Market Review: Rotation Ready, Spark Needed

eOptionDaily Market Report

Equity Market Recap
  • Stocks ended mixed, slipping from their recent record highs and fluctuating in afternoon trade following minutes from the latest FOMC meeting, which indicated that rate hikes may come quicker to offset inflationary pressures. Many Federal Reserve policymakers said it may be appropriate to raise interest rates again “fairly soon” should jobs and inflation data come in line with expectations. The comments reversed earlier gains in the dollar, while bonds bounced between gains and losses. Energy stocks were among the biggest laggards in the S&P, while biotech also declined. Recent gains in interest rate sensitive sectors (such as Utilities and REITs) reversed lower. The lone piece of economic data today positive as existing-home sales rise to a 10-year high in January despite higher rates, leaner supply, coupled with better earnings out of TOL led homebuilders higher – new 52-week highs for Dow components AAPL, DD, JPM, MMM, V
  • Some staggering statistics: 1) It has been more than 90 straight days (and counting) since the S&P 500 index has posted a more than 1% decline as stock markets remain in “euphoric” state; 2) The Dow Jones Industrial Average closed higher, setting its best record-setting streak in three decades (also marks the 28th record close for the Dow since the election) as it rallied for a 9-straight sessions, according to the Dow Jones Data Group; 3) the value of market cap added to U.S. equities since election: $2.5 trillion, as per Bloomberg as stock momentum continues to build on hopes President Trump policies (including tax cuts and deregulation), will accelerate economic expansion and lift corporate profit.
  • Minutes from the last Federal Reserve meeting said: “In discussing the outlook for monetary policy over the period ahead, many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee’s maximum-employment and inflation objectives increased”
  • In an interesting news item midday, newswires reported NASA saying there are several “earth-like” planets discovered orbiting nearby star” 40-light years away

 

Commodities
  • WTI crude remained under pressure all day, settling down 74c, or 1.36% at $53.59 per barrel (high earlier $54.60 and low $53.35), erasing yesterday’s gains on OPEC commentary. Gold settles down $5.60, or 0.5%, at $1,233.30 an ounce (3rd straight daily decline), but ended up rallying in futures trading after the release of minutes from the Federal Reserve’s most recent policy meeting.

 

Currencies
  • The U.S. dollar was mixed most of the day, weakening against most counterparts (yen and the euro) after minutes from the FOMC meeting showed uncertainty surrounding fiscal policy. The dollar index (DXY) turned negative after having risen by about 0.2% prior. Note the dollar index (DXY) had traded to 5-week highs yesterday. The euro posted a sharp bounce earlier (off 6-week lows of 1.0494) against the dollar, getting a lift after political news out of France after Bayrou offered an alliance with independent candidate Macron, which was accepted – euro jumped to session highs of 1.0572 vs. the greenback

 

Bond Market
  • Bonds were back and forth all day, ending slightly higher as yields dipped from earlier levels after comments from the FOMC Minutes. The 10-yr yield fell over 2 bps to 2.403% (2-week lows). Yields then popped midday following the political news out of France (10-yr to 2.44%), before fading post FOMC minutes. Also today, the U.S. Treasury sold $34B in 5-year notes at a yield of 1.937% vs. 1.931% in when issued prior, with a bid-to-cover (demand) at 2.29, below prior auction of 2.38 and indirect bidders awarded 58.2% of auction

 

Economic Data
  • Existing-Home Sales for January rise 3.3% to 5.69M, above estimate for 5.55M while December was upwardly revised to 5.51M from 5.49M (existing-home sales up 3.3% after falling 1.6% prior month); inventory rose 2.4% to 1.69M homes; 1st-time buyers 33% of total sales; Distressed sales 7% of total sales; median home price rose 7.1% from last year to $228,900

 

