The Week In Review

5/20/16

The stock market ended a flat week on a higher note as the S&P 500 (+0.6%; week-to-date +0.3%) broke a three-week losing streak. Today's action featured a rebound in global equity markets, a modest gain in the dollar, and the outperformance of the heavyweight technology (+1.1%), health care (+0.8%), and consumer discretionary (+0.7%) spaces. The Nasdaq Composite (+1.2%) ended its week ahead of the benchmark index (+0.6%) and the Dow Jones Industrial Average (+0.4%).

Today's session began on a higher note as investors looked to a rebound in global indices after this week's recent Fed-fueled selling. Participants recently dialed up their expectations for the speed and path of future fed funds rate hikes, responding to Fed speakers and the FOMC minutes from the April meeting.

The major averages extended their opening gains as investors looked to sector leadership from the heavily-weighted technology (+1.2%), health care (+0.8%), and financial (+0.6%) spaces. However, equity indices pulled back after the benchmark index fell short of testing its 50-day simple moving average (2060.54).

The broader market ticked lower in the final hour, but nine sectors finished above their flat lines. The influential technology (+1.2%) sector led health care (+0.8%) and consumer discretionary (+0.7%) while countercyclical consumer staples (-0.4%) ended with the only loss.

In the technology space (+1.2%), the high-beta chipmakers ended the week on a strong note as the PHLX Semiconductor Index gained 3.2%. In the sub-group, Applied Materials (AMAT 22.66, +2.75) spiked 13.8% after beating estimates for the quarter and issuing above-consensus guidance. Elsewhere, Yahoo! (YHOO 36.50, -0.52) displayed relative weakness after headlines speculated that bids for the web portal would register between $2 billion and $3 billion. The broader technology space gained 1.4% this week, trailing only energy (+0.4%; week-to-date +1.5%).

Biotechnology demonstrated relative strength as the iShares Nasdaq Biotechnology ETF (IBB 264.18, +5.28) gained 2.0%. For the week, the ETF climbed 4.1% compared to the gain of 0.6% in the broader sector. Elsewhere, Pfizer (PFE 33.74, +0.36) led the drug manufacturer sub-group while Dow component Johnson & Johnson (JNJ 112.64, +0.59) underperformed the broader market.

Retail names ended their week on a mixed note as disappointing guidance from Ross Stores (ROST 52.49, -3.03) and Foot Locker (FL 54.77, -3.78) weighed on the names. Elsewhere, Gap (GPS 18.01, +0.73) gained 4.2% after announcing that it would close 75 stores worldwide. Separately, Nordstrom (JWN 38.12, +1.01) and L Brands (LB 63.54, +2.92) rebounded 2.7% and 4.8%, respectively.

The Dow Jones Transportation Average (+1.1%) demonstrated relative strength with courier and logistics names leading. In the broader industrial sector (+0.5%), Deere (DE 77.74, -4.51) underperformed after lowering its year-over-year cash flow guidance. However, the company did beat analysts' estimates for the quarter.

Campbell Soup (CPB 59.90, -4.08) underperformed in the consumer staples space (-0.4%) after a sales metric missed its mark.

The U.S. Dollar Index (95.34, +0.05) ended its day modestly higher, but the greenback trimmed its gain against the yen and the euro. The dollar/yen pair finished higher by 0.2% (110.16) after slipping from the 110.55 level. Separately, the euro gained 0.1% against the dollar (1.1217).

The Treasury complex finished flat with the yield on the 10-yr note ending unchanged at 1.85%.

Today's volume was above the recent average with more than 953 million shares changing hands on the NYSE floor. However, this is relatively light given that today marked an option expiration date.

Today's economic data was limited to April Existing Home Sales:

Existing home sales increased 1.7% in April to a seasonally adjusted annual rate of 5.45 million (Briefing.com consensus 5.40 million) from an upwardly revised 5.36 million (from 5.33 mln) in March.

The April number was better than expected and qualifies as another data point supporting a pickup in second quarter growth.

The uptick in April was fueled by a 12.1% increase in home sales in the Midwest.

That gain, and a 2.1% increase in home sales in the Northeast, offset existing home sales declines of 2.7% and 1.7%, respectively, in the South and West.

On a year-over-year basis, existing home sales are up 6.0%, which incorporates a 3.7% year-over-year decline in the West that was attributed to the constraints of supply shortages and price growth.

The bulk of the total existing home sales increase was led by sales of existing condominiums and co-ops, which jumped 10.3% to a seasonally adjusted annual rate of 640,000 units.

Single-family home sales were up just 0.6% to 4.81 million, although they are up 6.2% year-over-year.

The median existing condo price was $223,300 in April, up 6.8% year-over-year, while the median existing single-family home price was $233,700 in April, up 6.2% year-over-year.

The median price for all housing types in April was $232,500, up 6.3% year-over-year.

The share of first-time buyers in April was 32% versus 30% in March and the same period a year ago.

The pickup in first-time buyers is good to see since they are integral to driving existing home sales activity.

At the current sales pace, unsold inventory sits at a 4.7-month supply, which is up from 4.4 months in March. Still, that is well below the 6.0-month supply typically seen during normal periods of buying and selling.

There is economic data of note scheduled for Monday.

Nasdaq Composite -4.8% YTD

Russell 2000 -2.1% YTD

Dow Jones +0.4% YTD

S&P 500 +0.4% YTD

Week in Review: Rate Hike Odds Rising

The stock market ended the trading week on a modestly higher note thanks to a Friday rally that helped the S&P 500 lock in a 0.3% gain for the week. The Nasdaq Composite outperformed, climbing 1.1%, while the Dow Jones Industrial Average (-0.2%) lagged.

The S&P 500 was able to eke out a slim gain even though the week was dominated by discussions concerning rate hike expectations. Comments from several Federal Reserve officials suggested that a rate hike in June is within the realm of possibilities while the FOMC Minutes from the April meeting reinforced that idea.

According to the Minutes, "Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation marking progress toward the Committee's 2.0% objective, then it would likely be appropriate for the Committee to increase the target range for the federal funds rate in June."

As for inflation, the April CPI report that was released on Tuesday showed hotter-than-expected headline inflation (+0.4%; Briefing.com consensus 0.3%) while core CPI increased an in-line 0.2%.

The commentary emanating from the Fed led to an uptick in rate hike expectations as expressed by the fed funds futures market. Last Friday, the probability of a rate hike at the June meeting was sitting at a lowly 8.0%, which increased to 30.0% by the end of the week. Furthermore, the fed funds futures market is pricing in a 55.0% likelihood of a rate hike in July.

The rate-hike discussion gave a boost to the greenback, helping the Dollar Index (95.34) register its third consecutive weekly advance after notching a fresh low for 2016 during the first week of May.