Month: November 2017

Equities rallied to new all-time highs this week. The S&P 500 has risen in 75 percent of Thanksgiving weeks since 1945, and is well on its way to another win.

Consumer discretionary and staples have powered the push to new highs, supported by strong Wal-Mart (WMT) earnings.

SPDR S&P Retail (XRT) climbed to a new 7-month high in the past week. It has matched the performance of Amplify Online Retail (IBUY) since the summer. IBUY rose to a new 52-week high in the past week.

Hedge funds have remained heavily long-technology (as of September 30^th). According to Goldman Sachs, 7 of the top 10 holdings are tech stocks: Facebook (FB), Amazon (AMZN), Alibaba (BABA), Alphabet (GOOGL), Microsoft (MSFT), Apple (AAPL) and NXP Semiconductors (NXPI). The other top holdings are Time Warner (TWX), Bank of America (BAC) and Citigroup (C).

Semiconductors have driven technology’s rise over the past 18 months. Hedge funds have shorted Intel (INTC) and Nvidia (NVDA), but both stocks are up sharply in 2017. Hedge fund managers got burned by another top-10 short position in Wal-Mart last week.

Homebuilders extended their 2017 rally last week. Existing home sales were stronger than expected, hitting an annualized pace of 5.48 million in October. Housing starts and building permits also beat expectations in October. Homebuilder confidence hit its second-highest level over the past 12 months in November.

West Texas Intermediate crude took another run at $58 a barrel on Wednesday, but energy stocks have yet to follow it higher.

Asian markets rallied strongly in the past week, led by a spike in Chinese shares. Tencent passed Facebook (FB) in market capitalization, making it the largest social media company in the world.

iShares China Large Cap (FXI) is approaching a major resistance line, but the rally comes as Chinese credit growth has stalled, and odds are the Chinese market is peaking.

The Hang Seng Index is approaching its 2007 high as Chinese money flows into Chinese stocks only available in Hong Kong, such as Tencent. Asia ex-Japan funds such as AAXJ are tracking the Hong Kong market. Funds covering the mainland market, such as ASHR and CNXT, are still well below their 2015 highs.

The U.S. Dollar weakened in November and the S&P 500 Index finally started underperforming the MSCI EAFE. The rally in U.S. technology giants pushed the S&P 500 into relative outperformance despite the weaker dollar in early November, but this gave way over the past week. This dip in relative performance could prove short lived.

The U.S. Dollar Index has bounced off its 50-day moving average multiple times since bottoming in early September.

Stocks rallied at the open on Monday as investors bid consumer stocks ahead of the holiday shopping season. Consumer discretionary made a new 52-week high on Monday.

Markets will close for Thanksgiving and open half the day on Friday. The holiday-shortened week has been historically good for stocks. Since 1945, stocks have rallied 75 percent of the time with an average return of 0.6 percent. Retail stocks could carry momentum from recent earnings forward if Black Friday sales are strong. SPDR S&P Retail (XRT) opened higher on Monday as well.

Analysts anticipate home sales hit an annualized pace of 5.45 million in October, up from 5.39 million in September. Durable goods orders are expected to increase 0.5 percent. Friday will bring the flash manufacturing and service PMIs for November. The November Federal Open Market Committee meeting will also be out this week. Odds of a December rate hike climbed to 100 percent in the days following the meeting. Rate hike odds have crept even higher in the futures market, with the odds of a 50 basis point hike currently at 8.5 percent.

The euro weakened on Monday and gold tumbled after German Chancellor Angela Merkel failed to gain support following her September electoral win. Germany must now hold another election. iShares MSCI Germany (EWG) has underperformed the S&P 500 Index since the September election. The euro has also struggled against the dollar. Merkel was a major force of stability during the multiple rounds of the Greek debt crisis and a counterweight to rising populist forces in Europe. The current political trajectory in Germany is bearish for the euro and that will create headwinds for developed-market funds.

