S&P 500 keeps high and volatile

BY  | FROM  | 2016-12-27 15:27

Forgive me S&P 500, it’s been eight trading days since my last closing high and I fear the worst.  Oil has moved up to prices not seen in weeks, and interest rates are 50% higher than they were the night (that dreaded night, when the sky was falling) of the election.  Surely catastrophe, poverty, and eternal short selling will follow us into the new year.  Propping up the nightmare news was that long-term mortgages posted a two-year high, at 4.30%, although they are still 50% less than the 40-year average and a long way from the double-digit rates of the early 1980s, when they reached 18%—for those who were able to get them back then.  Also, adding to the gloom is that President-Elect Trump has started to browbeat companies about what they are charging the U.S. government—not that they would overcharge even if they unpatriotically wanted to, being that the government’s process is so efficient and cost conscious.  Oh how I yearn for that Christmas rally, which has averaged a 1.4% gain the in the final week of the year (up 75.5% of the time).  Alas, it seems all I can do (and trade) is in a range, after post-election gains, which set record highs.  Guess I (as well as more than a few traders) will just watch from afar, absent any volume, hoping that Saint Goldman can push old Saint Dow up over 20,000—and to all a good night.  

There were events outside the Street, a terrorist attack in Germany killed twelve, and a gunman shot and killed the Russian ambassador to Turkey; the U.S. market did not react to the events, although the German incident was seen as putting pressure on Chancellor Merkel. In politics, the U.S. Electoral College met and voted to formally elect Trump as president, with his inauguration on Jan. 20, 2017. 

Trump continued to fill positions (requiring congressional approval) and name advisors (which requires no approval), with many of the names coming from the business circles.  Trump met separately with CEOs from defense product makers Boeing (BA; up 2.1% for the week) and Lockheed Martin (LMT; off 0.2% for the week), after criticizing their cost controls on U.S. projects; post-meeting remarks indicated that costs would be addressed by the companies.  However, Mr. Trump took to Twitter after the meeting and said that given the Lockheed F-35 cost, he has asked Boeing to “price-out” the F-18.  The bottom line for the Street was a new term: the Trump dance.

In central bank activity, Fed Chair Yellen said the employment picture was good, especially for graduating students. In economic news, UK third quarter GDP was restated up to 0.6% from the originally reported 0.5%. In the U.S., the U.S. weeklies, the Mortgage Application Report posted a 2.5% gain, compared with last week’s 4.0% decline, and the EIA Petroleum report came in with a 2.3 million barrel increase in Crude Oil Inventories, compared with last week’s pulldown of 2.6 million barrels (oil declined on the news).  The new Unemployment Claims Report came in as expected, at 256,000 for the week. The November Existing Home Sales report posted an annual rate of 5.61 million, when a 5.54 million rate was expected.  New Home Sales for November came in at 592,000 units, when 580,000 was expected, up from 563,000 in October.  The FHFA House Price Index for October posted a 0.4% gain, when a 0.5% gain was expected, and the year-over-year gain was 6.2%.  The December PMI Services Flash report came in at 53.4, down from the prior 54.7 reading.  November Durable Goods Orders came in down 4.6%, when a 4.0% decline was expected, with a year-over-year rate of -1.5%.  Durable Goods less transportation was stronger, posting a 0.5% gain (when a 0.2% gain was expected), with a year-over-year gain of 1.8%.  Personal Income for November came in unchanged, when a 0.3% gain was expected, and Consumer Spending was up 0.2%, when a 0.3% gain was expected.  The PCE Price Index came in flat for the month, as did the year-over-year value, while Core PCE was up 1.4% for the month and 1.6% year-over-year.  The Leading Indictors Report for November came in flat from October, when a 0.2% gain was expected. Consumer Sentiment for December came in at 98.2, when it was expected to be flat at 98.0.  The final third quarter GDP report placed the rate at an annualized 3.5% (the best rate in two years), stronger than the 3.2% rate that was expected; the preliminary fourth quarter report is expected on Jan. 27, 2017 (with an update on Feb. 28, 2017, and the final on March 30, 2017).

