Merrily We Roll Along

Merrily we roll along.  Stocks floated up on a quiet day led by technology where even bad economic data can’t contain the good feelings.  The session started off with some weak economic data but surging tech shares dragged equities higher with all the major indexes closing near their highs.

What you need to know:

1) The January comeback in stocks continues and is led by more speculative growth shares.  The tech heavy NASDAQ 100 is up by +17.98% since its December low and the large cap S&P500 Index is up by +15.9%.  The leadership by growth and tech is consistent with moves in the past, like January, 2018.

2) The Fed continues to send its message of patience as governors spread the word on the speaking circuit.  Though it should already be baked into the market, the Powell pivot continues to deliver as squeamish investors begin to wade back into equities.

3) Bonds seem to be sending a different message than stocks.  Ten year yields have moved up by 10 basis points in just 1 session after dipping last week.  Investment grade and high yield corporate bonds have had a great month almost echoing stock returns.  The move is characterized by contracting spreads, which is a risk-on indicator.

Stocks had nowhere to go but up yesterday as good feelings continue to swirl through the markets. Factory Orders contracted by -0.6% missing expectations and Durable Orders disappointed as well growing by +0.8%, short of projections.  The initial market response was selling, but as the session progressed, traders dusted off the bad news and followed the trend, which has of late, been positive. The S&P500 climbed by +0.68%, the Dow Jone Industrial Average rose by +.7%, the Russell 2000 gained +1.03%, and the NASDAQ 100 surged by +1.23%.   Many investors were suspecting that corporate earnings were set to deliver some negative surprises but so far the results seem to be pointing to another solid quarter.  It should be noted that analysts have been lowering the bar somewhat, so an earnings beat may not be all that its seems.  Many traders have been focused on forward guidance, which certainly has had an overall muted tone, though it is not evident in the almost overbought stock indexes.  Though the recent rally has been broad-based, the leadership still goes to the more speculative shares which typically lead the markets higher.  The FAANG index, for example, is up by +22.95% since the market’s December lows compared to the S&P500, which is up by +15.9% over the same period.  Amongst yesterday’s tech winners were Apple, Adobe, Microsoft, and Nvidia which all posted strong gains on the day.  Last night after the close, Alphabet/Google announced earnings and though the company handily beat earnings estimates, its profit margins were lower than expected as expenses grew at a greater than expected pace.  The growth in spending was attributed to the company's investment in cloud computing hardware.  This makes sense as cloud computing and storage represents significant growth for the company, but investors were unhappy and the stock sold off by around -2.6% in after market trading.  Though it is not yet clear, bonds continue to make interesting moves, which tells us that bond traders are still somewhat skeptical about the duration of the Fed pause.  The bond market is often looked at as being the more sensible of the markets as they are primarily driven by economic conditions and policy.  Though animal spirits do take over in some cases, for the most part bond traders tend to stick to the facts.  It is therefore prudent for investors to watch the bond market carefully in coming weeks as a confirmation of the recent move in stocks.  Ten year treasuries will start this morning's session at 2.73% and the slightly steeper 2/10 yield curve is at 19 basis points.

This morning we will get PMI’s from Markit and ISM.  Markit Services PMI is expected to come in flat at 54.2 and the ISM non-manufacturing Index is expected to be at 57.1 down from last month’s 67.6.  For more information on PMI’s and their importance see my note on the subject here: https://www.siebertnet.com/blog/index.php/2019/01/02/out-with-a-bang/.  We have a number of pre-bell earnings releases including Viacom and Archer-Daniels-Midland.  After the bell we will hear from Disney and Snap, amongst others.  Traders are awaiting tonight’s State of The Union speech.  Though the address is usually not a market mover, investors will look for clues on the potential for another shutdown… which could be a market mover.

daily chartbook 2019-02-05