The Week In Review

1/22/16

The stock market ended a volatile week on a sharply higher note thanks to a broad-based rally. The tech-heavy Nasdaq (+2.7%) outperformed both the S&P 500 (+2.0%) and the Dow Jones Industrial Average (+1.3%). The Friday spike was fueled by factors like:

A rebound from near-term oversold conditions

Speculation regarding additional monetary easing in Europe and Japan; and

An extension of yesterday's rally in oil

Equities began 2016 on a difficult note. Eight of the ten sectors in the S&P 500 entered today's trading session showing losses on the week, but all ten sectors entered with month-to-date losses between 13.0% (materials) and 0.5% (utilities). The heavy selling pressure experienced since the beginning of 2016 represent the worst start to a new year and even with today's spike losses in the Nasdaq, Dow Jones Industrial Average, and S&P 500 range between 8.3% and 6.7%.

Global markets have grappled with growth concerns to begin the year, and overnight indices found some relief as speculation regarding continued easing measures from the Bank of Japan followed yesterday's remarks from European Central Bank President Mario Draghi who stated that the central bank "will need to review and therefore possibly reconsider" its monetary policy stance in March.

Crude oil has gotten off to an even worse start than equities, with WTI crude declining more than 20.0% at its lowest point. However, the energy component rallied overnight, building on its gain from yesterday, climbing more than 9.4%. WTI crude backed away from its high, but still advanced 8.5% to $32.05/bbl.

In front of the pack energy (+4.3%), technology (+2.8%), telecom service (+2.4%), and financials (+2.0%) outperformed while industrials (+0.8%), health care (+1.6%), consumer staples (+1.6%), and  consumer discretionary (+1.7%) trailed.

The top-performing energy sector was aided by oilfield services giant Schlumberger (SLB 65.20, +3.75), which climbed 6.1% after reporting a Q4 earnings beat on in-line revenue. The stock was also helped after the company announced a $10 billion dollar share buyback. Meanwhile, Dow components Chevron (CVX 83.54, +2.49) and Exxon Mobil (XOM 76.57, +2.47) slightly underperformed the broader sector with gains of 3.1% and 3.3%, respectively.

For its part, the top-weighted technology sector was led by large-cap constituent Apple (AAPL 101.42, +5.12), which advanced 5.3%. This followed bullish commentary from Piper Jaffray, who advised investors to purchase shares before the company's earnings release next week, citing a possible 50.0% upside on the stock. To be fair though, fellow tech large-caps Microsoft (MSFT 52.29, +1.81), Alphabet (GOOGL 745.46, +18.79), and Facebook (FB 97.94, +3.78) also attracted heavy buying interest with advances between 2.6% and 4.0%.

In the Dow Jones Transportation Average (+1.3%), rail giants Union Pacific (UNP 69.99, -1.01) and Norfolk Southern (NSC 68.59, -1.48) showed relative weakness posting the worst losses in the composite. The two companies fell 1.4% and 2.5%, respectively. On the other hand, the Kansas City Southern (KSU 67.41 +2.87) outperformed after reporting above consensus Q4 earnings of $1.23 per share. The stock rallied 4.5% to top the composite.

Elsewhere, the consumer discretionary space (+1.7%) ended its day near the bottom of the board. However, sector heavyweights Amazon (AMZN 596.38, +21.36) and Disney (DIS 96.90, +2.88) were able to climb off midweek lows to top the group. The two names gained 3.7% and 3.1%, respectively. Meanwhile, Starbucks (SBUX 59.17, +0.14) inched off its session low, ending just above its flat line after issuing below consensus Q2 guidance in its earnings report. During today's trade, Starbucks surrendered its 50-day moving today (59.38).

Treasuries spent their session climbing off their opening lows that were brought on by a rally in equities. The benchmark note settled just below its flat line with its yield rising one basis point to 2.05%.

Market participation was true to recent form with more than a billion shares changing hands at the NYSE floor. Additionally, advancing issues at the NYSE outpaced decliners by nearly 9 to 1.

