Market Analysis: There Is No Such Thing As a Perfect Rally
If you look for perfection, you’ll never be content. -Leo Tolstoy Markets are mostly in a happy mood following Friday’s NFP-driven rally. I have serious doubts as to whether the Fed’s going to raise this year, but traders are now pricing in a 47% chance of a December rate hike, up from 9% post-Brexit. I peg the odds as more like 20-25%, though admittedly, that’s based on a feeling more than anything. The yen is down on news that Japan’s Emperor Akihito publicly hinted that he will be stepping aside. German industrial production beat expectations in June (pre-Brexit data), while Visa and Market said UK consumer spending accelerated in July from June, thouhg it was Q1 numbers. France’s central bank said its economy will rise 0.3% in Q3. Economists expected a 0.2% increase. This data implies that perhaps the UK really kitchen-sinked its growth forecast, creating low expectations it can beat. As you can see in these charts of the Citi UK and EU economic surprise indexes, European economic data remains pretty solid relative to Wall Street forecasts: UK: EU: The hot bio/pharma complex may get a lift today on solid numbers from Allergan (AGN) and Horizon Pharma (HZNP). Crude oil is still on the upswing with a move over $42 this morning. OPEC’s president predicted the current dip in oil will be short-lived, and that OPEC members are in “constant deliberations” on stabilizing the market. The group will hold talks in Algiers in September. Gold is selling off as the aforementioned rate hike expectations get ratcheted up. However, bonds are pretty flat — there’s no big rush to sell. On the deal front, TIAA said it is acquiring Everbank (EVER) for $19.50/ share in cash. Everbank has been rumored to be in play for a while and just surged big-time, which explains the small premium over Friday’s $18.64 close. Sentiment is still leaning bullish, as based on the shape of the VIX curve, ISE Sentiment Index, and the Investors Intelligence Survey. The AAII survey shows that individual investors are bearish, but overall, the bulls are still quite giddy. This is why it’s important to respect price above all else. A lot of folks were declaring the market as overheated at 2100, then 2150. And today, with futures up a few points, the S&P looks like it will open at all-time highs around 2190. As far as game planning goes, I wouldn’t think too hard. Watch small caps, biotech, oil, and high-yield. When they’re moving in the right direction, it’s hard to stop the bull. I’m really zoning in on oil right now. Its ascent off the $26 February low was a major factor in the bull’s revival this year. But when it broke down from $51 to $39, the bulls didn’t skip a beat. We could be a situation where the bulls ignore oil when it goes down, and they get encouraged when oil goes back up. I hear a lot of folks complaining that the Russell 2000 hasn’t confirmed the SPX record highs, but remember: there is no such thing as a perfect rally. In almost every rally in the past few years, there’s been one type of problem or another — lousy earnings, lousy economic data, low volume, narrow leadership, etc. Good enough can be good enough. Good luck friends.
Continue Reading -->T3’s Take 3: SPX Makes Record High on Huge Jobs Report
1) Jobs Report Delivers, and Then Some! For the second month in a row, the monthly nonfarm payrolls report blew away expectations. The US economy added 255,000 jobs in July, easily smashing the 180,000 consensus. Plus, June and May’s numbers were revised higher, and average hourly earnings beat forecasts with a 0.3% gain. With two strong months in the bag, the awful May jobs report now looks like a statistical anomaly, and traders are also quickly forgetting last Friday’s weak GDP report. The market’s conclusion reaction was clear… 2) The Fed Is Gonna Hike. Really? In the aftermath of the report, investors see a higher probability of a Fed rate hike this year. Fed Funds futures now imply a 47% chance of a December rate hike, up from 37% yesterday, and just 9% post-Brexit on June 27. Plus, all the usual hawkish trades quickly fell into place today: The US dollar ripped Gold took a major hit US Treasuries fell Now as far as whether this report actually moves the Fed, I have my doubts. The Fed’s been sitting still for so long that I doubt a couple data points makes a huge difference at this point. The Brexit is also still an issue. The Bank of England made a huge downgrade to its growth forecasts, and European commercial/investment banks are doing the same, which implies a good degree of fallout. This could give the Fed another reason to hold off. But either way, the numbers had equity traders in a great mood today… 3) New Record Highs! After the numbers hit, I said I would not count out a strong rally in stocks today. I thought it would take an upward reversal in bonds to make that happen, but that was wrong. Unlike in last month’s post-NFP rally, bonds stayed down, as did gold. The S&P 500 hit a new all-time record high at 2182.87, led by a big move in bank stocks, which benefit from higher interest rates. The index rose 