The market set a new intraday and closing high

BY  | FROM  | 2016-08-23 12:06

“United we stand, divided we…”—I don’t think I’ll finish that quote.  The FOMC notes showed that most felt the time was getting close to increase interest rates, but actually doing it appeared to be something else.  The Fed appeared to be looking for more of a consensus, with the broader agreement being that more data was needed.  Given the calendar of economic releases until the September 20-21, 2016, meeting, the Street’s lack of belief that it will increase soon has merit.  While the Fed can increase the rate at any time, no one expects it at the November 1-2, 2016, meeting, given that the U.S. presidential election is a week later, on November 8, 2016.  That leaves December as the next opening, with sufficient time for the positive data.  Still, using futures to calculate the event, the chances are less than 50%.  There is also talk of the Fed being “gun-shy” to pull the trigger on interest rates, with many accepting that late is better than early for the economy.  The bottom line at this point is that the FOMC will most likely increase interest rates, but it may not be until 2017. The background story, but on the front line for the market, was oil, which continued to inch up.  There are calls for USD 50, as oil closed at USD 48.57, up from last week’s USD 44.69; oil was under USD 40 in early August.  Also in the background were exchange rates, as the yen broke under 100 to the U.S. dollar, closing at 100.14.  The British pound, which went from 1.50 to the U.S. dollar to under 1.30, saw retail spending increase, with some analysis showing that the cheaper pound led to increased spending (the pound closed at 1.31). On the forward line is next week’s Fed symposium in Jackson Hall, on Thursday and Friday, with Chair Yellen’s speech at 11 a.m. on Friday, August 26, 2016 (the S&P 500 first closed over 2,000 on August 26, 2014, exactly two years ago, so how nice it would be to reach 2,200 on that day?  We closed at this week at 2,183.87).
 
With over 95% of earnings season over, retail reports dominated the market with mixed results.  The takeaway appeared to be that consumers were still spending, but they were picking their buys.  Even between competitors, reports differed, as business models, marketing, and inventories played a key role.  Winning retailers included Urban Outfitters (URBN) up 23.4%, Foot Locker (FL) up 12.0% and Gap (GPS) up 7.6%, as decliners included Staples (SPLS) off 8.4%, Target (TGT) off 6.9% and Best Buy (BBY) down 6.5%.  Overall, the quarter shows that retail remains a difficult environment to operate in, with low margins and a cautious customer base.  School season is starting up, but few reports mentioned expectations.
 
In economic news, Japanese Q2 GDP declined to an annualized 0.2% rate, much weaker than the 2.0% rate for the first quarter. Japanese exports declined 14% year-over-year for July, marking the tenth monthly decline, and imports declined 24.7%.  Chinese housing prices increased 7.9% year-over-year for July, as stimulus programs appeared to help. U.K. Q2 2016 inflation increased at a 0.6% rate, up from the prior quarter’s 0.5%.  Unemployment came in unchanged for the period, as expected, at 4.9% (the same as before the Brexit vote).  U.K. retail sales in July increased 1.4%.  The lower pound appeared to play a part; the higher sales helped boost U.K. stocks and the pound.
 
In U.S. economics, the July CPI came in flat as expected, which left the year-over-year rate at 0.8%—disappointing, and not what the Fed wants.  Core CPI was up 0.1%, when a 0.2% increase was expected, leaving it up 2.2% year-over-year.  The July Housing Starts came in up 2.1%, at an annual rate of 1.21 million, when a 1.18 million rate was expected (June was 1.19 million).  Permits, however, declined 0.1%, to an annual rate of 1.15 million. Industrial Production came in stronger than expected, up 0.7%, when a lower 0.3% gain was expected.  However, June was restated down to 0.4% from the originally reported 0.6% gain.  Capacity Utilization increased more than expected, to 75.9%, from last month’s 75.4%.  The weekly new Mortgage Application report posted a 4.0% decline, as both purchase and refinancing ones fell 4.0%.  The weekly EIA Petroleum crude oil inventory report posted a 2.5 million barrel decline (to 521 million; more than expected), as gasoline inventories declined 2.7 million barrels (to 233 million barrels; more than expected).  Oil was volatile as the report came out, but it moved up to become positive for the day.  The weekly new unemployment claims report came in with 262,000 new claims, slightly less than the 265,000 expected (last week was 266,000).  The July Leading Indicator Report came in up 0.4%, when a 0.2% gain was expected (which would have been down from June’s 0.3% gain). The FOMC notes to their July 26-27, 2016, meeting showed that it felt economic conditions permitted an increase, with the economic risk balanced, but concern remained about inflation and a lack of business investment.  Many felt okay about an increase but wanted more data and a wider agreement.  The market continued to see no increase in September and less than a 50% chance for December.  The market moved up on the notes.
 
