Stocks were edging higher Friday on Wall Street as traders look over a mixed bag of earnings reports.
Heavy equipment maker Deere & Co. jumped 6.6 percent in early trading Friday after reporting solid results for its latest quarter. Foot Locker plunged 15 percent after its profits fell short of analysts’ forecasts. Campbell Soup also lost 1.6 percent after turning in disappointing results. Technology and energy companies rose more than the rest of the market.
Global Economy – European stocks are up as global equity market stabilize following big losses earlier this week.
Energy producing stocks are stronger and are leading the overall market higher with Jun WTI crude oil up at a 3-week high on expectations that OPEC and non-OPEC oil producers will extend their production cuts until March of 2018.
North Korean geopolitical risks remain as CNN reported that the U.S. Navy is moving the USS Ronald Reagan aircraft carrier to join the USS Carl Vinson in dual-carrier training exercises near the Korean Peninsula.
ECB Governing Council member Vasiliauskas said that the risks to the Eurozone are now “broadly balanced” and the ECB should use its Jun meeting to start building a case for unwinding of QE before making an announcement in the fall.
German Apr PPI rose +0.4% m/m and +3.4% y/y, stronger than expectations of +0.2% m/m and +3.2% y/y with the +3.4% y/y gain the largest year-on-year increase in 5-1/3 years.
U.S. Economy – There were no major FED reports released on Friday. With the positive Wal-Mart report now in, we have Q1 results from 71.4% of the retailers in the S&P 500 index.
Total Q1 earnings for the Retail sector are up +1.4% from the same period last year on +2.9% higher revenues, with 63.3% beating EPS estimates and 53.3% beating revenue estimates. The sector’s Q1 results are tracking below what we have been seeing in other recent periods and are also among the weakest this reporting cycle. For Q1 as a whole, combining the actual results from the 463 S&P 500 members that have reported with estimates from the still-to-come 37 companies, total earnings are expected to be up +12.9% on +6.2% higher revenues, the highest growth pace in over five years.
The Finance, Technology, Industrial Products, Consumer Discretionary, Basic Materials, and Business Services sectors stand out with double-digit earnings growth.
Market Sentiment – The probability of a rate hike at the June 14 Federal Open Market Committee meeting is 54% today, which compares to 69% yesterday. Once the domestic political and global geopolitical issues settle down, the dominant influences of a stronger global economy and rising global inflation will ultimately take bonds lower, especially at the long end of the curve.
Technically, it appears that bonds are almost ready to trade lower and revert back to the long term trend. The only caveat is Trump and whether more negative news or uncertainty comes out over the next few trading sessions. That would cause Global equity markets to respond negatively and keep bonds near the current price level.
Stock Market Analysis – While the overall market is rising once again vulnerability remains in several major sectors. The small caps, which are speculative and tend to lead the market during bull market cycles is now trading below the 50 day line, which tells me that investor sentiment is becoming increasingly bearish in the short term.
Speculative small caps and tech is accumulated aggressively during bullish market cycles and tends to lag during bearish market cycles the most. While the larger cap tech remains above the 50 day line, there’s increased Geo Political tension in the stock market at this time, which more likely than not will push the overall tech sector lower and cause either congestion or corrective pressure from the large caps in coming weeks.
Below you can see the SP 500 along with every major sector within the index. Notice that roughly half of the major sectors are trading below the 50 day moving average, which inevitably pushed the SP 500 itself below the 50 day line.
Typically, when there’s so much imbalance between the various key sectors, the overall market finds it increasingly difficult to trade higher, especially when there’s increased Global tension and volatility, which is starting to make it’s way into the various sectors, especially financial and retail.
Lastly, take a look at the long term momentum chart for overall NASDAQ, which remains the strongest index at this time and is helping the SP 500 remain some degree of balance. If you look carefully at the chart below, you will see 10 years of market internals. Notice that every time over 80% of stocks in the tech reach above the 200 day moving average, we begin seeing increased selling pressure, till there’s balance in the market once again.
Typically, when over 80% of stocks trade above the 200 day moving average, we begin seeing slow but deliberate selling pressure, till the percentage of stocks trading above the 200 day line is either balanced or oversold, which is the scenario we anticipate will play out over the next few months. This will cause increased pressure to the overall market structure and will increase vulnerability in the SP 500, since the QQQ and the SP 500 share great deal of large cap stocks. Expect more congestion and downside, with very little directional bias, till markets regain some degree of balance once again.
Courtesy of Market Geeks