Commodities, Retail Tests Leave Stocks Skimming Low End Of Range

U.S. stock indexes positioned for a mild Monday bounce but did little to shake Wall Street from its cautious posture. The nagging issue of a sky-high dollar's drag on multinational companies' earnings prospects and a broad commodities slump continue to weigh on stock sentiment, at least sort of. These lingering issues could factor into trading this week and are likely on the Federal Reserve's mind as it mulls flipping the switch to higher interest rates. The broader stock market's resiliency in the face of headwinds raises a new dilemma, at least according to some observers. Valuations, especially those fed by share buybacks, are stretched. The big worry? Wall Street may be getting pretty comfy propped up by buybacks.

Global markets took some solace in a Chinese stock bounce on Monday even as another round of downbeat data there kept alive concerns for waning commodities demand from this economic giant. China's exports dropped 8.3% in July, the biggest drop in four months as weaker global demand and a strong yuan hurt manufacturers. Imports fell 8.1% from a year earlier. China's central bank has already lowered interest rates four times since November, but more cuts and other support measures may now be on the way. In fact, that expectation likely drove China's Shanghai Composite up nearly 5% for its biggest one-day gain in a month. The driver? Renewed expectations that state power will prop up the stock market, too. Even with Monday's return to calm, U.S. stocks may have an uphill slog. The blue-chip Dow Jones Industrial Average ($

)—which is lagging the other major stock indices— marked its seventh straight lower finish Friday. That's the worst streak since around 2011's debt-ceiling crisis.

The broader S&P (SPX), charted in figure 1, had dropped in four of five sessions and in five of the last seven weeks, as weakness for energy shares offset relative stability elsewhere. SPX has held its relatively narrow trading range since April. It's in the low reaches of that range now, but a range is a range. The CBOE Volatility Index (VIX) remains low by historical standards (figure 2), inviting some observers to wonder if it, too, has some catching up to do if commodities and currencies stay as volatile as they've been.

Oil futures prices remained under pressure to start the week, adding to last week's nearly 7% decline to March levels, and nearing a test of the six-year low hit then. Oversupply, waning demand, and fresh concerns for limited storage capacity are combining to drive down prices. Metals, grains, and more are also sliding at the hands of a stronger dollar. But the energy sector isn't the only headwind, although Wall Street may be trying to convince itself otherwise. Some 80% of U.S. companies have reported their results for the quarter. S&P 500 index company revenue is seen declining year-over-year by 3.1%, according to industry analysts. That will mark back-to-back quarterly revenue declines, a feat last recorded in 2008 and 2001, periods of broad economic weakness, to say the least.

The week is relatively light on economic reports, especially over the next few days (see figure 3). Wednesday brings retail sales, an important gauge for bullish traders who want a neat line drawn between the job market's improvement and consumer spending. Retail sales by some measures have been spotty. Auto sales were hot in July, housing is in an uptrend but Wall Street is still waiting for the consumer's reach to widen. Will data this week—including earnings from

,

,

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and others—confirm or refute that spending is back with a vengeance? All told, economic "cover" for a Fed move is starting to take shape.

Friday delivered a solid July hiring reading, and a slight uptick in wages—a report that most industry economists believe did little to knock the Fed from an expected interest rate hike at its September meeting. The perceived odds of an interest rate increase at the September meeting sit at roughly 56% post-jobs report, compared with 46% before that release, according to trader pricing in the Fed funds futures market. It's commonly used by investors and traders to gauge potential central-bank policy. The odds of a rate hike at the December meeting stand at 79%, versus 72% pre-report, the Fed funds market indicates. Analysts at Citigroup, Credit Suisse, Deutsche Bank, Bank of America Merrill Lynch, and UBS all now believe the U.S. economy has perked up enough to greenlight the Fed next month, though Goldman Sachs thinks Janet Yellen and crew will keep what will be the first hike since 2006 on ice until December. For sure, most economists believe it's not an easy debate at the Fed as inflation remains in hiding, especially at the wage level. A snapshot of wholesale-level inflation comes with the late-week producer price index report. What is getting clearer, every tiny slice of economic data between now and September could be increasingly sensitive for stocks. Good trading, JJ