In M&A, real estate issue Mid-America Apartment (MAA; off 7.4% for the week) said it would buy Post Properties (PPS; up 6.4% for the week) for USD 4 billion in a share deal.  Aerospace and automotive supplier Honeywell (HON; flat for the week) was rumored to be close to closing a deal to buy JDA Software.  Xylem (XYL; up 4.8% for the week) was reported to be considering an offer for Sensus USA for USD 1.7 billion.  Private issue KKR was said to be considering a USD 1.3 billion offer for television distributor Entertainment One (ENTMF; up 9.3% for the week).  ValueAct Capital Management announced a 2% position in brokerage house Morgan Stanley (MS; up 4.7% for the week).  Industrial German issue Linde AG (LNEGY; up 11.3% for the week) and U.S. Praxair (PX; up 5.0% for the week) were reported to be in merger talks to combine their companies, with a market value of USD 60 billion.
 
In layoffs, network product maker Cisco Systems (CSCO; off 1.1% for the week) will lay off 5,500 employees, 7% of their workforce. SolarCity (SCTY; off 0.8% for the week) said it is planning layoffs as part of its cost-cutting program. 
 
In other news, auto maker Ford (F; up 0.5% for the week) said it planned to have a fully autonomous vehicle by 2021, which will have commercial applications such as ride hailing or parcel delivery.  China released plans for stock-trading links between Shanghai and Hong Kong issues for later this year. Oil continued up on talk (and rumors) that producers would support prices, but many traders got burned last April when the talk was for limiting output.
 
For the week, the market set a new intraday and closing high on Monday (2,193.81 and 2,190.15, respectively).  The market, did however, close lower, at 2,183.87, a minor 0.01% decrease from last week’s 2,184.05 (which was up 0.05% from the week before that).  Year-to-date, the market is up 6.854% (8.39% with dividends), and is up 19.40% from its February 11, 2016, low of 1,829.08, and up 3.34% from the start of earnings season (June 30). 
 
Breadth turned positive after last week’s neutrality, as the market set a new intraday and closing high on Monday.  For the week, 271 issues gained, up from last week’s 232, and 231 declined, down from the prior week’s 250.  Six issues gained at least 10% (six did so last week), with another 21 up at least 5% (12 were the prior week).  No issue declined at least 10% (four did last week) and eight issues declined at least 5% (six did the prior week).  Year-to-date, breadth continued to be positive, as 354 were up (the same as last week), with 247 (246) issues gaining at least 10%, and 115 (118) of them up at least 20%.  On the year-to-date down side, 147 (148 last week) issues were down, as 64 (70) of them were off at least 10%, and 20 (24) of them were down at least 20%. 
 
On a sector basis, five of the ten sectors gained in price, compared with six last week (and the prior week’s four).  Sector returns varied, with issues following through the same way.  Energy again did the best, up 1.97% for the week, after last week’s 1.25% gain, with the reason again being oil, which closed at USD 48.57, up from last week’s USD 44.69 (and the prior week’s USD 41.98); the sector is up 15.55% year-to-date. Consumer sectors reversed last week’s gains, as mixed earnings reports and guidance left them down.  Consumer discretionary was down 0.70% (after last week’s 0.55% gain), and consumer staples was down 0.27% (after last week’s 0.71% gain).  Year-to-date, the sectors were up 4.07% and up 8.38%, respectively.  Telecommunication services did the worst, off 3.84% for the week, as AT&T (T) fell 5.2%, but is up 19.2% year-to-date.  The sector remains up 15.26% year-to-date, which is second only to utilities, which is up 15.52% year-to-date (after declining 1.29% for the week).  Health care fell 0.67% for the week (after last week’s 0.63% decline), as news continued to be poor on the profitability of the new health care act; the sector is up 3.00% year-to-date.
 
