SQUAWK BOX WEEKLY UPDATE – 11/09/15

Markets Performance / Current Trading Range

  • The markets were able to post a sixth-consecutive week of gains this past week, with the S&P 500 closing a point shy of 2,100, rising another +1.0% to 2,099 on Friday November 6, up from 2,079 on Friday, October 30.
  • From the relative low of 1,882 on September 28th, the S&P 500 has climbed an astonishing +12%.
  • Nearly this entire six-week rally, however, has been fueled by one bad economic report after another (particularly in manufacturing), with the original catalyzing event, of course, coming on October 2nd with the dismal September jobs report locking the Fed into easy-money policies even longer.
  • Last week, we finally received a very upbeat economic headline print, with a jaw-dropping reversal in job creation for the month of October, and the markets are now under a bit of pressure as the pendulum has swung back to everyone expecting an imminent rate hike once again.
  • We had some perceived hawkish comments from Fed Chair Janet Yellen last Wednesday preceding the amazing jobs report on Friday, and like clockwork, investors from all over the world are making preparations for an imminent rate hike from the Fed. Over the past several days, we’ve seen:
    • Pressure on risk-on U.S. equities, while other global markets tied to more dovish central banks at the moment are outperforming (most notably European indices outperforming recently with a weaker euro and the Shanghai Composite up more than 20% from its August lows).
    • U.S. Bonds yields moving higher, with the 10-year treasury yield back towards the highs of the year above 2.3%.
    • U.S. Dollar surging in relation to nearly all other currencies – U.S. Dollar index once again nearing the 100-handle last seen in March.
    • Dollar-denominated gold and commodities getting pressured once again – WTI Crude Oil back below $44/barrel.
    • In sector rotations, financial stocks are moving higher on the likelihood of wider net-interest margins, and smaller cap stocks are gaining a bit of life again with the strong dollar helping profits. Higher dividend and bond-proxy related sectors, however, like utilities, telecom, and low-growth staples stocks are selling off.
  • Nevertheless, the benchmark S&P 500 index still sits comfortably right in the middle of its record territory 100-point trading range (2,020 – 2,120), closing today at 2,079 – and we’re only about 50 points away from the all-time record high of 2,131 reached back in May.

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 2,020, most recently surging back above its 200-day moving average.
  • 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 (roughly 100-point range) for roughly 5 ½ months (March-mid-August), trading sideways between 2,020 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. A potentially rising VIX will be closely watched if selling continues on the prospect of an imminent rate hike.

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 season continues but is winding down, now with well over 400 of the 500 S&P 500 companies having reported. This week will be big on retail with Macy’s, Kohl’s, and Nordstrom reporting. We’ll also be getting headlines throughout the week from several corporate analyst days, including McDonald’s, Cummins, and DuPont.
  • FOMC Decision on Interest Rates.
    • December 16 (with Press Conference)
    • Fed officials speaking this week include: Eric Rosengren, Charlie Evans, James Bullard, Bill Dudley, and Loretta Mester.
  • The biggest economic data report of the week will come on Friday again, this time with retail sales, projected to rise 0.3% in October. These sales numbers will become increasingly more important as we finish out 2015 as retail sales historically show a very strong correlation with stocks’ performance at the end of the year, and as we go up against some very tough comparison numbers to beat from last year – particularly 4.7% retail sales growth in November of last year.

Glossary:

n/a

References:

Blanchard. (2015). S&P “vulnerable” if Fed hikes in December, bond guru Gundlach warns. Blanchard Gold: https://www.blanchardgold.com/investment-news/the-longview/s-p-vulnerable-if-fed-hikes-in-december-bond-guru-gundlach-warns/

Forsyth, Randall W. (2015). Job Numbers Add Up to Rate Hike. Barron’s. November 9, 2015.

Levisohn, Ben. (2015). My, What Nice Earnings You Have. Barron’s. November 9, 2015.

Minerd, Scott. (2015). Bad News Is Good News, Once Again. Guggenheim Partners: http://guggenheimpartners.com/perspectives/macroview/bad-news-is-good-news-once-again?utm_source=twitter&utm_medium=social&utm_content=scott%20minerd&utm_campaign=macro%20view

McCullough, Keith. (2015). 2 Things Sabotaging The ‘Bullish’ Cheap Oil Narrative. Hedgeye: https://www.youtube.com/watch?v=t3_6-pNj7R4

Paris, Costas. (2015). Maersk Line to Cut 4,000 Jobs as Market Deteriorates. The Wall Street Journal: http://www.wsj.com/articles/maersk-line-to-cut-staff-as-market-deteriorates-1446623156

Racanelli, Vito J. (2015). Looming Rate Hike Blunts Market’s Gain. Barron’s. November 9, 2015.

Reuters. (2015). Fed’s Brainard says caution warranted due to global risks. CNBC:  http://www.cnbc.com/2015/11/06/feds-brainard-says-caution-warranted-due-to-global-risks.html

Rickards, Jim. (2015). Yellen’s Feedback Loop. West Shore Funds: http://www.westshorefunds.com/?utm_source=Rickards%27+Commentary+Subscribers&utm_campaign=945ea69d60-Rickards_Commentary_11_09_201511_9_2015&utm_medium=email&utm_term=0_9afea3e436-945ea69d60-63432301

Rollins, Blaine. (2015). Do the bears dare? 361 Capital: http://www.361capital.com/weekly-briefings/bears-dare/?mkt_tok=3RkMMJWWfF9wsRoku67PZKXonjHpfsX56usqUKC2lMI%2F0ER3fOvrPUfGjI4HScJiI%2BSLDwEYGJlv6SgFSrnEMbd1zbgOWBE%3D

Schiff, Peter. (2015). Ep. 116: The Great Rate Hike Hoax. Schiff Radio:  https://www.youtube.com/watch?v=3o1tlmOOw_k

Schiff, Peter. (2015). Over-Hyped Oct. Jobs Report Does Not Assure Dec. Rate Hike. Schiff Radio: https://www.youtube.com/watch?v=2l-KhvbgrxM

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