0.9% to close right on the highs. Regional banks were especially strong with the KRE ETF powering 3.5% higher. Small caps and transports also posted strong gains. The decliners’ column was led by the G.U.T.S complex that has dominated the action in 2016: Gold, Utilities, Treasuries, and Silver, all instruments that suffer from higher rates. Crude oil was down for most of the day on the dollar’s rise, but nearly squeezed into the green by day’s end. Monday’s Trading Calendar US Economics (Time Zone: EDT) 10:00 Labor Market Conditions Index Change (Jul): prior -1.9 Mortgage Delinquencies (2Q): prior 4.77% MBA Mortgage Foreclosures (2Q): prior 1.74% Global Economics 08:30 CAD Building Permits 21:30 AUD NAB Business Confidence 21:30 CNY CPI y/y 21:30 CNY PPI y/y Earnings Before the Open: Allergan (AGN) Dean Foods (DF) Horizon Pharma (HZNP) After the Close: Arena Pharma (ARNA) Ctrip.com (CTRP) Hertz Global (HTZ) Nuance Comm. (NUAN)
Continue Reading -->The Morning Hammer: Massive NFP Report Makes Bears Cry
1) Most Impressive! SPX just made new all-time highs above 2181 and is holding strong on the huge jobs report. We’re also seeing very nice outperformance in the Russell 2000 and Nasdaq. I thought it would take a rebound in bonds and gold to keep the equity move rolling, but I’m not going to argue with Mr. Market. He decided he’s more comfortable with a possibly more hawkish Fed, and I’m not going to argue with him. 2) Watch the Bios! I still think there’s a chance we see SPX 2200 today or within the next few days. Biotech (IBB) is key. It’s done a great job of shaking off bad news and if IBB clears $300 with authority, the bulls will really get in gear which should also send the Nasdaq to its own new record (just 9 points away). From a big-picture perspective, biotech’s comeback off the lows has been pretty impressive. It started 2016 by falling nearly -30% into the February bottom, and now it’s down “just” -12%. This is the ultimate risk-on sector, so if starts moving, it will drag risk assets with it. 3) VIX Drops 9% Lots of folks have been saying the VIX is “too low” and therefore must rise under the “what goes down must come up” theory of finance. But the SPX has been showing almost no movement in recent weeks and the VIX, while low, has already been pricing in a volatility expansion. I would not be surprised to see the VIX under 11, assuming equity markets hold steady or if we see a very slow rise. I hear a lot of chatter about buying VXX calls or similar instruments because the VIX should go up. That is dangerous thinking, and would only pay off if the SPX immediately made a dramatic down move. 4) FireEye Burned Former momo highflyer FireEye (FEYE) is getting slammed today on earnings, which may draw out fake M&A rumors. Is a deal likely? I don’t know. Presumably, there are plenty of software companies that would love to add more security offerings to their suite of services. But if FireEye’s technology is so valuable, why isn’t it more popular with actual customers? Check out the chart below of the slide in expected 2017 FireEye revenues: A year ago, traders were expecting over $1.2 billion in 2017 revenues. Now they’re forecasting below $900 million. It’s a classic case of collapsing fundamental and price momentum. 5) Oil! I’d really like to see oil put another hurting on the bears with a slow grind higher. But remember, oil got a lot of mileage from supply outages, and we’re coming back down the other side of that ride with production coming back online. So the comeback, if it’s in the wings, may be a little slow. That said, equities and high-yield are holding up pretty well in the face of the oil slide, so it’s hard to complain too much.
Continue Reading -->July NFP Report Instant Analysis: Is a Reversal in the Wings?
The July NFP report hit this morning at 8:30 a.m. ET and it was pretty impressive. The headline number was 255k, smashing the 180k consensus. We also saw an 18k upward revision to the past 2 months and better-than-expected hourly earnings. This is the second big beat in a row, which has the big May miss looking like a one-time statistical aberration. We’re seeing a big rip in the dollar, a big dip in gold, and US and German government bonds are sliding. The big question now is whether this will be a repeat of last month. Last time around, we had a huge dip in bonds and gold that was bought very, very quickly. Then, equities followed through after a bad start with SPX ripping 1.5%. I would watch USD/JPY very closely. If the dollar pulls back, that means the dovish status quo trade may keep on raging. Also watch gold. If it bounces back, maybe the doves still wanna rock. Keep in mind we’re less than 30 minutes past the report and NFP is an anything goes day. But as I write this, USDJPY is dipping back. SPX futures are now up 8 handles I am not counting out a big run up in stocks today. I would watch the following levels as possible signals for a reversal: USD/JPY: 101.05 Gold: $1367/$1368 10YR US Treasury Yield: 1.500% 10YR German Bund Yield: -0.085%
Continue Reading -->For the Love of Everything That Is Holy, Can We Please Get a Real Move?
