OPEC And Fed Overshadowed By Market Trained At New Highs

The hits keep on coming as the market marks five days of the current rally. Thursday begins with the S&P 500 Index (SPX) resting just below all-time record highs and potentially in line for another boost amid positive earnings results.

OPEC and the Fed dominate today’s news cycle, but don’t discount strong earnings results from HP Inc HPQ and Best Buy Co Inc BBY, which are shaking things up a little this morning. HPQ, formerly Hewlett-Packard, rallied after beating expectations late Wednesday, and BBY absolutely killed it with earnings results this morning. The BBY results provide further evidence that the consumer is there. Companies just have to know how to catch them.

The OPEC meeting turned out as many investors had expected, with the cartel deciding to extend current production cuts another nine months. But oil prices are on the run this morning amid disappointment that the group didn’t vote to cut production even further. Current cuts haven’t been successful at raising prices, and U.S. production is up significantly since November, when OPEC reduced output.

Fed minutes for May gave the market a late boost Wednesday, sending the S&P 500 (SPX) to a record high close. Traders seemed to welcome the Fed’s plan to gradually normalize its $4.5 trillion balance sheet and remain “prudent” with its rate hikes. The minutes indicated that the Fed is likely to take a structured approach with the balance sheet to avoid too steep a tightening, though the plans sounded a little vague.

Fed officials said once again that economic slowdown in Q1 seemed “transitory,” so that puts the focus a little less on Friday’s second gross domestic product (GDP) estimate from the government and more on Q2 growth. Chances of a rate hike by June now stand at 83%, with less than a 50% chance of another hike by the end of the year.

The SPX closed above 2400, though it wasn’t for the first time. From a technical perspective, the important level to close above remains the 2405-2406 area, or just above Wednesday’s settlement. When the SPX moved solidly above 2300 back in February, additional buyers came in. We’ll see if that sort of scenario develops if and when the SPX plows through the current intraday high.

Earnings season is 95% over, and what a season it’s been! Companies in the SPX posted average earnings per share growth of 15.4%, and average revenue growth of 8.4%, according to research firm CFRA. For Q2, the Wall Street consensus estimate is 6.4% EPS growth and 5.7% on the revenue side of the ledger. Ten of the 11 sectors saw year-over-year gains, and 73% of companies beat estimates.

Take those Q2 estimates in stride, though, because actual earnings results have been exceeding pre-earnings estimates in recent quarters. That said, comparisons do get a little harder from this point. A few more big companies have yet to report, with Costco Wholesale Corporation COST the key name to watch after the close today.

Eight of the 11 SPX sectors posted gains Wednesday, but financials remained a straggler. Continued strength in Treasuries could be weighing on financials. Info tech and materials keep performing robustly, and got some company from real estate, a sector that hasn’t really done much this year. Ideas that mortgage rates could remain manageable under the Fed’s scenario might have lent some support late Wednesday.

Mechanical Market

If you lived in the 1970s, you might remember the mechanical bull craze. These days, “mechanical” could describe the market’s behavior. That’s what an analyst said Wednesday on CNBC, and it’s an apt description. The term “mechanical” doesn’t apply only to stocks, which have drifted back and forth between 2350 and 2400 for the S&P 500 (SPX) since  early February before Wednesday’s close just above that range, but also to oil, gold, and Treasuries. Gold keeps swinging between $1,200 and $1,300 an ounce, while 10-year Treasury yields pivot around 2.3%. U.S. front-month crude oil has been between $45 and $55 a barrel seemingly forever, but really only since late last year. All this implies a rather static picture in which investors of all sorts, in all kinds of markets, seem disinclined to push matters too far in one direction or the other, putting prices into a mechanistic, pendulum-like motion.

Wanted — A Catalyst

What sort of catalyst could send markets out of their current stasis? Last week’s political controversies on Capitol Hill, which shocked the market for a single day, remain a possible instigator. So does the Fed, with its June 13-14 meeting. Geopolitical events could loom, with this week’s attack in England a sad reminder that we continue to live in a dangerous world. Whatever the case, it’s almost certain that eventually markets will break out of their current ranges, either up or down. That’s what happened last summer, when the SPX traded between 2150 and 2200 for about two months between July and September before breaking its pattern in a mid-September sell-off. The market then continued to trade with a weak bias until early November, when the election rally began. That rally took the SPX all the way to 2400 by March — and that’s roughly where it remains.

Strap on the Seatbelts

All eyes now might be on a relaxing Memorial Day Weekend, with U.S. markets closed Monday for the holiday. But don’t spend too much time in the hammock, because the market awaits testimony on Capitol Hill from former FBI Director James Comey, and it might be best to prepare for possible fireworks. The date for his testimony isn’t set, but news organizations reported it would be after Memorial Day, which could mean next week. We’re in a news-driven cycle now that earnings are behind and few major economic reports loom until the May payrolls data. Last Wednesday revealed a market that seems vulnerable to political shocks, so stay tuned, and try to enjoy those Memorial Day picnics anyway.