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TRADING THE WEEK: A Tale of Two Markets
Traders Magazine Online News, June 26, 2017
It’s a tale of two markets.
Despite industry pundits stating the stock market can’t go higher and exhibits bear market tendencies, prices refuse to fall. Investors still like stocks, especially in a rising rate environment, and won’t sell. But pressures are mounting that make selling at the top very attractive.
Larry Peruzzi
Larry Peruzzi, Managing Director International Trading at Mischler Financial Group, noted this confluence of events and told Traders Magazine stocks finished last week a mixed bag week. On the one hand, the Russell rebalance last Friday added some trading volume and keeping prices within striking distance of fresh all-time highs.
“The Dow and S&P 500 index hit record closes last Monday before pulling back on Tuesday and trading mostly sideways the balance of the week. Economic data was light with decent May existing home sales numbers on Wednesday, mostly in line PMI on Friday as well as better May new home sales. The mid-month spike in the VIX index is also subsiding as we closed out the week at the 10 level, down 13% over the last two weeks.”
But on the other hand, market wrenching political drama remains as President Trump stays at the center of tampering allegations, future Fed rate hikes and lower oil prices, as well as a flat yield curve, keep a lid on activity. Peruzzi noted that some investors, such as Fundstrat Global’s Thomas Lee, are starting to question the market rally duration.
“He cut his 2017 and 2018 S&P 500 earnings outlook,” Peruzzi noted. “Also, oil remained weak with WTI crude down about 7% the last 2 weeks. Oil’s decline in the past would have pressured markets but weighting adjustments are allowing us to look past it.“
Peruzzi said that it is increasingly feeling as though this market is dealing with two fears. The fear that valuations are stretched beyond the earnings justifications and fear that the lack of inflationary pressures will keep real rates low for the foreseeable future.
Trading last week was a continuation of the relief trade seen two week ago – staying above the 7 billion share per day level. Approximately 7.46 billion shares per day changed hands last week compared to the week prior when volume was 7.37 billion shares per day, according to Bats Global Markets.
“Digging a little deeper it looks like the latter is winning,” he said. “Fed Funds are pricing in a 0% chance of a rate hike in late July and only a 16% probability of a hike in September. This could be setting us up for a Ground Hogs Day movie type of summer, same thing day after day. So, as investors head to the beach they will keep one eye on the sky for approaching storms and one eye on the markets for the same but the current pitcher seems to be blue skies for both.
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