With market volatility at 20-month lows, I’m falling asleep. It’s like April-May all over again, but worse. Thankfully, we’ve got a pivotal NFP report coming today at 8:30 a.m. ET. So maybe, just maybe we’ll get some real movement today. Economists are looking for 180K on the headline number, 0.2% MoM growth in hourly earnings, and a 4.8% unemployment rate. Last month, we saw a huge 107K beat on the headline number, which just about made up for the 122k miss the month before. On the surface, it seemed like a very much hawk-supporting report, but the market’s reaction said otherwise. Gold and bonds dipped on the report, then ripped like mad. Equities followed through on the decline in rates with a big 1.5% rally in SPX. Traders assumed that the report wouldn’t necessarily make the Fed get more hawkish, and it turns out those traders were right. Based on some weak economic data (GDP, PCE Deflator) and the Bank of England’s huge forecast cut for UK growth (which implies a nasty Brexit impact), the Fed’s forward path looks pretty dovish, at least-near term. But remember, Fed expectations tend to turn on a dime. Fed funds futures are now pricing in a 37% chance of a December rate hike — but that mumbers was down to 9% post-Brexit. I’m not in the silly business of making NFP guesses. But the scenario I would like to see is a modest beat on the headline numbers — say 190k-220k — which I think could drive a rip above 2200 within a day or two on the basis that “the number’s not hot enough to move the Fed but it’s good enough to show things aren’t falling apart.” SPX futures are up fractionally this morning following modest gains in Europe. The dollar is down a tad against the euro and yen, while gold is up a hair. Gold miners are indicated up after strong performances in euro-areaminers. Cybersecurity name FireEye (FEYE) is getting hit hard on its awful quarter. It may end up in the M&A rumor column soon, so maybe put it on your radar screen. LinkedIn (LNKD) beat by a mile, which means Microsoft (MSFT) timed the deal pretty well. Well done fellas. The sideways grind means we’re working off overbought conditions, and some sentiment indicators have cooled off. The AAII survey shows that individual investors are fairly bearish, and the ISE Sentiment Index’ 10-day moving average is coming down a bit. I will admit that some others like the shape of the VIX curve (though the VIX could drop even more) and Investors Intelligence Survey indicate serious complacency. So sentiment is still bullish, but slowly moving towards being mixed. I’d rather see more outright bears, but let’s deal with what we’re given instead of what we want. Good luck friends!
Continue Reading -->This Is the Most Boring Market Since December 2014
Kick Your Options Trading Up a Notch My buddy Doug Robertson is hosting a FREE options trading webinar this afternoon where he’s teaching his secrets for generating major options profits in volatile markets. Click here for more information 1) The Bank of England Throws Money at the Brexit The Bank of England is afraid of the Brexit, so they’re throwing everything including the kitchen sink at the problem. This morning, the BoE cut rates by 25 bps, expanded its QE program by 60 billion pounds, and started a new 10 billion-pound corporate bond purchase plan. The BoE took a massive hack at its growth forecasts, and now sees 2017 GDP at 0.8% vs. 2.3% previously, the biggest cut in its history. 30-year UK Gilt yields dropped to all-time lows, and European equity markets rebounded intraday. The UK’s FTSE 100 Index rose 1.6%, while the German DAX was up 0.6%. 2) The Grind Continues Markets have been in a holding pattern over the past few days ahead of tomorrow’s pivotal NFP report, which could move markets in a big way. (more on this below) And the S&P 500’s epic boring sideways grind continued today with the index rising 0.02% to 2164.25. Not 2%, not 0.2%, but 0.02%. So you have some perspective on the action, the index has not made a 1% move since July 8, and market volatility is even lower now than during the April-May snoozefest. In fact, S&P 500 volatility hasn’t been this low since December 2014! Check out this chart of S&P 500 volatility: No wonder we can’t stay awake… Once again, the Russell 2000 showed a smidge of outperformance, though biotech (IBB) cooled