Trading has been low, even for August; the month-to-date is 11.8% lower than the 10-year August average.  Trading volume for the week decreased 1%, after last week’s 12% decline, and it remains 19% lower than the one-year average weekly volume.  Measurable volatility (the high-over-low price variance) continued to be low but increased for the week, up to 1.17% from last week’s 0.76% (1.64% the prior week), with the one-year weekly average at 3.05%.  The days without 1% moves continued, with none since July 8, 2016, when it was up 1.53%.  Tuesday’s 0.55% decline, after Monday’s record close, was the largest move for the week. 
 
The VIX was volatile, as it reached 13.71 but declined at the end of the week.  It closed down, at 11.34 from last week’s 11.55 (less than one-half of the 26.76 posted during the Brexit downturn).  Interest rates were also volatile, as they increased, even as the FOMC notes changed few minds.  The 10-year U.S. Treasury closed at 1.58%, up from last week’s 1.51% and down from the prior week’s 1.59%.  The 30-year U.S. Treasury closed at 2.29%, up from last week’s 2.23% and down from the prior week’s 2.32%.  Oil prices increased for the week, as they closed the week at USD 48.57, up from last week’s USD 44.69 (and the prior week’s USD 41.98).  Gold also increased, to close at USD 1,347.80, up from last week’s USD 1,341.70 (USD 1,341.40 the prior week).  The euro closed at 1.1326, up from last week’s 1.1163, as the pound closed at 1.3076, up from last week’s 1.2920 (it was 1.50 the night of the Brexit vote).  The yen (quoted in yen-to-U.S. dollars, so higher is weaker) closed at 100.21, down from last week’s 101.29, as it briefly traded under 100.  The yuan closed at 6.6523, down from last week’s 6.6408.
 
On a market-value basis, the S&P Global BMI decreased USD 80 billion for the week, compared with last week’s USD 587 billion increase; year-to-date, the index was up USD 1,908 billion.  The S&P 500 increased USD 2 billion for the week, compared with last week’s USD 10 billion increase, and it was up USD 1,032 billion year-to-date.  The S&P 500 represented 42.14% of the BMI, up from last week’s 42.06% (it represented 41.61% at year-end 2015 and 33.87% at year-end 2010).  The Nikkei was off 2.21% for the week (up 4.09% last week) and off 13.07% year-to-date.  The Shanghai was up 1.88% for the week (up 2.48% last week) and down 12.18% year-to-date. 
 
Next week is expected to be dominated by the Fed’s annual symposium in Jackson Hall on Thursday and Friday (August 25-26), with the highlight being Chair Yellen’s 11 a.m. Friday speech. Economic reports will pick up next week; Tuesday will bring the July New Home Sales and June FHFA Home Prices, and July’s Existing Home Sales will come out on Wednesday.  Thursday will bring the July Durable Orders and Shipments.  Friday will end the week with the July trade report, detailing imports and exports as well as Wholesale Inventories.  The second quarter GDP will also be updated.
 
With over 95% of the second quarter reported, the finishing touches on the quarter will play out.  To date, 70% of the issues have beaten their estimates, as the quarter did its job of supporting the market.  Earnings were higher than the depressed Q1 2016 period, but there was not a significant gain.  The gain permitted prices to hold their multiples, which are still a major concern on the street.  At this point the third quarter estimates have held, which call for a record quarter.  At the least, earnings will need to show another improvement from the second quarter to support the market.  For next week, 15 issues, representing 2.1% of the market value, are scheduled to report.  Earnings highlights will include Tuesday’s electronics issue Best Buy (BBY), and technology solution issue Hewlett Packard Enterprise (HPE) will report after the close.  Thursday will bring low-end discount stores Dollar General (DG) and Dollar Tree (DLTR), as well as jewelry stores Signet Jewelers (SIG) and high-end issue Tiffany (TIF).  Thursday will close the week out with semiconductor maker Broadcom (AVGO) reporting after the close.
 

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