Day Traders Diary

3/17/17

Defying the spirit of St. Patrick's Day, the major averages failed to turn shamrock green, closing just a 'wee bit' below their flat lines. The Nasdaq finished flat while the S&P 500 and the Dow closed with losses of 0.1% apiece.

The bulls swiped up the majority of sectors on Friday, but the ones they left behind--financials (-1.1%), health care (-0.5%), energy (-0.1%), and consumer staples (-0.2%)--proved to be influential. The financial sector saw some belated selling pressure in the wake of this week's FOMC meeting as investors tried to sort out how the Fed's future outlook for interest rates will bake into the industry's bottom line.

On the other hand, the health care group got tripped up this morning on news that biotech giant Amgen's (AMGN 168.41, -11.70) new cholesterol drug Repatha didn't live up to expectations in a clinical trail. AMGN shares lost 6.5% of their value, which influenced the iShares Nasdaq Biotechnology ETF (IBB 295.28, -3.31) lower by 1.1%.

The lightly-weighted utilities (+0.6%), telecom services (+0.6%), and materials (+0.5%) sectors made a valiant effort to counter the heavy blow from the bears, but received little help from their peers; the technology (+0.1%) and consumer discretionary (+0.1%) sectors just couldn't piece together a truly solid performance as their top components deferred a leadership role in the cause.

News flow was relatively light on Friday, but it's worth pointing out that Secretary of State Rex Tillerson said all options are on the table, including military action, in countering North Korea's threat to the United States and its allies. Mr. Tillerson emphasized that the U.S. aims to avoid a military conflict, but made it clear that the "policy of strategic patience has ended."

Aerospace & defense names like Boeing (BA 180.10, +1.91), Lockheed Martin (LMT 271.98, +4.04), and Raytheon (RTN 156.97, +3.31) did their part to push the industrial sector (+0.4%) higher, but the sector's advance ultimately proved to be modest.

In the Treasury market, U.S. sovereign debt extended its week-to-date gain on Friday, leaving the benchmark 10-yr yield four basis points lower at 2.50%. For the week, the 10-yr yield lost eight basis points as investors relished in the Fed's more dovish than expected rate projections.

Friday saw a handful of economic reports, including February Industrial Production, February Leading Indicators, and the University of Michigan Sentiment Index for March, but their influence was minimal:

Industrial Production held steady in February (Briefing.com consensus 0.2%) while Capacity Utilization declined to 75.4% (Briefing.com consensus 75.4%) from a revised reading of 75.5% (from 75.3%) in January.

The key takeaway from the report is that it is not as disappointing as the headline suggests. Nevertheless, total industrial production is still weak, up just 0.3% year-over-year. The overall capacity utilization rate of 75.4% is 4.5 percentage points below its long-run average, which suggests there is ample overhead space still until production bottlenecks occur.

The Conference Board's Leading Indicators report for February ticked up 0.6% (Briefing.com consensus 0.5%) after a 0.6% increase in January.

The key takeaway from the report is that the index is at its highest level in over a decade after six consecutive monthly gains, fueling the underlying belief that economic growth in 2017 should be improving.

The preliminary reading of the University of Michigan Consumer Sentiment Index for March rose to 97.6 (Briefing.com consensus 96.8) from 96.3 in the prior month's reading.

The key takeaway from the report is that consumers are feeling better about their current personal finances; however, there appears to be a sharp divide about the outlook that cuts sharply across political partisan lines.

Investors will not receive any economic data on Monday.

Nasdaq Composite +9.6% YTD

S&P 500 +6.2% YTD

Dow Jones Industrial Average +5.8% YTD

Russell 2000 +2.5% YTD

Week in Review: Back in the Green

After snapping a streak of six consecutive weekly gains, the stock market returned to its winning ways. The S&P 500 added 0.2% for the week, but did not overtake its record high from the start of March, which may count as a loss for investors starved for more. The tech-heavy Nasdaq (+0.7%) outperformed, climbing near its early-March high to flirt with another record close. The index is now up 9.6% for the year while the S&P 500 has climbed 6.2%.

The first two days of the trading week were highlighted by reduced trading volume as the East Coast braced for a winter storm. In addition, the looming FOMC rate decision contributed to reduced activity. Although overall trading volume on Monday and Tuesday was down about 15% from average, activity on the M&A front was alive and well, as Intel (INTC) agreed to acquire Mobileye (MBLY) for $15.30 billion in cash, paying a 34.0% premium to Mobileye's share price from the previous session.

On Wednesday, the Federal Open Market Committee raised the federal funds target range by 25 basis points to 0.75%-1.00%. This move was widely-expected going into the day of the announcement, but investors were somewhat surprised to see the Fed maintain its measured outlook. The central bank nudged up its median target rate for the end of 2019 to 3.0% from 2.9%, but left its long-run target unchanged at 3.0%.

It is worth noting that the Fed tightened policy at a time when growth forecasts have shifted lower. The Federal Reserve Bank of Atlanta now expects that first quarter GDP will be up only 0.9% after calling for growth of more than 3.0% at the start of February. To be fair, first quarter GDP readings have a known tendency to underperform the remaining three quarters. For her part, Fed Chair Janet Yellen said, "GDP is a pretty noisy indicator", adding that the central bank expects growth to average 2.0% over the course of 2017.

With the March hike in the books, the market's expectations are now in line with FOMC projections for two more hikes before the end of the year. The fed funds futures market sees almost no chance of a hike in May (6.4%), but is starting to price in a rate raise for June (58.3%). Looking at the remainder of the year, the fed funds futures market sees a pause into the second half, currently expected to conclude in December when the range should be boosted to 1.25%-1.50%.