off after 2 days of solid action. The Bank of England’s stimulus package pushed up gold and US Treasuries, and crude oil notched a 2.4% gain on what appears to be short covering. Energy stocks were mixed, but high-yield bonds were strong. When crude oil goes up, high-yield energy bonds perform well because default expectations fall. 3) NFP Preview Traders are expecting a 180K increase on nonfarm payrolls with a 4.8% unemployment rate. (see the full consensus estimates below) Last month, we saw a huge 107K beat on the headline number, which just about made up for the 122k miss the month before. Gold and bonds dipped on that report, and then ripped like mad. Equities followed through on the decline in rates with a big 1.5% rally in SPX. At this point, it seems like it may take a big headline number to get traders believing the Fed will hike rates — perhaps 250K or more — and it would also help to have the June number revised up. Click here for my in-depth NFP preview. Friday’s Trading Calendar US Economics (Time Zone: EDT) 08:30 Trade Balance (Jun): exp. -$43.0b, prior -$41.1b 08:30 Change in Nonfarm Payrolls (Jul): exp. 180k, prior 287k 08:30 Two-Month Payroll Net Revision (Jul): prior -6k 08:30 Change in Private Payrolls (Jul): exp. 171k, prior 265k 08:30 Change in Manufact. Payrolls (Jul): exp. 4k, prior 14k 08:30 Unemployment Rate (Jul): exp. 4.80%, prior 4.90% 08:30 Average Hourly Earnings MoM (Jul): exp. 0.20%, prior 0.10% 08:30 Average Hourly Earnings YoY (Jul): exp. 2.60%, prior 2.60% 08:30 Average Weekly Hours All Employees (Jul): exp. 34.4, prior 34.4 08:30 Change in Household Employment (Jul): prior 67 08:30 Labor Force Participation Rate (Jul): prior 62.70% 08:30 Underemployment Rate (Jul): prior 9.60% 13:00 Baker Hughes U.S. Rig Count (8/5): prior 463 13:00 Baker Hughes U.S. Rotary Gas Rigs (8/5): prior 86 13:00 Baker Hughes U.S. Rotary Oil Rigs (8/5): prior 374 15:00 Consumer Credit (Jun): exp. $16.000b, prior $18.558b Global Economics 02:00 EUR German Factory Orders m/m 03:00 CHF Foreign Currency Reserves 03:30 GBP Halifax HPI m/m 08:30 CAD Unemployment Rate 10:00 CAD Ivey PMI Earnings Before the Open: Cognizant Technology Solutions (CTSH) SouFun Holding (SFUN) After the Close: None of significance
Continue Reading -->NFP Preview: Does the Bank of England Trump the Numbers?
Tomorrow, we’ll get the big bad July NFP report, and like last month, it feels like a big one. Here are the consensus numbers: Change in Nonfarm Payrolls (Jul): exp. 180k, prior 287k Two-Month Payroll Net Revision (Jul): prior -6k Change in Private Payrolls (Jul): exp. 171k, prior 265k Change in Manufact. Payrolls (Jul): exp. 4k, prior 14k Unemployment Rate (Jul): exp. 4.80%, prior 4.90% Average Hourly Earnings MoM (Jul): exp. 0.20%, prior 0.10% Average Hourly Earnings YoY (Jul): exp. 2.60%, prior 2.60% Average Weekly Hours All Employees (Jul): exp. 34.4, prior 34.4 Change in Household Employment (Jul): prior 67 Labor Force Participation Rate (Jul): prior 62.70% Underemployment Rate (Jul): prior 9.60% (source: Bloomberg) Last month, we saw a huge 107K beat on the headline number, which just about made up for the 122k miss the month before. On the surface, it seemed like a very much hawk-supporting report, but the market’s reaction said otherwise. Gold and bonds dipped immediately, then ripped like mad. Equities were fired up on the decline in rates, and the SPX put in a big 1.5% rally. Traders assumed that the report wouldn’t necessarily make the Fed get more hawkish, and it turns out those they were right. Based on some recent weak economic data (GDP, PCE Deflator), plus continued worries over the impact of the Brexit, the Fed’s forward path looks less certain than ever. Fed funds futures are now pricing in a 37% chance of a December rate hike, up from 9% post-Brexit, but down from 45% a week ago. At this point, it seems like it may take a big headline number to get traders believing the Fed will hike rates — perhaps 250K or more — and it would also help to have the June number revised up. One scenario to consider: we get a modest beat (190K-220K), we see a dip in gold and bonds, and then they rip all over again, just like last month. The Bank of England’s stimulus package is driving the action right now, so traders may just see any NFP-related dips as buying opportunities.