Sector News Breakdown
Consumer
  • Retailers; TJX Q4 results top views/Q1 guidance misses; VFC upgraded at Morgan Stanley noting shares have dropped 15% since Jan ’16 vs. the S&P 500’s +15% move; RL was downgraded at Atlantic Equities; LZB Q3 sales missed estimates; WWW sees higher FY17 earnings/weak revenues after Q4 tops view; CHS rises on earnings
  • Consumer Staples; UN said it launched a comprehensive review after failed takeover by KHC; SJM says will buy back up to 3M shares; KR shares weaker early; SFM reports tomorrow morning; there were also several company updates from the CAGNY conference (ongoing all week); PM among those raising estimates at CAGNY, boosting forecast by 10c on FX changes
  • Restaurants; TXRH shares fall after reported a weak 4Q last night, as EPS came in 9c below consensus and comps ended the quarter at +1.2%, down from +3.8% at the start of 4Q; PZZA Q4 EPS beat but revs miss lowest estimate and Q4 comps also short of views; RRGB mixed Q4 as EPS beat/revs miss and comp sales fell (-4.3%), traffic fell (-2.9%) and guest check fell over (1%); CHEF execution improves in 4Q, but FY17 guidance implies limited margin recovery said one analyst; YUM 12M share Block Trade priced at $66.55
  • Autos; Baird positive on auto suppliers saying top ideas among the auto suppliers are VC, BWA, DLPH, MBLY and are also buyers of ADNT and MEI despite group up 20%-25% since election; MBLY Q4 EPS/revs topped consensus; TSLA to report earnings tonight
  • Housing & Building Products; TOL to 52-week highs after Q4 revenue topped views with 1Q backlog $4.35B and reaffirms forecast for year adj. gross margin while raising its year delivery forecast to 6,700-7,500 range; TPH Q4 revs missed views; HVT Q4 EPS beat/sales missed
  • Casino, Lodging & Leisure; in cruise lines, NCLH Q4 EPS/revenue topped consensus; SIX Q4 revs topped consensus; casinos were mostly lower (MGM, MPEL); while lodging names slipped

 

Energy
  • Energy complex lagged others on weaker oil; in E&P space; WLL shares reacted negatively to strong 4Q16 earnings accompanied by ’17 guidance reflecting a higher capital program than modeled and lower estimated production guidance; CXO shares slip despite strong 4Q with a solid forward outlook; NFX another decliner on mixed earnings/outlook
  • MLPs; MLPs lower as energy complex lags today, the Alerian MLP Index (AMZ) down over 1%; Citi resumed coverage of TRGP with a Buy rating and $64.00 tgt; also downgraded TEP saying is reasonably valued but remain Buy rated on TEGP on potential; TLLP 5M share Spot Secondary priced at $56.80; DCP upgraded to buy at UBS and up tgt to $45 from $37 citing opportunities: Fee Based NGL Pipes, Exposure to the Permian, SCOOP/STACK
  • Drilling; PKD 12M share Spot Secondary priced at $2.10; SDRL says restating its financial statements/postpones Q4 results
  • Frac sand; Goldman Sachs said with US land rig count rising 92% since May, and up nearly 47% since the end of 3Q16, it appears that the frac sand market is tightening more quickly than they previously envisaged – Anecdotal evidence of $30-$40/T FOB sand prices – now see upside risk to our estimates. Among the covered frac sand companies, they rate SLCA and EMES as Buy and FMSA/SND as Neutral; HCLP Q4 revs beat and says expects improved pricing in Q4
  • Renewables/Solar movers; FSLR shares slip after mixed Q4, H1’17 weakness, and lack of industry visibility overall (downgraded at Credit Suisse to underperform); SSNI downgraded at Wunderlich noting stronger Q4 but guidance implications are significantly lower than firms prior expectations; CSIQ was downgraded at JP Morgan saying overcapacity and weak demand continue to challenge solar manufacturers

 

