On Tap In Markets Today: Russell Overhaul, Oil, Banks

Markets were mixed at the open, as investors appear to be bracing for what is typically the busiest Friday of the summer days of trading when the Russell U.S. indexes undergo their annual rebalancing act.

Oil might grab a spotlight again today but might also be vying for attention with bank stocks, which could get some action after the Federal Reserve gave the group passing grades on its annual stress test. (See below.)

One note of caution as the trading day unfolds: The annual overhaul of the Russell indexes has stocks coming and going to keep up with market trends and, if history is any indication, might lead to some added volatility considering that it typically is the heaviest day of volume all year.

On the board yesterday, the three major benchmarks looked mixed with the S&P 500 (SPX) and the Dow Jones Industrial Average ($DJI) falling prey apparently to weakness among the financials and consumer staples sector to close to the downside. The Nasdaq Composite (COMP) edged up to settle in the green uninterrupted for two days and on track to snap a two-week loss. But the trading day was more likely marked by all three benchmarks rattling around on the flat line before tipping in either direction—something that appears quite similar to what’s happening in the early going today.

At the session’s finish yesterday, SPX lost a point, $DJI gave up nearly 13 points and COMP added almost 3 points. Hardly the makings of dramatic moves on the markets. The SPX has been trading nearly 4% above its 125-day moving average in recent sessions.

The health care sector appeared to be flexing its muscle Thursday after Senate Republicans introduced a draft bill called the Better Care Reconciliation Act that looks to repeal taxes and mandates of the Affordable Care Act, aka Obamacare, and replace them with tax credits based on income, rather than age.

Was there a little bit of bear exhaustion going on yesterday? Crude oil prices bounced higher after three consecutive sessions of declines that put the sector into bear-market territory, marked by a 20% drop from recent highs. The energy sector moved up for the first time this week. Crude oil prices finished higher by 0.05% to $42.73, still below that $44 resistance level and still in that bear market zone. They’re starting the session slightly positive but barring a big-time rally, it doesn’t look like there might be enough oomph to snap five straight weeks of losses, which marks that biggest drop in prices in the first half of the year in two decades, according to Reuters. (See chart.)

Meanwhile, the yield curve continues to compress with the 10-year and 5-year Treasury notes barely budging yesterday while the 2-year tripped. Reuters reported that the yield curve flattened to almost 10-year lows. At the close, the 10-year stood at 2.15%, a mere 35 basis points higher than the 5-year at 1.76% and only 84 basis points above the 2-year at 1.34%. A flattening yield curve typically indicates that expectations of future inflation, and sometimes economic growth, are retreating.

FIGURE 1: CRUDE OIL EDGES HIGHER Crude oil futures contracts, tracked through Thursday on the thinkorswim® platform from TD Ameritrade, managed to edge higher on the session, but are still trampling around bear market territory and headed for a fifth straight week of losses. Data source: CME Group. For illustrative purposes only. Past performance does not guarantee future results.

No Stress Here

The Federal Reserve gave gold stars to the largest U.S. banks as they underwent the annual stress test, which assesses the capital wherewithal of the banks to prevent a financial collapse in a worst-case scenario.

This is the third year in a row that the banks have passed and this might provide fodder for next week’s efforts to win Fed approval to up dividend payouts in the second round of tests.

Nine and Counting

In what appears to be another sign of economic growth, the Conference Board’s Leading Economic Index (LEI) edged up 0.3% in May, marking the fifth straight month of gains. Eight of the nine components tied to it expanded.

"The U.S. LEI continued on its upward trend in May, suggesting the economy is likely to remain on, or perhaps even moderately above, its long-term trend of about 2% growth for the remainder of the year, " Ataman Ozyildirim, a research director for the Conference Board, said. “The improvement was widespread among the majority of the leading indicators except for housing permits, which declined again. And, the average workweek in manufacturing has recently shown no sign of improvement.”

Looking Up in Japan

The Japanese government sees its economy growing again, according to the June report from the country’s Cabinet Office on Thursday. Not unlike the Federal Reserve, the Cabinet Office chooses its words judiciously in it reports, upgrading its assessment of the economy by noting that it was on a path of “moderate recovery,” and omitting the cautionary “delayed improvement” clause it wrapped around some of parts of the economy in the May report, according to published reports.

This is first time since December that Tokyo was so upbeat and it follows the “expansion” term that the Bank of Japan used in its April assessment, reports said. That was the first time the e-word was uttered by BofJ in nine years when it said that “Japan's economy has been turning toward a moderate expansion.”