Continue Reading -->The Morning Hammer: Why the VIX Could Collapse, and 4 Other Thoughts on Today’s Market Action
5) Tesla Destroys Options Traders Yesterday, I opined that Tesla (TSLA) options were probably not as cheap as they looked. It turns out they were way oveprriced. As of yesterday morning, they were pricing in a $12.84 move. Tesla is down only $1.30, which is absolutely murdering holders of puts and calls. Weekly at-the-money $225 calls are down -67% while the $225 puts are down -55%. Meanwhile, sellers of the weekly $225 straddle are up an amazing 61% in one day — I wish I was in that crowd! 4) Watch Dem Bios! For the past 2 days, the SPX has looked pretty sleepy. However, relative strength in biotech (IBB,XBI) and the Russell 2000 implied more bullishness under the surface. Today, both IBB and XBI are in the red, but making little moves off the lows, even with sector heavyweight Biogen Idec (BIIB) sinking another -1.7% as takeover rumors extinguish themselves. If I was a bear, I would most definitely not want to see biotech turn green and lead again, especially since the Russell is outperforming SPX by about 30 bps. 3) Sentiment Update Sentiment is still getting more bearish. The CBOE Equity Put/Call is at 0.94 this morning, which is right in-line with the YTD average, but well off the early July lows. However, the ISE Sentiment Index is at 66 this morning (66 calls for every 100 puts). That’s a of aggressive hedging in the early going. Plus, the AAII survey shows 29.8% bulls — well below the long-term 38.6% average. Overall, it looks like traders are looking a little more skittish ahead of a pivotal NFP report tomorrow. 2) Oil Crude oil is still hugging the $40-handle pretty tightly. I’m still a bit puzzled as to how well both equities and high-yield are ignoring oil’s 20%+ drop off the highs. Take a look at this chart of crude oil vs. HYG year-to-date: Energy stocks have been slipping, but overall, the market’s basically yawning at oil weakness. Maybe folks are just rotating into metals? GLD is up 28% YTD while SLV is up 46%. Meanwhile, the miners (GDX) are up 127%! 1) Why the VIX Could Collapse Lots of traders are out saying the VIX is low, but I believe it could drop to the 10-11 range. Remember what the VIX is — a representation of volatility expectations, as measured by 30-day SPX options. With the recent lack of movement, 20-day realized SPX volatility has collapsed to 5.4. So the 12.6 VIX is actually trading at a massive premium to actual market volatility. This means it’s already pricing in an expansion in volatility. If the market continues to go flat (which I expect for the next month) — or if it climbs slowly — the VIX could easily drop below 11 as traders reprice options to reflect persistently low actual market volatility. Now with a wild move, all bets are off (we do have NFP tomorrow) — buyers of puts or call could make a lot of money. But if the markets go flat as I expect, folks buying what look like “cheap” options will find out that they overpaid. P.S. If you’re into this fancy options stuff, check out today’s FREE webinar with my buddy Doug Robertson.
Continue Reading -->Morning Call Express: Trying To Keep Constructive
In today’s Morning Call Express, Scott Redler talks about the move by the BOE to cut rates and increase the stimulus and how the Equity Markets are responding. He also notes that the jobs report tomorrow will be very important to the future direction of the market. Scott also looks at names like JP Morgan (JPM), Apple (AAPL), and others.
Continue Reading -->Bank of England Throws Money at UK Economy
The Bank of England cut rates by 25 bps, expanded its QE program by 60 billion pounds, and started a new 10 billion-pound corporate bond purchase plan. and bega a corporate-bond purchase program in the aftermath of the Brexit. Traders expected the cut. However, they only expected a 50-billion pound increase in the QE program. The BOE took a massive hack at growth forecasts, now seeing 2017 GDP at 0.8% vs. 2.3% before. The pound is the worst performing major currency while the FTSE is up about 1%. The 30-year Gilt is now at all-time record lows, while gold just pusehd into the green. SPX futures popped up about 10 handles are in modestly positive territory. TLT is now up about 80 cents. Of course, a lot of folks are out complaining about how markets are being pushed higher by central bank machinations rather than fundamentals. But we must deal with the hand we’re delt, not the one we want. Markets like stimulus, plain and simple. That said, we could end up in another holding pattern today ahead of tomorrow’s big NFP report, though keep in mind, we’ve had some very stealthy bull action thhe past couple of days. The SPX hasn’t done much, but we saw some very strong action in small caps and biotech, and a nice turnaround in oil yesterday. I get the feeling a big NFP report could push SPX over 2200 tomorrow. The market feels like a coiled spring, and a big up spike could force bears to capitulate, putting in a real short-term top.
Continue Reading -->