Monday, July 4, 2016

Weekly Market Outlook 7/5


Stock Market

U.S. stocks closed higher Friday for the fourth day in a row, staging a big comeback after a swoon following Britain’s historic vote to leave the European Union.  The U.S. market ended the week up 3 percent, its biggest weekly gain since November. British stocks have regained all the ground they lost since the vote last week, and U.S. stocks have come close.

The Q2 earnings season will get into the spotlight following Alcoa’s  July 11th report. But the earnings season has actually gotten underway already, with results from 21 S&P 500 members already out.  Total earnings for the 21 index members that have reported results are down -4.1% on +0.9% higher revenues, with 60% beating EPS estimates and equal proportion coming ahead of top-line expectations. Comparison of the Q2 results thus far with prior periods offers a mixed picture. But it’s likely too small a sample to draw any conclusions from in any case.  For Q2 as a whole, total earnings for the S&P 500 are expected to be down -6.2% on -0.7% lower revenues. This will be the 5th quarter in a row of negative earnings growth for the S&P 500 index.

The Energy sector remains the biggest drag on the aggregate growth picture, with total earnings for the sector expected to be down -78.9% on -27.1% lower revenues.Excluding the Energy sector, earnings for the rest of the index would be down -2.8%.

Shifting focus to market sentiment, as most of you know, I follow momentum levels very closely and since March, medium term momentum levels have been declining from a historic high, when over 90% of stocks in the SP 500 began trading above the 50 day moving average.

Finally, when the market reacted to Britain’s exit and lost close to 5% in value, the medium term momentum level finally moved into oversold territory, which was characterized by by roughly 20% of stocks in the SP 500 trading above the 50 day line, which is considered reasonably oversold.

july150
Based on the current sentiment, the odds are fairly strong that the market is going to stay near the 50 day line and congest over the next few sessions, till Global markets gain a bit more certainty and volatility levels continue to decline further.

july1spy

Don’t expect too much directional bias till bonds begin breaking lower and that’s the topic I’m going to jump into next.


Bond Market

Initial claims in the June 25 week did rise 10,000 to a slightly higher-than-expected 268,000 but follow a revised decline of 19,000 to 258,000 in the prior week. The 4-week average is unchanged in the latest week at a 266,750 level that is roughly 10,000 below a month-ago in what is a favorable indication for the June employment report.

claims

Continuing claims confirm the labor market’s strength, down 20,000 in lagging data for the June 18 week to 2.120 million.  In an important comparison, the June 18 week was also the sample week for the June employment report and a specific comparison with the sample week of the May employment report shows a very sizable 40,000 improvement.  The 4-week average, down 13,000 in the week at 2.134 million, is 17,000 below the May sample week. The good news continues with a 1 tenth down-tick in the unemployment rate for insured workers to a record low 1.5 percent.

The main driver of the long bond in the past week was Britain’s decision to leave the E.U. and both the 30 year and 10 year bond are near all time highs, since foreign money is rotating into U.S. bonds and out of foreign stocks, which is only driving bonds higher, even though most indicators are pointing to higher interest rates and lower bond prices over the next few months.

Technically, the long bond is oversold based on just about every technical factor imaginable, including penetration of upper Bollinger Band, excessively high RSI levels and divergence between the RSI and price action, which typically leads to a long term price reversal, which is what I’m expecting from the long bonds over the next few months, since the odds are fairly high that the FED will begin raising rates towards the end of the year and bonds will begin “pricing in” higher yield and begin trading lower, since they trade inverse to interest rates.

july1tlt

The most likely scenario is a pullback down to the 50 day line, which will congest till we begin getting a bit closer the end of the year. The U.S. dollar should begin rising in anticipation of higher rates and that should cause commodities and bond prices to move sharply lower in the coming months.


Crude Oil 

Crude oil inventories fell 4.1 million barrels in the June 24 week to 526.6 million, extending an uninterrupted series of weekly declines to its sixth week.

Gasoline inventories rose 1.4 million barrels while distillate fuel fell 1.8 million. Year-on-year, both crude oil and refined product stocks are still much higher than a year ago at this time, but the gain is quickly shrinking, with crude oil now up 13 percent while gasoline is up 10.3 percent and distillate fuel up 10.8 percent.

crudejuly

Refineries were operating at a very high 93.0% capacity last week, but production of gasoline decreased slightly to 10.0 million barrels per day while distillate fuel oil production rose marginally to average 5.0 million barrels.  Motor gasoline demand averaged 9.7 million barrels per day over the last four weeks, 1.8 percent higher than last year at this time, but distillate demand was 2.9 percent weaker, averaging 3.8 million barrels per day.  Technically, crude may have reached a price high for the current cycle and could well be on it’s way back down along with the rest of the commodities complex. The RSI reached above 70 in early June and price has stagnated since that time.

july1uso

The main trend or the long term trend remains neutral to bearish and fundamentally it’s hard to imagine that Crude oil could have moved so high over the past several months.  The main culprit is the weakness from the U.S. dollar, which moves inverse to commodities and has caused overall support for defensive stocks, commodities and the bond market. With FED targeting raising rates in December, it’s more than likely that we will start seeing a break in the commodity complex and that includes Crude Oil and Gold, in addition to Grains and Softs.


Gold Market

Gold continues to rally in light of weaker U.S. dollar and uncertainty surrounding Britain leaving the Euro. Technically, the entire Gold market is extremely overbought and has gained well over 100% over the past year.  Just about every oscillator is pointing to sharp pullback in price of Gold, which should happen as we get closer to the end of the year, when the markets will begin assimilating higher rates and that will translate into higher value for the U.S. dollar and lower overall price for Gold.

Furthermore, economy is picking up in the U.S., granted much slower than expected, but employment is once again on track, GDP is recovering and earnings revisions for the first time are not as negative as we’ve seen over the past 5 quarters.  Don’t expect too much additional upside, since markets begin discounting everything known, well ahead of time.

Have a great day!

Courtesy of Market Geeks

No comments:

Post a Comment