Market Review: Nasdaq Posts 7-Month Win Streak

eOptionDaily Market Report

Closing Recap
Wednesday, May 31, 17
DJ Industrials
S&P 500
Russell 2000
Equity Market Recap
·      Stocks end lower as financial and energy weakness drag broader markets lower for a second session, though the action in banks was the real story (GS 6-month lows) given declining bond yields and cautious commentary from various firms (JPM, BAC, and GS) regarding trading activity. Large cap Pharma was one of the few bright spots, as investors rotated money back into defensive sectors (utilities, consumer staples have also been strong). Other defensive assets also saw strength, as gold rallied 0.8% and bonds jumped (yields to 1-month lows) on mixed economic data. Despite the sharp downdraft in financial and energy stocks, the broader market still remains on solid footing, trading not far off recent highs last week. For the month, the NASDAQ has been the best-performing major index, up about 2%, followed by a 0.9% gain for the S&P 500. Both indexes are set for their best monthly percentage gains since February 2017.
·      More news out of Washington: Fired FBI director James Comey plans to testify publicly in the Senate as early as next week to confirm bombshell accusations that President Donald Trump pressured him to end his investigation into a top Trump aide’s ties to Russia – CNN reported midday. Also, overnight, the WSJ reported former national security adviser Mike Flynn will cooperate with a subpoena and hand over business records sought by a Senate committee investigating the Trump campaign’s ties with Russia
·      The Fed Beige Book appears to strengthen case for Fed to raise rates in June, as Beige Book sees increasing signs of labor shortages, higher wages; says economy still growing ‘modest or moderate’ pace
·      Mixed bag for commodity prices as oil prices declined, falling back to 2 ½ week lows and erasing much of its prior run higher into last week’s OPEC meeting. The meeting provided no further surprises, coupled with rising rig counts and demand uncertainty, prices ended broadly lower. Also weighing were reports that OPEC’s output rose ~370K bpd in May as Libyan and Nigerian output surged and as compliance dropped to 92% from last month’s 96%. That did not help, as July oil ended lower by -$1.34, or 2.7%, to settle at $48.32 per barrel (down about 2% for May).
·      Precious metals ended higher, rising $9.70, or 0.8% to settle at $1,275.40 an ounce as defensive assets rallied amid falling stock prices and renewed concerns out of Washington (Comey and Flynn). For the month, prices, tracking the most-active contracts, rose about 0.6%
Currencies & Bonds
·      The U.S. dollar weakened after disappointing housing and factory data as the dollar index (DXY) touched lows of 96.85 – near the lows of last Monday. The dollar fell to lows of 110.49 against the yen, (down from overnight high 111.23), while the euro trades up above 1.123 levels; the Pound back above the $1.29 level vs. the dollar following conflicting reports about the support for U.K. Prime Minister Theresa May’s Conservative Party in the June 8 general election. The dollar index is down about 2% for the month of May.
·      Treasury markets extend recent gains, as the yield on the benchmark 10-year drops back under 2.20%, down a few bps points after weaker economic data. Following the Fed Beige book comments late afternoon, bond yields found themselves holding lower, as the 2-year Treasury yield at 1.274%;  and 10-year Treasury yield at 2.199%–marking a five-week low.
Economic Data
·      Chicago PMI rises to 59.4 (which was corrected midday from an original reading of 55.8) following a 28-month high in May of 58.3 – estimate was for a 57.0 reading
·      Pending Home Sales for April fell (-1.3%) MoM vs. est. up 0.5%; the index was 3.3% lower than a year ago in April, marking the first yearly decline since December; Northeast fell 1.7%; Midwest fell 4.7%; South fell 2.7% while the West was up 5.8%
Sector News Breakdown
·      Retailers; KORS Q4 EPS/sales were better (though comps fell -13.6%), but guided Q1 and year profit below consensus (Q1 60c-64c on revs $910M-$930M vs. 80c/$944M); VRA posted Q1 EPS loss slightly better than views on in-line sales, while guidance for next quarter and year were mixed; JILL Q1 comps/EPS top views and raised its year forecast to 80c-84c vs. est. 79c; FRANupgraded to market perform at FBR Capital; apparel/department stores were lower
·      Housing & Building Products; roofing stocks mentioned positively at Longbow as reiterates buys on OC and BECN citing roofing checks; WHR plans to ask the U.S. government to impose broad barriers on imports of household washing machines, part of the company’s efforts to fight what it calls unfair trade practices by South Korea-based rivals; NX Q2 EPS/sales/Ebitda top consensus
·      Energy can’t get out of the doldrums, with several E&P, equipment names trading to 52-week lows (including XEC, NBL, SLB, RRC, HP, MUR, NFX, EQT) given the sharp decline in oil prices again today – group tried to pare losses as oil moved off lows, but group still among top decliners