On the economic front, today's data included the December Existing Home Sales and December's Leading Indicators.

Existing home sales surged 14.7% month-over-month in December to a seasonally adjusted annual rate of 5.46 million units from 4.76 million in November (Briefing.com consensus 5.12 million)

This was the largest monthly increase ever recorded.

December closed out the strongest year of existing home sales (5.26 million) since 2006 (6.48 million).

We wouldn't expect a repeat of such strong growth in January, partly because there is a scarcity of available inventory.

At the December sales pace, the inventory of unsold homes stood at a 3.9-month supply, which is the lowest since January 2005. A 6.0-month supply is typically maintained during normal periods of buying and selling.

The median existing home price for all housing types increased 7.6% year-over-year to $224,100, which marked the 46th consecutive month of year-over-year gains. The median existing single-family home price was up 8.0% to $226,000.

The Conference Board's Leading Economic Index declined 0.2% in December following an upwardly revised 0.5% increase (from 0.4%) for November (Briefing.com consensus -0.1%)

Notably, it was said in the release that the Leading Economic Index increased 0.7% in the second half of 2015, which was much slower than the 2.0% growth seen in the first half of the year.

The December downturn was paced by negative contributions from the ISM new orders index (-0.1) and building permits (-0.1), as well as average weekly initial claims (-0.07) and stock prices (-0.05).

Those areas offset a 0.22 percentage point contribution from the interest rate spread.

Separately, the Coincident Economic Index increased 0.1% in December while the Lagging Economic Index increased 0.2%.

There is no economic data on tap for Monday.

Russell 2000 -10.2% YTD

Nasdaq -8.3% YTD

Dow Jones -7.6% YTD

S&P 500 -6.7% YTD

Week in Review: Stocks Bounce Off January Lows

Volatility in the stock market highlighted the first two weeks of 2016 and the third week was no different as equity indices extended their year-to-date ranges to the downside before ending the week on a higher note. A broad-based rally on Friday helped the major averages register gains for the week with the Nasdaq Composite spiking 2.3% since Friday while the S&P 500 (+1.4%) and Dow Jones Industrial Average (+0.7%) followed.

To be sure, while the advance lifted the market off its lowest level since early 2014, equity indices remain deep in the red for 2016 with the S&P 500 down 6.7% for the month while the Nasdaq Composite is lower by 8.3% since the end of December. Eight sectors show month-to-date losses between 2.7% (consumer staples) and 11.2% (materials) while countercyclical telecom services and utilities hold respective January gains of 1.1% and 1.2%.

The telecom services sector was lifted near the top of the 2016 leaderboard with Verizon (VZ 47.04, +1.17) surging almost 6.0% after reporting earnings. The carrier delivered results just ahead of analysts' average expectations, but the subsequent strength was likely a function of participants seeking relative safety within the countercyclical sector.

The telecom sector accounts for just 2.3% of the S&P 500 so other groups had to contribute to the weekly advance. To that point, all but two sectors finished the week in the green with consumer discretionary (+2.5%), technology (+2.4%), and consumer staples (+1.8%) showing relative strength while industrials (-0.04%) and financials (-0.5%) could not end the week in positive territory.

The past week featured several quarterly reports from large companies, but the overall focus remained on the global macro environment and the shifting expectations for impending action from major central banks. On Thursday, the European Central Bank made no changes to its policy stance, but ECB President Mario Draghi said during his press conference that the governing council "will need to review and possibly reconsider" its monetary policy stance in March. This was viewed as a sign of more easing on the way and global equities responded with a rally. Later on Thursday, Nikkei reported that the Bank of Japan is looking at expanding the reach of its own stimulus measures, which contributed to the bid in equities that persisted into Friday.

It wasn't just stocks; however, as crude oil also rallied during the latter portion of the week, surging from a 2016 low of $26.19/bbl to $32.19/bbl in just two sessions. The advance took place despite a bearish inventory report and was likely intensified by a short squeeze. WTI crude ended the week higher by 9.4%, narrowing its January loss to 13.1%.