Market Pauses After Monday's Rally, Awaiting More Data On Trade, Factories

After a booming start to the week led by the sizzling energy and financial sectors, stocks seemed set for a bit of a pause early Tuesday. Trade balance and factory orders data could help set the tone.

Monday was another big day, with the Dow Jones Industrial Average (DJIA) rallying to a new intraday high before stepping back by the end of the session. Small stocks also climbed, with the Russell 2000 Index rising about 1.8%. And tech stocks didn’t miss the fun this time, rising more than 1% to give the Nasdaq a boost. Last week saw the post-election party slow down a bit, but Monday showed signs of new life.

As next week’s Fed meeting approaches, rate hike odds remain at around 93%, according to the futures market.  Although the Fed has pretty much telegraphed its likely decision, the meeting could still be noteworthy if Fed Chair Janet Yellen has anything interesting to say about the economy moving into 2017. Investors might want to listen for any insight from Yellen both for indications of when the next hike might come, and also for her thoughts on inflation, particularly with energy prices on the upswing. 

With less than three weeks remaining until Christmas, holiday shopping is likely to be in the mix every day from here on, and things started off on a positive note judging from Black Friday and Cyber Monday. Somewhat surprisingly, however, trading among retail investors tracked during November by TD Ameritrade’s Investor Movement Index, or IMX, released Monday, didn’t follow the usual seasonal pattern in which most of the heavily-traded stocks are retail or Internet and technology-based companies. Several popular stocks were natural resources-based, including mining, steel, oil, and shipping, which could have been driven by the president-elect’s plan to spend $1 trillion on infrastructure.

The IMX also showed selling in financial stocks, which may sound counter-intuitive considering that sector’s huge rally since the election. But remember, these are the same stocks investors were buying four or five months ago.

It may be worth keeping an eye on today’s trade balance number, even though it’s not historically a data point that gets much attention. President-elect Trump hopes to bring more manufacturing back to the U.S., and if he succeeds, it could bring down the trade deficit. So it’s good to get a sense of where the number is now for comparison down the road.

Potential Rate Hike Blow Debated

Though it’s possible that the expected mid-December Fed rate hike could give rallying stocks a pause, that’s not necessarily the case. “The resulting price action will not likely deny investors the Santa Claus Rally they have come to feel entitled to, for a boxer is rarely felled by the punch he expects,” predicted Sam Stovall, Chief Investment Strategist for CFRA Research, in a note to investors on Monday. Stovall notes that when the Fed last raised rates a year ago, the S&P 500 Index (SPX) gained 1.5% from Dec. 11, 2015, the date of the hike, through the end of 2015. Those gains included positive performances for large-, mid-, and small-cap benchmarks. In addition, 10 of 11 sectors rose in price, with high-yielding sectors including real estate, telecom services, and utilities leading the way. Keep in mind, however, that past performance is no guarantee of future results.

Treasury Market Volatility Still Near Highs

Volatility in the 10-Year Treasury bond market spiked over the last month as bond prices took a dive, and remains just off recent highs. The CBOE’s TYVIX, which measures constant 30-day expected volatility of 10-year Treasury note futures prices, recently fell to $6.65, down from its peak above $7 last week but still at historically lofty levels. The recent volatility upswing, which accompanied a quick 70 basis-point rise in 10-year yields to around 2.4%, also came as volatility in equities slumped. The CBOE’s VIX recently fell below $12.50, from highs near $22 right before the U.S. election. Though volatility doesn’t necessarily point to future market performance, the moves seem to indicate that immediate fear has receded in the equity market and there’s less fear priced into the bond market compared to a couple weeks ago, but also that participants are still pricing in an elevated risk of another leg higher in Treasury yields.

Could Factory Data Continue Recent Run?

After slumping into negative territory earlier this year, factory orders have recovered somewhat over recent months. Later this morning, we’ll learn if the recovery continued in October. September marked the third-consecutive month in which factory orders increased, rising 0.3%. October could show a major increase, with Wall Street analysts’ consensus for a 2.5% gain, according to Briefing.com. Investors got a preview last week when the Institute for Supply Management (ISM) said November factory activity reached a five-month high, marked by a pick-up in new orders and production. Moving ahead, the question is whether the fledgling strength in manufacturing might be helped or hurt by factors including the stronger dollar and the incoming administration’s plans for increased infrastructure spending.