. Evans is a voting FOMC member this year while Mr. Williams is an alternate FOMC member.

Treasuries fell back to their flat lines in the wake of the comments from the two policymakers. The 2-yr yield, which is most susceptible to FOMC rate decisions, closed the day one basis point lower at 1.20% after posting a session low at 1.17%. The benchmark 10-yr yield ended flat at 2.48%.

Financials (+2.0%) provided strong sector leadership, leading Friday's session from the open to the close. The sector's tenacity took root before the market even opened after The Wall Street Journal reported that President Trump would reduce regulatory burdens on the financial sector through an executive order aimed at scaling back the Dodd-Frank Act and reversing the Fiduciary Rule. Mr. Trump did just that following a White House meeting with business executives led by Blackstone's (BX 30.74, -0.05) Steve Schwarzman.

At the opposite end of the day's leaderboard, consumer discretionary (-0.1%) was the only sector to finish the day lower. The space took several shots from the likes of Chipotle (CMG 404.08, -19.22), Hanesbrands (HBI 18.98, -3.73), and AutoNation (AN 49.77, -2.00) after investors reacted negatively to the latest earnings reports from the three companies.

The discretionary sector could not climb out of the red as top component Amazon (AMZN 810.20, -29.75) weighed. The internet retail giant retreated 3.5% after reporting worse than expected revenues, coupled with disappointing guidance on Thursday evening.

Technology (+0.7%) finished the day in line with the benchmark index. Visa (V 86.08, +3.78) was the sector's top performer thanks to better than expected earnings and revenue. However, lackluster performances from large-cap components like Apple (AAPL 129.08, +0.55), Facebook (FB 130.98, +0.14), and Alphabet (GOOGL 820.13, +1.87) held the sector's gains in check.

On the countercyclical side, the health care, consumer staples, telecom services, and real estate sectors gained between 0.4% and 0.6%, while utilities (+0.1%) closed just a step behind.

Defensive spaces dominated the week with four of the five logging weekly gains. Comparatively, the financial (+0.2%) and technology (unch) sectors were the only cyclical groups to close the week higher.

Today's economic data included January Employment Situation Report, January ISM Services, and December Factory Orders:

January Employment Situation Report

January nonfarm payrolls came in at 227,000 while the Briefing.com consensus expected a reading of 170,000. The prior month's reading was revised to 157,000 from 156,000. Nonfarm private payrolls added 237,000 while the Briefing.com consensus expected an increase of 175,000. The unemployment rate increased to 4.8% (Briefing.com consensus 4.7%).

Average hourly earnings increased 0.1% (Briefing.com consensus +0.3%), while the previous month's reading was revised to 0.2% (from 0.4%). The average workweek was reported at 34.4 while the Briefing.com consensus expected a reading of 34.3. The previous month's reading was revised to 34.4 (from 34.3).

The key takeaway is that this is one of those so-called "Goldilocks" reports since it is strong enough to keep participants thinking good things about the economy, but not strong enough to convince the market to think it means the Fed is now going to be in a hurry to raise the fed funds rate. The tempered growth in average hourly earnings, which dialed back year-over-year growth to 2.5% from 2.8% in December, is the focal point as it relates to the market's perspective on the Fed.

The ISM Services Index for January decreased to 56.5 while the Briefing.com consensus expected a downtick to 57.0. The prior month's reading was revised down to 56.6 from 57.2.

The key takeaway from the report is that growth in the services sector, which accounts for a much bigger slice of economic activity than the manufacturing sector does, persisted for the 85th straight month.

The Factory Orders Report for December showed an increase of 1.3% while the Briefing.com consensus expected a increase of 1.4%. The November reading was revised up to -2.3% from -2.4%.

The key takeaway from the report is that the December increase was led entirely by orders for nondurable goods (+3.1%). Paced by a 2.5% decline in transportation equipment orders, durable goods orders fell 0.5% in December.

Investors will not receive any economic data on Monday.

Nasdaq Composite +5.3% YTD

S&P 500 +2.6% YTD

Dow Jones Industrial Average +1.6% YTD

Russell 2000 +1.5% YTD