·      E&P sector; Morgan Stanley cut price targets by 16% across its coverage as now assumes a “moderate-for-longer” crude price in valuations/firm favors quality, low cost U.S. producers; retains attractive industry view and expects upside for oil and equities over summer (sees “top tier” Permian names including PXD, PE, FANG, XEC, CXO, RSPP, EOG best-positioned)
·      Utility stocks; defensive sector continues to benefit from low rate environment, as shares of AEP, ED, NEE, ES, PNW, CMS, LNT, DTE, PPL, XEL, SRE among names at 52-week highs today
·      Large Cap banks get a double whammy today, falling on the continued low rate environment as bond yields slip again (hurting lending margins), while JPM also said (speaking at Bernstein conference) that markets revenue down 15% y/y QTD, while fixed income down, equities up slightly QTD and doesn’t see reason 2Q trend would change in June; GS COO said client activity still subdued in Q2 (shares of GS, MS, C active). Weakness not relegated to large cap only, as regional banks suffer as well on lower yields (HBAN, RF, CFG, KEY, FITB)
·      Finance & Lending; ARI 12M share Spot Secondary priced at $18.25; Auto loan providers also under pressure amid weaker demand, tightening lending standards and any pickup in car-loan defaults (ALLY, SC, CACC). Loan growth has continued to slow from 2015’s highs while growth in the highest-risk auto segment fell again in 1Q according to Bloomberg
·      Large Cap Pharma; MNK is exploring a sale of its generic drug unit, in a deal that could fetch as much as $2 billion – Reuters ; TEVA said Phase III Halo study of fremanezumab to prevent migraines met all primary and secondary endpoints; PRGO filed its 10-Q for 1Q2017 as top-line was consistent with pre-announced range and 2017 outlook unchanged; LLY said its Cyramza successful in late-stage bladder cancer study; GEMP CEO resigned May 23rd; FOLD says SD-101 granted FDA’s rare pediatric disease designation as treatment for the epidermolysis bullosa
·      Biotech movers; group was broadly lower yesterday, led by large cap ahead of ASCO cancer conference this weekend; ALNY received breakthrough therapy designation from the FDA for its investigational treatment of prophylaxis of attacks in patients with AHP; FWP filed appeal of the Patent Trial and Appeal Board decision on its dispute with BIIB
·      Medical equipment and devices; EXAS rises after UNH said it will begin covering virtual colonoscopy tests such as EXAS’s Cologuard, effective July 1; ISRG said the FDA has approved X/system to launch later in Q2
Industrials & Materials
·      Industrials & Machinery; DCI was upgraded to buy at Jefferies as see increasing evidence that its end markets are exiting the multi-year trough; KOP was cut at Jefferies as expect the stock to be range bound until 2-3 quarters. The sharp declines in the commodity space carried over into industrial stocks as well, with machinery stocks broadly lower.
·      Transports; index declined after touched highs of 9184 before retreating (100 day MA was 9179)….9064 is 50-day MA support; broad weakness today for rails, airlines, truckers
·      Metals & Mining; iron ore price extend recent declines as Bloomberg noted the price of 58% content ore has sunk into the $30s a ton this month to the lowest since June, according to Metal Bulletin Ltd. That compares with a drop into the $50s for benchmark 62% material to the lowest since October (CLF, VALE, RIO leveraged to iron ore prices)
Technology, Media & Telecom
·      Internet; after trading above the psychological $1,000 level yesterday for the first time ever, AMZN shares drop back below the $990 level earlier (lows $982.16); overall, profit taking in high-beat Internet sector most of the session; SNAP named new short idea by Hedgeye
·      Semiconductors; ADI the latest semi chip maker to post better earnings, as Q1 EPS beat by 19c on higher sales and margins while guiding next quarter above views; AVGO to report earnings tomorrow after the close; QCOM said HPQ, Lenovo Group Ltd. and Asustek Computer Inc. will make notebooks and tablets running its chips and MSFT’s Windows operating system
·      Software & Hardware; VMW upgraded to outperform at Baird with street high $115 tgt (ahead of earnings Thursday night), while RBC and JPM also positive on shares; internet security maker PANW to report earnings after the close
·      Hardware and Equipment movers; ACIA said it had identified a “quality issue” it believes affects a portion of ~1,300 AC400 units and ~5,000 CFP units manufactured by one of its three contract manufacturers over a 4-month period; BOX and HPE to report after the close; Toshiba will not release results for the fiscal year ended in March until after its annual general shareholders meeting June 28, the Nikkei reported
·      Media & Telecom; movie theatre stocks fall for a second day (IMAX, AMC, NCMI, CNK) following soft Memorial Day weekend sales; defensive telco stocks were higher early, while media names mixed; VIAB lower after weak “Baywatch” movie results this weekend

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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