There are a lot of moving pieces in the global market picture this week. Earnings reports continue to come out at a fast and furious pace. Investors have shown that they clearly have no patience for signs of slowing growth at high valued companies, sending Facebook (FB), Twitter (TWTR), and Shopify (SHOP.TO) sharply lower in recent days as large numbers of market players fled for the door at the same time. On the other hand, initial gains by Amazon (AMZN) and Apple (AAPL) indicated that investors are willing to reward positive results if sustainable.
Many of the biggest cap and sector leading companies have reported and moving forward the focus turns to the mid and small caps who may face higher expectations after broader indices like the Russell 2000 and S&P 600 SmallCap hit new all-time highs in recent weeks.
It’s also a big week for economic news. Hard numbers like US GDP and ADP payrolls have come in well above expectations, construction spending was distorted by a big revision and the softer PMI data was mixed.
Friday brings US non-farm payrolls, but trade balance numbers for the US and Canada this week plus China next week could be even more significant. President Trump has been ramping up trade threats again lately, excluding Canada from NAFTA talks and threatening more and higher tariffs on Chinese goods.
July saw a common seasonal reprieve for stocks but we’re now heading toward the weakest and most volatile time of the year for stocks with a number of crosswinds blowing. In this week’s edition of Equity Leaders Weekly, we look at the impact of strong economic data on US interest rates and monetary policy. We also take our monthly look at the Sector Scopes chart to investigate capital flows between market sectors.
CBOE Interest Rate 10-Year (TNX.I)
Trends in interest rates provide significant insights into investors expectations and can have a significant impact on the value of the US Dollar, US bonds, and stock prices. Over the course of 2018, strong economic data and expectations of continued US interest rate increases have pushed up US treasury yields and the US Dollar while putting headwinds in front of bonds and interest sensitive stocks.
The stock market selloff back in February could have been sparked by the 30-year yield (TYX.I) breaking out over 3.00%, a sign that the easy money stimulus party was over. Since then the Fed has raised the fed funds rate twice while treasury yields leveled off. It looks like yields are starting to march upwards again. The 10-year interest rate has regained 3.00% and in clearing 2.99%, it completed a bullish Double Top signalling the start of a new upswing. Next resistance appears at the May peak near 3.11%. A breach of that level could be seen as a major breakout by investors.
On August 1st, the Fed held interest rates steady but issued an optimistic statement highlighting a strong economy and a strong labor market. TNX.I moved up on the news indicating that investors might see this as a hint that the Fed plans to continue raising rates at a gradual (currently quarterly) pace for longer, taking Fed Funds up into the 3.00-3.25% range, or potentially accelerating the pace of increases.
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Sector Scopes Monthly Market Review
The Sector Scopes section of the SIA Charts website tracks the Bullish Percent (percentage of stocks on bullish Point and Figure signals) across 31 industry sectors. In addition to providing a snapshot of which groups are in or out of favor, changes over time can help identify capital flows.
Over the course of July, the overall picture shifted to the right moderately (increasing Bullish Percent) as would be expected in a rising market environment. Most sectors are not looking overextended at this point in time except for Utilities (UTIL) and maybe Real Estate (REAL) (a concern with interest rates rising again) while nothing is looking really oversold.
Sectors that weakened or moved to the left the most this month included Internet (INTE), Leisure (LEIS), Metals (META), and Computer Hardware (COMH). Sectors that strengthened or moved significantly to the right this month include Insurance (INSU), Aerospace (AERO), and Manufacturing (MANU).
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