The 10-year Treasury yield opened the week at 2.35 percent. It edged higher on Monday after German bond yields climbed higher. Libor started moving last week in anticipation of a December rate hike. The 1-month interbank interest rate closed last week at 1.29 percent, up from 1.25 percent. A hike at the December FOMC meeting will lift the Fed Funds Rate 0.25 percent, to a range of 1.25 to 1.50 percent.

West Texas Intermediate crude oil slipped below $56 a barrel on Monday. Energy stocks slid over the past two weeks, but the energy exploration and services subsectors rebounded over the past few days. Natural gas prices also fell on Monday.

Earning reports will be light this week. Medical device maker Medtronic (MDT) Salesforce.com (CRM), Analog Devices (ADI), Hormel (HRL), Campbell Soup (CPB), Deere (DE), Lowe’s (LOW), Dollar Tree (DLTR), Urban Outfitters (URBN), Intuit (INTU), Agilent (A) and Palo Alto Networks (PANW) are all scheduled to report.

The Russell 2000 gained 1.2 percent on the week, and the Nasdaq rallied 0.5 percent. The Dow Jones Industrial Average and S&P 500 Index saw small losses of 0.3 and 0.1 percent.

The House passed its version of tax reform on Thursday. Attention now turns to the Senate, which must pass its version before the two can hash out the differences in conference. Heading into this week, lawmakers were hoping to have both bills passed by Thanksgiving and the final bill on the President’s desk by Christmas. One GOP Senator already came out against the Senate bill, however, citing the high tax rates for partnerships and other businesses that do not incorporate. Investors have priced tax reform into stocks and its failure could have repercussions for the 2018 midterm Congressional elections, as well as Federal Reserve policy and the economy. Fed officials have factored fiscal stimulus from Washington into their rate hike plans this year and next. Consumer confidence rose sharply this year, partly in expectation of higher disposable income following tax cuts.

Producer prices rose faster than expected, up 0.4 percent in October versus 0.1 percent expected. Headline consumer prices rose 0.1 percent and core CPI 0.2 percent. Both met expectations. October retail rales exceeded forecasts. Initial claims for unemployment rose to 249,000 last week, in line with the 2017 average of 245,000. Industrial production and capacity utilization were stronger than expected in October. The National Association of Homebuilders’ confidence index rose to 70, the highest level since February. Housing starts and building permits for October also beat forecasts.

Overseas data was mixed. Inflation data in Europe and Canada met expectations. Chinese investment data showed signs of a slowdown.

Crude oil prices eased during the week, but climbed back above $56 on Friday. U.S. production has been rising, in addition to the higher rig count.  SPDR Energy (XLE) fell 3.2 percent on the week.

General Electric (GE) announced a 50-percent cut to its dividend this week. Shares fell more than 10 percent from Friday’s close to Tuesday’s before rebounding. The dip pulled SPDR Industrials (XLI) down 0.8 percent for the week.

Even though inflation data was dollar-positive this week, the U.S. Dollar Index declined 0.6 percent as the euro and yen rallied. Both currencies are nearing their two-month highs. The 10-year Treasury yield fell to 22.35 percent after starting the week at 2.40 percent.

Brick-and-mortar retailers rallied this week after sporting goods retailers reported solid earnings. Shares of Footlocker (FL) gained 28 percent on Friday following its earnings report. While physical retail performed well, the best news came from Wal-Mart’s (WMT) online division. Wal-Mart (WMT) climbed double-digits on Thursday, to a new all-time high, after it reported online sales growth of 50 percent. That helped the firm beat earnings estimates by three cents and revenue forecasts by $2 billion. Same-store sales were strong too, up 2.7 percent versus forecasts of 1.8 percent. Rising grocery sales also drove shares higher. Grocery stocks, including Wal-Mart, slumped in June when Amazon (AMZN) announced its purchase of Whole Foods. Wal-Mart’s strong results indicate it is handling the competitive threat well.