Financials
  • Large Cap banks mixed; US banks bounced from earlier lows, getting a lift as bonds declined and yields jumped, providing a push for financials; European banks mostly lower outside of LYG after earnings; RPT falls as 4Q Funds from Operations (FFO) 33c per share vs est. 34c; ENV sees Q4 EPS 32c up from prior 30c and says currently finalizing certain accounting matters related to potential state and local non-income tax obligations; IVR reported Q4 core EPS miss

 

Healthcare
  • Large Cap Pharma; AET accelerates $3.3B of share buybacks; ANIP downgraded at Roth Capital on near-term concerns with the recent market share decline for the EEMT franchise; OCUL slides as announces FDA acceptance of NDA resubmission for Dextenza; GBT 5.1M share Spot Secondary priced at $24.50; President Trump said he plans to submit a healthcare plan early March (to replace the ACA)
  • Biotech movers; ARGS falls as late-stage study unlikely to show treatment benefit of Argos Therapeutics’ lead product candidate/committee recommends stopping drug study for futility; CMRX said final data from its “AdVise” trial showed a clinical benefit of the early antiviral effect of brincidofovir for the treatment of adenovirus (AdV) infection; SRRA upgraded at Wedbush; PBYI underperformed in biotech, falling as much as 10%
  • Medical equipment and devices; LNTH rises as announces development pact with GE; WMGI shares rise after reported solid top and bottom line 4Q results post-close last night; ENTL plunged after the company reported Q4 financial results and provided yearly guidance
  • CAR-T; JUNO initiated outperform at Wells Fargo based on what we view as a best-in-class platform in adoptive cellular therapy (ACT), expectations for superior therapeutic profile with lead CD19 CAR-T product JCAR017 in B-cell cancers ($34-$36 tgt) and MP on KITE shares

 

Industrials & Materials
  • Industrials & Machinery; in machinery, TEX mixed Q4 as EPS beat/sales miss and year EPS trail estimates; PH was upgraded to overweight at JP Morgan; VMI rises on earnings; Dow component MMM trades to 52-week highs today (CEO said today slightly more positive about ’17 vs. 5-months ago)
  • Transports; XPO climbs on earnings; UPS was downgraded to neutral at Bank America; MATX tumbles on Q4 EPS miss (weighs on Dow Transport index) – MATX also said Q1 ocean transportation income is expected to be less than half of what it was a year ago; UNP said sees pricing challenges in coal and international intermodal
  • Metals & Mining; in steel, ThyssenKrupp AG said it would sell its Brazilian steel plant to TX for EUR1.26 billion ($1.33B), ending its steel operations in the Americas https://goo.gl/havlpF ; gold miners active, with NEM sliding on earnings and said it sees higher 2017-2018 gold cost
  • Aerospace & Defense; Business jet shipments in 2016 fell to lowest number since 2004 at 661 units vs 718 y/y, according the General Aviation Manufacturers Association; 2016 business jet billings were $18.35B vs. $21.88B YoY
  • Chemicals; Dow component DD outperformed after EU regulators set to clear merger with DOW according to various media outlets

 

Technology, Media, & Telecom
  • Internet; Cowen downgraded TRIP and TRVG citing competition; FB and ML baseball in talks to stream one game per week as per Reuters; FB traded to new all-time highs today
  • Software & Hardware; AAPL announced that Apple Park, the company’s new 175-acre campus, will be ready for employees to begin occupying in April and process of moving more than 12,000 people will take over six months; GRMN Q4 EPS/revs handily top consensus  on mixed year guidance/in supply pact with BMW
  • Media & Telecom; DISH trades to 15-month highs after Q4 results; IMAX and DIS extend their comprehensive film deal through the end of 2019; LAMR Q4 AFFO beats/but revs miss estimates on lighter guidance; SREV plunges on weaker guidance; CRTO slides as guided Q1 revs (ex: TAC) down QoQ; FUEL active as guides Q1 adjusted Ebitda to unexpected loss

Market commentary provided by Hammerstone Markets, a division The Hammerstone Group, a firm separate from and not affiliated with Regal Securities L.P.  Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.

 

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