SQUAWK BOX WEEKLY UPDATE – 10/19/15

Markets Performance / Current Trading Range

  • In somewhat quiet fashion, the markets were able to grind higher for the third straight week last week, as the S&P 500 rose nearly +1%, closing on Friday 10/16 at 2,033 from 2,015 on 10/9.
  • The volatility that we’ve seen and come to expect since late August has completely collapsed over the last couple of weeks, as the VIX (Volatility Index) has fallen roughly -40% since late September.
  • A lot of the market damage we’ve seen since August has largely been repaired, as the S&P 500 is up +9% since its recent low on August 25, and is only off nearly -5% from its all-time high of 2,131 from May.
  • With this move higher, the benchmark S&P 500 index is actually sitting just above its recent technical trading channel of 1,870-2,020 from the last couple of months.
    • The S&P 500 is now trying for the first time since August to push above its 200-day moving average, which is now acting as near-term resistance.
    • Short covering continues to be partially responsible for the recent market move higher.
    • Healthcare returned last week as the top performer, while WTI crude oil prices fell back to $46/barrel.
    • Despite the 1% move higher in markets last week, both gold and treasuries continue to outperform equities, with the 10-year yield falling back to 2%.

Recent Trading History

  • Continuing on the technical front, the S&P 500 has been able to push above key former support/current resistance levels of 1,980-2,000, but continues to flirt with its 200-day moving average, acting as new resistance – currently at the 2,030 threshold.
  • The S&P 500 had been recently trading in a range-bound (nearly 150 point range) for roughly two months (late August – mid October), trading sideways in volatile fashion between 1,870 and 2,020.
  • The S&P 500 was previously range-bound (nearly 100 point range) for roughly three months (May-July), trading sideways between 2,040 and near record territory of 2,120, before falling convincingly below the 200-day moving average in late August.
  • Volatility in late August and September soared as the S&P 500 dropped as much as -12% to a recent low of 1,867 (level last seen in October of 2014), however, the VIX (Volatility Index) has collapsed roughly -40% since the end of September as markets have grinded higher.

Market Drivers (*Level of Importance/Weight in Descending Order/Bold Discussed in Audio Podcast)

SHORT-TERM (ST) DRIVERS:

  1. Federal Reserve’s Interest Rate Hike
  2. Continuation of Risk-On/Risk-Off
  3. Corporate Earnings
  4. Chinese Economy Slowing / Market Turmoil

 LONG-TERM (LT) DRIVERS:

  1. Economic Data
  2. Currency Wars
  3. Global Debt Levels
  4. Geopolitics and Terrorism

 Major Events on the Horizon

  • Earnings are again in full-focus this week: IBM, CAT, BA, KO, AXP, GM, T, MCD, AMZN, MSFT, MMM, and PG all reporting, amongst many others.
  • Market participants will continue to listen in for additional clarity on monetary policy direction from Fed officials John Williams, Bill Dudley, and Jerome Powell this week.
  • FOMC Decision on Interest Rates.
    • October 27-28
    • December 16 (with Press Conference)
  • In economic data, much of this week’s focus will be on the housing sector – homebuilder sentiment, housing starts, and existing home sales.

Glossary:

  • Buybacks – The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buy back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake (Investopedia, 2015).

References:

Calhoun, Joseph. (2015). The Calm Before The Storm? Zero Hedge: http://www.zerohedge.com/news/2015-10-19/calm-storm

Demos, T., Driebusch, C. (2015). Weak Pricing, Pulled Deals: IPOs in 2015. The Wall Street Journal: http://www.wsj.com/articles/weak-pricing-pulled-deals-ipos-in-2015-1444865780

Durden, Tyler. (2015). IBM Reports Terrible Q3 Earnings: Worst Revenue Since 2002; Slashes Guidance. Zero Hedge:  http://www.zerohedge.com/news/2015-10-19/ibm-reports-terrible-q3-results-worst-revenue-2002-slashes-guidance

Durden, Tyler. (2015). Hilsenrath ‘No Rate Hikes In 2015’ Hint Sparks Buying Panic In EM FX And Japanese Stocks. Zero Hedge: http://www.zerohedge.com/news/2015-10-14/hilsenrath-no-rate-hikes-2015-hint-sparks-buying-panic-em-fx-and-japanese-stocks

Hilsenrath, J., Sussman, A. (2015). Fed Doubts Grow on 2015 Rate Hike. The Wall Street Journal: http://www.wsj.com/articles/fed-doubts-grow-on-2015-rate-hike-1444866104?mod=djemalertMARKET

Layne, N., Ramakrishnan, S. (2015). Wal-Mart warns on profit, stock has steepest decline in 25 years. Yahoo! Finance: http://finance.yahoo.com/news/wal-mart-expects-strong-dollar-132732116.html?l=1

Racanelli, Vito J. (2015). Goldilocks Scenario Helps Drive Stocks Higher. Barron’s: http://www.barrons.com/articles/goldilocks-scenario-helps-drive-stocks-higher-1445055666

Rickards, James. (2015). Fed (Mis)communication Policy. West Shore Funds: http://www.westshorefunds.com/fed-miscommunication-policy/

Schiff, Peter. (2015). Ep. 113: Walmart Is The Canary In The Retail Coal Mine. Schiff Radio:  https://www.youtube.com/watch?v=kstaYf_DIOc

Smialek, Jeanna. (2015). Fed’s Williams Sees Reasons to Increase Rates Soon and Slowly. Bloomberg: http://www.bloomberg.com/news/articles/2015-10-19/fed-s-williams-sees-reasons-to-increase-rates-soon-and-slowly

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