In M&A, Canadian insurance issue Fairfax Financial (FRFHF; up 5.8% for the week) said it would buy Switzerland's Allied World Assurance (AWH; up 17.4% for the week) in a USD 4.9 billion cash and stock deal.  U.S. phosphate and potash crop nutrients for agriculture issue Mosaic (MOS; off 1.3% for the week) said it would buy Brazilian mining issue Vale’s (VALE; off 5.6% for the week) fertilizer business for USD 2.5 billion.  Global oil issue BP plc (BP; up 1.20% for the week) announced that it would invest USD 1 billion in gas fields off the coast of northwest Africa.  Specialty gases issue Praxair (PX; off 4.0% for the week) said it would merge with German Linde AG, after two years of on-and-off discussions, in a deal which would create a USD 678 billion company. Lloyds Banking Group (LLOY; flat for the week) said it would buy Bank of America’s (BAC; off 0.3% for the week) MBNA credit card unit for USD 2.4 billion.  Beverage maker Coca-Cola (KO; off 0.3% for the week) said it would buy Anheuser-Busch InBev’s (BUD; up 0.5% for the week) 54% investment in Coco-Cola Beverage Africa for USD 3.15 billion.  Johnson & Johnson (JNJ; flat for the week) re-entered the Actelion (ALIOY; also flat for the week) merger deal talk, after walking away due to price (at least that is the public story), though some are saying it’s all part of the new Trump.  

On an issue level, game maker Nintendo (NTDOY; off 7.6% for the week) received lukewarm (at best) reviews for its new Super Mario Run game. Iran has finalized a deal with Airbus (EADSY; off 1.72% for the week) to acquire 100 jetliners, adjusting the previous sale from 118 planes and the value from USD 25 billion to USD 10 billion. 

Also of note, a French court found current IMF Chief Christine Lagarde guilty of negligence during her term as French finance minister; she will continue at the IMF.  The U.S. settled separate suits over mortgage securities with Deutsche Bank (DB; off 2.0% for the week) for USD 7.2 billion and Credit Suisse (CS; off 2.8% for the week) for USD 5.3 billion.  Italy set up a USD 20.9 billion fund to assist troubled banks.

The market continued to consolidate its gains, as it traded in a tight range, which was generally seen as positive, given that it managed to hold its position.  For the week, the index closed at 2,263.79, up 0.25% from last week’s closing high of 2,258.07, when it had declined 0.06%.  The slight gain left the market only 0.35% away from a new closing high (set Dec. 13, 2016, at 2,271.72) and up 5.81% from the election.  With only four trading days left to the year, the market is up 10.76% year-to-date (13.18% with dividends), making it a very good year for the S&P 500, as a whole – especially given that it was down 10.51% on Feb 11, 2016.

Breadth tuned positive after last week’s three-to-two negative performance.  For the week, 288 issues gained, up from last week’s 200 and 216 declined, up from the prior week’s 303.  One issue gained at least 10% (none did last week) and two additional issues were up at least 5% (five were the prior week).  Two issues declined at least 10% (11 did so last week), and ten additional issues declined at least 5% (34 did so the prior week).  Year-to-date, breadth slightly declined again, as 374 gained (376 last week), with 270 issues gaining at least 10% (270 last week) and 167 of them up at least 20% (157 last week).  On the year-to-date downside, 128 issues were down (126 last week), with 66 of them off at least 10% (66 last week), and 30 of them were down at least 20% (29 last week).  

Trading was slow for the week and expected to be slow for next week’s holiday week.  Six of the 11 sectors gained, the same number as last week (but different sectors), compared to the prior week’s 11 for 11 gainers, when the market closed at a closing high.  Telecommunication services was the big winner, up 2.40%, and it is up 18.45% year-to-date.  Financials posted a 0.85% gain, as it continued up, posting an 18.17% gain since the Nov. 8, 2016, election, and up 21.86% year-to-date.  Energy fell 0.29% for the week, but it maintained its first place standing year-to-date, up 25.22%, and its last place standing from the end of 2014, off 4.27%.  Real estate did the worst, off 0.35%, as it is off 1.15%.  Health care posted a 0.22% decline, as it is set to be the worst sector for year, with a current year-to-date return of -3.53%.

