Day Traders Diary

8/13/17

Stocks finished near the bottom of their narrow trading ranges on Friday, but still managed to eke out a narrow victory. The Nasdaq (+0.2%) finished at a new record high while S&P 500 (+0.1%) and the Dow (+0.1%) settled just a tick below their record marks. Small caps underperformed, sending the Russell 2000 lower by 0.2%. For the week, the S&P 500 added 0.2%.

Financials dominated the earnings front again on Friday after kicking off the third quarter earnings season in the prior session. Bank of America (BAC 25.83, +0.38) surpassed earnings expectations, but Wells Fargo (WFC 53.69, -1.52) disappointed, missing both top and bottom line estimates. As a result, BAC shares climbed 1.5% while WFC shares dropped 2.8%.

The S&P 500's financial sector opened the session with a sizable loss of around 0.9%, but quickly bounced back. In the end, the sector finished little changed.

Investors received several pieces of influential economic data on Friday, including the core Consumer Price Index, which increased less-than-expected in September (+0.1% actual vs +0.2% Briefing.com consensus). The core CPI differs from the total CPI in that it excludes the volatile categories of food and energy.

The cooler-than-expected reading sent Treasury yields into the red; the benchmark 10-yr yield dropped four basis points to 2.28%. However, it didn't have much effect on the market's rate-hike expectations. At the closing bell, the CME FedWatch Tool placed the chances of a December rate hike at 82.9%, virtually unchanged from 82.7% on Thursday.

In total, five of the S&P 500's eleven sectors finished Friday with gains. The technology group (+0.5%) was among the top performers, benefiting from broad strength. HP (HPQ 21.71, +1.31) showed particular resolve, jumping 6.4% to its best mark in over seven years, after raising its guidance for fiscal year 2018 on Thursday evening.

The materials sector (+0.5%) also outperformed, thanks in part to steel and iron ore companies, which rallied after China's monthly imports of iron ore hit an all-time high in September. Reports that President Trump may be fighting for rules in NAFTA that would require automakers to use North American steel also helped fuel buying interest.

On the flip side, industrial stocks slipped, especially transportation names, which sent the Dow Jones Transportation Average lower by 1.0%. JB Hunt Transport (JBHT 104.01, -4.34) was the DJTA's weakest performer, dropping 4.0%, after reporting worse-than-expected earnings.

The health care sector (-0.3%) also lagged, with health insurers like Anthem (ANTM 183.83, -5.91) and Humana (HUM 237.73, -3.71) showing particular weakness following the White House's decision to end the Affordable Care Act's cost-sharing reduction payments. The two companies finished with losses of 3.1% and 1.5%, respectively.

President Trump announced that he will not be certifying the Iran nuclear deal, essentially kicking the deal to Congress, which will have 60 days to decide whether to impose sanctions on Iran that were lifted under the agreement. If Congress does nothing, Mr. Trump vowed to end the accord. 

Reviewing Friday's big batch of economic data, which included the Consumer Price Index for September, Retail Sales for September, the preliminary October reading for the University of Michigan Consumer Sentiment Index, and Business Inventories for August:

• Total CPI increased 0.5% (Briefing.com consensus 0.6%) in September while core CPI, which excludes food and energy, rose 0.1% (Briefing.com consensus 0.2%).
  • The headline numbers were a little softer than expected, which will create some chatter that they could sway the Fed into thinking that it would be prudent to hold off on a rate hike at its December meeting. The key takeaway from our vantage point, though, is that the September CPI report hasn't run afoul of the Fed's price stability mandate. To that end, total CPI is up 2.2% year-over-year, versus 1.9% in August, and core CPI is up 1.7% for the fifth month in a row.
• September retail sales increased 1.6% (Briefing.com consensus +1.5%). The prior month's reading was revised to -0.1% from -0.2%. Excluding autos, retail sales increased 1.0% while the Briefing.com consensus expected an increase of 0.8%. The prior month's reading was revised to +0.5% from +0.2%.
  • The key takeaway from the report is that core retail sales, which exclude auto, gas, building material, and food services and drinking place sales, and which factor into GDP computations, increased a solid 0.6%.
• The preliminary reading of the University of Michigan Consumer Sentiment Index for October rose to 101.1 (Briefing.com consensus 95.6) from 95.1 in September.
  • The key takeaway from the report is that the positive sentiment occurred among all age and income groups and across all partisan viewpoints. That should presumably bode well for consumer spending, which is the most important driver of GDP growth.
• Business Inventories rose 0.7% in August, which is in line with the Briefing.com consensus. The July reading was revised to 0.3% from 0.2%.
  • The key takeaway from the report is that the inventory build will be a positive component for Q3 GDP forecasts.

On Monday, investors will receive just one piece of economic data--the October Empire State Manufacturing Survey (Briefing.com consensus 21). The report will be released at 8:30 ET.

• Nasdaq Composite +22.7% YTD
• Dow Jones Industrial Average +15.7% YTD
• S&P 500 +14.0% YTD
• Russell 2000 +10.7% YTD

Week In Review: Stocks Tick Up As Earnings Season Gets Under Way

The stock market moved modestly higher this week, touching new record highs yet again. The Dow led the advance, adding 0.4%, while the Nasdaq and the S&P 500 each settled with gains of 0.2% apiece. The small-cap Russell 2000 struggled, however, ending the week with a loss of 0.5%.

Financials kicked off the third quarter earnings season on a mostly higher note; JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) all reported better-than-expected earnings. However, Wells Fargo (WFC) missed both top and bottom line estimates. Despite the largely positive showing, the S&P 500's financial sector moved lower, dropping 0.9%.

The retreat wasn't all that surprising as the financial sector did ride a four-week rally into earnings season--climbing 10.6% from September 7 to October 6--and, therefore, was likely overdue for a pull back. A decline in Treasury yields also worked against the sector, which typically benefits from an increase in interest rates. The benchmark 10-yr yield dropped eight basis points to 2.28%.

Softer-than-expected consumer prices had a hand in pushing Treasury yields lower, but did little to dial back the market's rate-hike expectations. The Consumer Price Index increased less than expected in September (0.5% actual vs 0.6% Briefing.com consensus), as did the core Consumer Price Index, which excludes food and energy (0.1% actual vs 0.2% Briefing.com consensus).

The minutes from the September FOMC meeting were also released this week, but contained little to no new information. In short, the minutes showed that the Fed favors staying on a path of gradual rate hikes, although there was growing concern that the factors keeping a lid on inflation may not be transitory after all.

Following this week's events, the CME FedWatch Tool places the chances of a December rate hike at 82.9%, down modestly from 93.1% last week.

Industrial heavyweight General Electric (GE) had a rough showing this week, dropping 5.8%, after announcing that several of its top executives will be leaving the company. JPMorgan lowered its target price for the company to $20 from $22, which weighed on GE shares as well.

AT&T (T) was another notable laggard this week after announcing that its video subscribers declined for the third quarter in a row; the wireless giant finished with a loss of 7.5%.

On a positive note, the world's largest retailer--Wal-Mart (WMT)--jumped 9.7% this week after announcing a new return service that will allow its customers to return items they purchased online or in the store in under 30 seconds. Wal-Mart's brick-and-mortar locations potentially give the company an advantage over internet-based names like Amazon (AMZN) in the area of returns.

Wal-Mart's positive performance helped the S&P 500's consumer staples sector (+1.5%) settle alongside the technology (+1.3%), utilities (+1.3%), and real estate (+1.8%) groups at the top of the sector standings. On the flip side, the telecom services sector was by far the weakest performer--thanks mostly to AT&T--finishing with a loss of 4.6%.