"We all live in suspense from day to day; in other words, you are the hero of your own story." -- Mary McCarthy
We Need a Hero
Do we really need a hero? Well, no, not really. What market participants are looking for, though, might be a catalyst. Yes, several major equity indices did trade at all-time highs yesterday, and if you are broadly long the marketplace (like your pal), that is not a bad thing at all, but something is missing. Most of the communications from market professionals that I am receiving these days have to do with questions like "What's next?", and "How to set up, right now".
These are tough questions. Truly. The indices seem to be almost resting at these lofty levels. Geopolitical risk will apparently go into hibernation until the Italian elections next year. The VIX is still banging around below 10, or close to 25-year lows. (Almost) everybody at the Fed is rowing the boat in the same direction, as illustrated by Cleveland's Loretta Mester's comment yesterday that "we could risk a recession" if normalization of monetary policy is delayed for too long. Go, banks! James Bullard appears to be a wild card, but he does not vote, and Fed watchers often expect him to even contradict himself. So, we spin the wheel. What moves this marketplace? A mishap in northern Asia would be an awful catalyst even to ponder. (By the way, South Korea heads to the polls today.) That's why gold always has a (tradeable) place in any portfolio. A less apocalyptic catalyst for financial markets will likely be oil.
My Grandmother used to say that I was a "crude young man". Grandma was a saintly woman, and rarely wrong. I think of her every time I write about oil, and I miss her terribly. WTI crude took one in the mush last week, breaking the $47 support line, and pushing below $44 before stabilizing on the wrong side of that doorway. The "Ugly Stick" showed up, and the beat-down was severe, but it did end. Black gold found a little support in yesterday's session from the Saudi Energy Minister (Khalid Al-Falih), who sounds confident that OPEC's production cuts will be extended at the former cartel's May 25 shindig. In all honesty, what choice does OPEC have? On top of that, what is the Saudi Energy Minister going to say?
A failure to extend those cuts would cause, at the minimum, a short-term crash in market prices for the commodity. U.S. production has ramped up and can continue to be profitable at far cheaper levels than can most of the competition. That said, the U.S. cannot make up completely for cuts that are well-coordinated and well-policed across both OPEC and other large non-cartel producers such as Russia. Most nations do not keep accurate records on inventories, but the U.S. does, and U.S. inventories at the headline level have printed in contraction for four weeks in a row. A fifth such print is expected tomorrow.
Do I think that it is OK to be long the oil patch at this level? Well, I am. To be fair, though, I am not rah-rah on this trade. I did leg into last week's selloff in several names that I am comfortable with, and know. I am not playing the futures markets in this space right now, and this is only within my tolerance for acceptable risk. Will the energy sector be that hero, that catalyst? At least through that meeting in two weeks, and be sure, I consider my positions in this arena to be temporary in nature. There will be no campaign of "dollar cost averaging" should a trap door open beneath the $44 level for the underlying commodity. The flip side? I think we need to see a take and hold above $47.50 to feel more secure.
Just My Opinion
Without going into personal doubts and preferences, the political stage is at present far more interesting than are the financial markets. This will only be exacerbated as earnings season comes to a close, in roughly 10 days or so. Every story needs a villain, as well as a hero. While crude oil, or the entire commodity complex (with a little help from Chinese demand) for that matter, have the ability to be one or the other, so does the political scene.
High-profile domestic political events such as what we are now witnessing, which dominate the news cycle, have the potential to erode confidence and maybe be even the ability to project policy preferences. Soft data? Vulnerable. Hard data? Still looking for help, but certainly will remain on the wrong side of the fence without the likelihood of sentimental support. In the end, market direction will rely upon sentiment as much as anything else. Elevated valuations, while enjoying some support from the broad improvement seen in the earnings space, will be tested as interest rates rise, but I think we are a long way from seeing material impact on equity markets for that reason. Sentiment does matter.
06:00 - NFIB Small Business Optimism Index (April): Actual 104.5, March 104.7. Interestingly, small businesses remained extremely confident in April, with this release printing above expectations. If there is a negative, there was a sizable drop in the "expect the economy to improve" sub-component. That negative was partially made up in improvement seen in the "current job openings" line.
08:55 - Redbook (Weekly): Last Week 2.3% y/y. This series has remained strong-ish in 2017, despite the reported death of retail. The strength, which at first was only seen on a year-over-year basis, is now visible even when the snapshot taken is shorter in duration. The evidence is that the retail sector is changing, and evolving in a smaller environment. Not buried.
09:00 - Fed Speaker: Minneapolis Fed Pres. Neel Kashkari will speak from Minneapolis and will take questions from the audience. Kashkari, whose focus over the years has been more on regulation than on policy, has evolved into perhaps the most dovish voting member of the FOMC this year. This is potentially your market event of the day, outside of earnings.
10:00 - JOLTS (March): Expecting 5.66 million, February 5.74 million openings. Job openings continue to skate along at elevated levels, even as the participation rate takes a breather. Markets do not follow this item closely, but we do know that Janet Yellen does. Therefore, though chances are that this will not change anything in your P/L today, the item remains on our alert list.
10:00 - Wholesale Inventories (March-rev): Flashed -0.1% m/m. The good news is that this is simply updated data from March, so no surprise is expected, and this data impacts first-quarter GDP, which we already know was awful. Markets are already focused on the potential impact of second-quarter economic growth on forward-looking policy.
13:00 - Fed Speaker: Boston Fed Pres. Eric Rosengren will be in New York City to speak on risk management. Rosengren does not vote on policy, and has been an outspoken hawk of late. This is not considered a market-moving event.
16:15 - Fed Speaker: Dallas Fed Pres. Robert Kaplan, who is a voting member of the FOMC this year, will speak from Dallas. Kaplan has not been heard from in almost a month. At that time, he was vocal about getting started on managing the Fed's balance sheet in the near term. Kaplan will take questions from both the media, and the audience.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2426, 2415, 2406, 2399, 2391, 2385
RUT: 1407, 1400, 1393, 1386, 1377, 1367
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (AGN - Get Report) ($3.31), (AON - Get Report) ($1.27), (DF - Get Report) ($0.17), (DUK - Get Report) ($1.03), (ODP - Get Report) ($0.12), (SN) (-$0.18), (SRE - Get Report) ($1.66), (W - Get Report) (-$0.57)
After the Close: (BUFF) ($0.22), (EA - Get Report) ($0.75), (TWNK - Get Report) ($0.16), (NVDA - Get Report) ($0.81), (PCLN) ($8.78), (TSRO) (-$2.19), (DIS - Get Report) ($1.41), (YELP - Get Report) ($0.16)
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