Trading declined 31% for the week, after last week’s 10% advance, and it was 22% lower than the one-year average.  Trading continued to be calm, even as there were two terrorist attacks.  Measurable volatility (the high-over-low price variance), which was already low, decreased, coming in at 0.73%, the lowest weekly reading since May 2015, down from last week’s 1.29% and the prior week’s 2.72%, with the one-year weekly average at 2.44%.  No day posted an increase of at least 1%, as Tuesday saw the greatest change—a mere 0.36% gain (Wednesday was the worst day, off 0.25%).

The VIX decreased for the week, closing at 11.44 from last week’s 12.20 (22.51 at the end of October), showing very little forward concern.  Interest rates were little moved, as the 10-year U.S. Treasury closed at 2.54%, down from last week’s 2.59% (year-end 2015 was 2.28%).  The 30-year U.S. Treasury closed at 3.12%, down from last week’s 3.17%.  Oil was mostly stable (with a little volatility on Wednesday, as the EIA report came out); it closed up at USD 53.25, up from last week’s USD 52.03.  Gold ticked down, closing at USD 1,135.20, down from last week’s USD 1,136.60.  The euro closed at 1.0456, down from last week’s 1.0451, and the pound closed at 1.2285, down from last week’s 1.2485 (it was 1.50 the night of the Brexit vote).  The yen (quoted in yen to U.S. dollars) closed at 117.32, down from last week’s 117.92.  The yuan closed at 6.9463, down from last week’s 6.9593.  

On a market-value basis, the S&P Global BMI increased USD 15 billion for the week, compared with last week’s USD 299 billion decrease; year-to-date, the index was up USD 2,199 billion (to USD 45.218 trillion).  The S&P 500 decreased USD 23 billion for the week, compared with last week’s USD 13 billion decrease, and it was up USD 1,583 billion year-to-date (to USD 19.483 trillion).  The S&P 500 represented 43.09% of the S&P Global BMI, down from last week’s 43.15% (it represented 41.61% at year-end 2015 and 33.87% at year-end 2010).  The Nikkei was up 0.14% for the week (up 2.13% last week) and is up 2.07% year-to-date.  The Shanghai was off 0.41% (off 3.40% last week) and is down 12.12% year-to-date.

The market and banks are closed Monday (for the Christmas holiday), as only four trading days remain for the year; markets and banks are closed the following Monday, Jan. 2, 2017, for New Year’s Day.  The opening week of 2016 was its worst five-day opening in history, for the S&P 500 and the Dow Jones Industrial Average.  The reality was that S&P 500 investors lost USD 1.05 trillion, as global markets declined USD 1.59 trillion, to take USD 2.64 trillion out of the pockets of investors.  Let’s hope 2017 is not a repeat.  

Trading may vary next week, as year-end window dressing could come into play. Economic reports will be few next week, as the year comes to a close.  Tuesday will bring the S&P CoreLogic Case-Shiller Home Price Index for October, along with the December Consumer Confidence level (at 10 a.m.).  Wednesday will bring the weekly new Mortgage Application Report, as well as the Pending Home Report for November (at 10 a.m.).  Thursday will bring the weekly new Unemployment Claims numbers, which will be the last major report for the year. There are only two scheduled earning reports next week, both after the close on Wednesday, and both technology issues: microcomputer parts maker Micron Technology (MU) and software and services issue Red Hat (RHT).  Three issues will report the week after (Jan. 2–6, 2017), with three the week after that (Jan. 9–13, 2017).  The real fun will begin on Friday, Jan. 17, 2017, when the banks start, with Bank of America (BAC), JPMorgan (JPM), and Wells Fargo (WFC) reporting.


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