Day Traders Diary

10/17/18

• The S&P 500 finished at its flat line on Wednesday following a volatile day of trading. A late morning surge in the financials sector (+0.9%) lifted the benchmark index from its early depths -- the S&P 500 was down as much as 1.0% -- and the release of the September FOMC minutes prompted another small bout of volatility in the afternoon.

  As for the other major averages, the blue-chip Dow Jones Industrial Average lost 0.4%, the tech-heavy Nasdaq Composite remained unchanged, and the small-cap Russell 2000 lagged, losing 0.5%.

  Stocks opened slightly lower following some disappointing September housing data. Housing starts rose to a seasonally adjusted annualized rate of 1.201 million units in September, below the Briefing.com consensus estimate of 1.221 million, and building permits declined to a seasonally adjusted 1.241 million, also below the Briefing.com consensus estimate of 1.273 million.

  In addition, the weekly MBA Mortgage Applications Index declined 7.1% week-over-week.

  The softer-than-expected data hit the consumer discretionary sector (-0.7%) in particular, with home improvement retailers Home Depot (HD 185.17, -8.41) and Lowe's (LOW 102.44, -3.54) dropping 4.3% and 3.3%, respectively. The two companies were also downgraded to 'Neutral' from 'Outperform' at Credit Suisse.

  Nonetheless, the S&P 500 rebounded to its flat line largely due to the financial sector's sudden climb. Investors initially had a muted reaction to U.S. Bancorp's (USB 52.90, +1.93) better-than-expected earnings, but shares eventually started taking off, ending the day with a gain of 3.8%. Goldman Sachs (GS 228.28, +6.58, +3.0%) and Morgan Stanley (MS 47.19 , +1.25, +2.7%) also had strong performances, extending yesterday's post-earnings gains.

  The minutes from the September FOMC meeting briefly caused the S&P 500 to stumble in late afternoon trading after showing that a number of participants agreed for the need for more gradual rate hikes, and that a number of participants saw a need to hike above the long-run level. Following the minutes, the probability of a December rate hike ticked up to 83.0% from 79.5% on Tuesday, according to the CME FedWatch Tool.

  Also, Treasury yields ticked slightly higher following the minutes with the Fed-sensitive 2-yr yield and benchmark 10-yr yield each advancing two basis points to 2.88% and 3.18%, respectively. The U.S Dollar Index increased 0.6% to 95.31, touching a one-week high.

  Relative weakness in the information technology sector (-0.5%) kept the bulls in check on Wednesday. IBM (IBM 134.05, -11.07) dragged on the sector, losing 7.6%, after missing revenue expectations. The Dow component remained upbeat, though, upholding its guidance and expecting its cloud technology to lift revenue moving forward.

  In other earnings news, Netflix (NFLX 364.70, +18.30) climbed 5.3% after reporting higher-than-expected subscriber growth. The company added nearly seven million new subscribers last quarter, with six of the seven million coming from overseas. In addition, Netflix expects to add nine million more in the fourth quarter. The communication services sector, which houses Netflix, advanced 0.5%.

  Separately, WTI crude dropped 3.1% to $69.65/bbl, hitting a one-month low, after EIA petroleum data showed a build of 6.5 million barrels in crude oil inventories for the week ended October 12. The oil-sensitive energy sector lost 0.7%, closing near the bottom of the sector standings.

  Across the border, Canada became the second country in the world to legalize marijuana on Wednesday, causing a sell-the-news reaction in weed stocks. Widely-followed Tilray (TLRY 148.25, -10.13) lost 6.4%.

  Reviewing Wednesday's economic data, which included the weekly MBA Mortgage Applications Index and the Housing Starts and Building Permits for September:

• Mortgage applications declined 7.1% week-over-week and housing starts declined 5.3% in September, paced in part by a 0.9% decline in starts for single-family units.
• Housing starts declined 5.3% in September to a seasonally adjusted annual rate of 1.201 million units (Briefing.com consensus 1221K), with single-family starts down 0.9% to 871,000. Building permits were down 0.6% to a seasonally adjusted annual rate of 1.241 million (Briefing.com consensus 1273K), although that was owed to a 9.3% decline in permits for buildings with five units or more. Single-family permits were up 2.9% to 851,000, which tied with March for the third-lowest annual rate this year.
  • The key takeaway from the September Housing Starts and Building Permits report is that the supply of new homes isn't picking up fast enough to meet the demand for new homes at more affordable price points. Accordingly, overall home sales activity will continue to be curtailed by affordability constraints.

• On Thursday, investors will receive the weekly Initial Claims report, the October Philadelphia Fed Index, and the Conference Board's Leading Economic Index for September.

• Nasdaq Composite +10.7% YTD
• S&P 500 +5.1% YTD
• Dow Jones Industrial Average +4.0% YTD
• Russell 2000 +3.5% YTD
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• Headlines provided by Briefing.com