Morning Trading Notes Jan 30: Stocks retreat, bonds break out as traders await State of the Union and FOMC

January 30, 2018, 6:45 am EDT

The bearish reversals that emerged in major US indices like the Dow and S&P 500 yesterday have blossomed into full blown corrections with US indices in full retreat this morning. Dow futures are trading down another 150 points as traders take profits off the table.

At this point an overdue correction appears to be getting underway. US indices have been driving relentlessly upward for over two months without any kind of a significant pause and have been overbought for a while now.

Within the context of the bull market that started in November 2016, it has not been uncommon for stocks to rally into the start of earnings season and then pause or pull back, so we could be seeing traders start to take profits against news as we move deeper into earnings season. Companies in focus with earnings today include McDonalds, Pfizer and Electronic Arts in the US and Metro in Canada.

Traders have been responding to the strong US economy and earnings environment by pushing up US Treasury yields. Yesterday the 10-year yield broke out to its highest level since 2014 and the 30-year yield continued to climb, approaching 2.75% and 3.00% respectively. Rising interest rates tend to drag on interest rate sensitive sectors in the stock market, particularly Utilities, Real Estate, Telecom and Financials.

Rising bond yields indicate that traders are expecting US interest rates to rise over time, indicating they expect to see the Fed remain hawkish and to continue raising interest rates past the 2.00% neutral level, which it could pass in the coming year. Canada has already passed the 1.00% top of its previous rate hike cycle and we appear to be moving into an era of normalizing monetary policy around the world. Traders may get more clues about what the Fed is thinking in tomorrow’s FOMC statement but since it is outgoing Chair Yellen’s last meeting, we may have to wait for incoming Chair Powell’s first meeting in March for a full assessment.

The US Dollar continues to stabilize, but the Dollar Index remains below the 90.00 level it needs to reclaim to kick off a recovery trend. In currency markets, money continues to flow into defensive havens with JPY, CHF and gold among the stronger performers on the day so far.

Commodity markets are mixed this morning. Oil is falling ahead of tonight’s API inventory report with WTI clinging to $65.00 and Brent trading below $70.00. On the other hand, grains continue to attract attention with big breakouts continuing in Corn and Wheat.

Tonight at 9:00 pm EST we get President Trump’s first State of the Union address. The tone should be relatively upbeat with the strong economy, rising stock market, tax reform and job gains in focus. These speeches don’t usually have a big impact on the broader market, but could this time if the President wades into the budget debate and depending on what he has to day about immigration, a key stumbling block in negotiations. These speeches also often impact specific stocks and sectors as traders sort out the winners and losers. Comments (or the lack thereof) related to wall building/infrastructure spending, or health care reform may attract attention to specific stocks.

 

 

 

This article is intended as general market commentary, based on sources considered to be reliable but could contain unintended errors. Commentary, estimates and charts are provided for information, education and entertainment purposes. They are not intended as and should not be construed in any way as investment advice. The authors assume neither liability nor credit for returns from readers’ trading or investment activity. We do not accept any remuneration from companies mentioned in this report. The authors or related parties may enter or exit short term trading positions in markets mentioned in this report at any time without notice. Some of the charts used in this commentary are based on Forex and Contracts for Difference (CFD) markets; leveraged products which carry a higher degree of risk and may not be suitable for all investors. CFD trading is not available in the United States of America. Copyright 2018 The Fundamental Technician, all rights reserved.

 

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