Building On Gains: Watching To See If Late-Week Strength Carries Over

As the new week dawns, the question is whether stocks can build on a pretty impressive turnaround rally that began late Thursday and carried into Friday. There aren’t as many key earnings reports in coming days, but Fed speakers and some important inflation data wait in the wings.

Several Fed officials might opine today at the Atlanta Fed's 23rd Annual Financial Markets Conference ahead of an expected appearance in Europe early Tuesday for Fed Chair Jerome Powell. Ahead of all that, stocks tipped higher in pre-market trading following solid gains in Europe and most of Asia overnight, while crude oil climbed above $70 a barrel for the first time since late 2014.

The positive tone early Monday followed a fierce Friday rally that looked like a delayed reaction to what’s been an outstanding earnings season so far. Apple Inc. AAPL earnings earlier in the week seemed to be the catalyst as that stock climbed more than 13 percent in five sessions to a new all-time high.

Price Check At Register One

This week might change course about midway through. The first half is likely to be focused on earnings and Fed speeches. By mid-week, attention could shift toward Wednesday’s Producer Price Index (PPI) and Thursday’s Consumer Price Index (CPI). All eyes are probably going to be on PPI, and if it shows too much inflation, the “rate hawks” might start warning that 10-year Treasury yields should go over 3 percent again. For whatever reason, that 3 percent level seems to drive fear in the market. The yield stood near 2.94 percent as Monday dawned.

The focus on data comes after an April employment report that just sort of lay there. It was simply an interesting data point, but not much more. Jobs growth of 164,000 continues to look pretty healthy, even if it’s not moving at the break-neck levels above 200,000 a month that some of the more bullish investors like to see. The three-month average is over 200,000, however.

Looking at wages, the slightly lower than expected hourly pay growth of 2.6 percent in the report probably won’t be enough to ease some investors’ fears of a more hawkish Fed raising rates four times this year. Don’t forget, too, that the Fed upwardly revised what had been a weak March jobs growth number.

Speaking of jobs, the monthly Job Openings and Labor Turnover Survey (JOLTS) is due Tuesday, and that could give more insight into the job picture. However, it’s the March number, so the report is a bit backward looking.

Before any other Tuesday events, one particularly noteworthy Fed speaker takes the podium when most of the Western Hemisphere will likely be sleeping. That’s tonight (really tomorrow morning) when Fed Chair Powell is scheduled to participate in a panel discussion on Monetary Policy Influences on Global Financial Conditions and International Capital Flows at a conference in Switzerland. It’s being webcast live on the Fed’s site if you want to set your alarm for 3:15 a.m. ET Tuesday. Judging from the title, it doesn’t sound like one that’s likely to be all that market moving, but you never can tell, especially if there’s a Q&A.

Recapping “Feel Good Friday”

AAPL’s rally appeared to be the tide that lifted most boats. Before AAPL reported, so much talk had circulated around the market about why many big names hadn’t seen strong earnings reflected in their stock prices. Then, after AAPL rallied, so did some stocks that previously hadn’t seen an earnings-related boost, including Facebook, Inc. FB and Walt Disney Co DIS. All of a sudden, many investors seemed to remember that earnings tend to drive the market. It’s never a good idea to celebrate too soon, but Friday’s big rally might show a slight shift in psychology as more people seemed willing to take risk ahead of a weekend.

Another potentially positive sign Friday was volatility staying mostly on the sidelines. By the end of the day, the VIX was under 15 and near three-month lows (see below). There wasn’t any corresponding sell-off in bonds that might have reflected even more investor optimism and less chance of looming market turbulence, but in general, there may have been pent-up demand from people looking to buy and not necessarily seeking a safety play on the other side of the fence.

Friday was just one day and it’s important not to get carried away, but the rally might have taken some wind out of the sails of those who’ve been bearish on banks and info tech. Even the semiconductor stocks did OK, though not as well as some of the FAANGs.

Crude Revisits 2014

Over in the commodities aisle, crude oil enters the week above $70 per barrel for U.S. futures for the first time since late 2014, and media reports over the weekend that Saudi Arabia might want to try and push prices to $80 could possibly play into crude trading. Remember, too, that oil is now near levels that might cause airlines to jump in and hedge, which could also push oil prices higher.

Last week was a wild one for some other commodities, by the way. Soybean futures fell nearly 2 percent after China revealed it hadn’t imported U.S. soybeans for an extended period during this trade spat between the two countries. Meanwhile, wheat prices jumped more than 6 percent amid reports of adverse U.S. weather affecting crop conditions.

Keep technical factors in mind, too, even if you’re a long-term investor. The S&P 500 Index (SPX) just missed closing at key resistance of 2670 on Friday, and that remains an important level. A serious move above 2670 might be enough to draw more buyers off the sidelines, but we’ll have to wait and see. The 200-day moving average for the SPX has seemed to act as a major support point recently and starts the week around 2616 (see more below).

FIGURE 1: 2014 REDUX FOR OIL. This four-year chart of U.S. crude futures (candlestick) and the S&P 500 (SPX, purple line), shows that the last time oil hit $70 in late November 2014, the SPX was trading near 2072. This long period of relatively cheap oil coincides with gains of nearly 30 percent for the SPX. Note how the SPX has leveled off in the last few months as oil again approached $70. Whether this is related could be a subject for debate. Chart source: CME Group, S&P Dow Jones Indices The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Smoothing Out?

Volatility sank to nearly three-week lows Friday as the VIX fell under 15. This easing might reflect a cool-off now that earnings season is about two-thirds of the way through and the Fed meeting and jobs report lie in the rear-view mirror. The Fed’s statement last week — which acknowledged a pick-up in prices but appeared to forecast inflation staying near current levels — might also have helped reduce fear. VIX dropped even more Friday when the wages component of the jobs report came in below expectations, briefly easing inflation fears. All this doesn’t mean we’re out of the woods on volatility, however. The tariff issue with China remains unresolved and could keep investors nervous, and the Iran nuclear deal also looms large as the U.S. approaches a deadline to stay in or leave the agreement May 12. Also, U.S./North Korean talks loom on the horizon. With much of earnings out of the way, geopolitical hiccups could resume their heavy impact on the market in weeks to come.

SPX Still Batting “200”

In baseball, a .200 batting average is sometimes jokingly called the “Mendoza Line” in honor of a 1970s Major Leaguer with that last name who struggled to get a base hit at least two out of every 10 times he stepped to the plate (not good). For the S&P 500 Index (SPX) this year, “batting 200” might be seen as a more successful offensive statistic. Once again last week, the SPX drifted briefly below its 200-day moving average and found buyers who seemed to be waiting for an opportunity to swing their bats. The SPX bounced right back from lows below the 200-day, which stood at 2616 going into Monday, and slugged its way to well above that by the end of the week. It’s one of several times this year the 200-day moving average seemed to hold, and arguably solidifies that territory’s technical significance going forward. Still, the SPX seems relatively range-bound between roughly 2600 and 2700, well below its highs for the year, and it’s unclear what if any catalyst could emerge to move it back into home run territory again anytime soon.

Tech Still Leads the League

After factoring in Friday’s nearly 2 percent climb, the info tech sector leads all others over the first one-third of the year with gains of around 7 percent. This comes after infotech easily took the brass ring in 2017. Consumer discretionary wins the silver medal so far in 2018 with a gain of about 5 percent, followed by energy at around 2 percent. Those are only positive sectors year-to-date as the SPX remains well below its lofty January highs. The financial sector, which some economists say is often key to a broader rally, remains in the red as bank stocks continue to struggle despite impressive earnings for the most part. The worst-performing sectors this year are consumer staples and telecom.