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RoboStreet – May 10, 2018
Stocks, Oil Prices, Dollar, Bond Yields Rise in Tandem
Animal spirits returned to Wall Street Wednesday after equities made a strong move higher, with the S&P 500 and the Nasdaq climbing 1.0% apiece, and the Dow advancing 0.8%. Investors continued to digest President Trump’s Tuesday decision to withdraw the U.S. from the Iran nuclear deal. However, buying picked up notably around midday as the S&P 500 started to pull away from its 50-day moving average — which, up until that point, had been an area of resistance.
The energy sector led the charge, closing atop the sector standings by a wide margin with a gain of 2.0%. A rebound in the crude oil futures market, which returned to a three-and-a-half year high as WTI crude futures settled higher by 2.9% at $71.10 per barrel. President Trump’s decision to restore the “highest level of economic sanctions” against Iran, OPEC’s third-largest oil exporter, will likely decrease crude supply on the global market which, in turn, should force prices higher.
In total, nine of eleven S&P sectors closed in the green. On the downside, the lightly-weighted utilities and telecom services sectors finished at the back of the pack. The consumer staples sector has lagged further as Walmart weighed on the group, losing 3.1%, after the company agreed to buy a 77% stake in Indian e-commerce giant Flipkart for $16 billion which qualifies as Walmart’s largest acquisition deal ever.
U.S. Treasuries prices are looking to close this week out on a broadly lower note, pushing yields higher across the curve. The yield on the benchmark 10-yr Treasury note returned to the psychologically important 3.00% mark, while the 2-yr yield ticked up one basis point to 2.53% – a fresh cycle high.
Reviewing this week’s economic data, which included the April Producer Price Index, March Wholesale Inventories, and the weekly MBA Mortgage Applications Index: The Producer Price Index for final demand increased 0.1% versus 0.2% consensus, while the final demand index, less food and energy, rose 0.2%, as expected.
The key takeaway from the report is that there was a moderation in the producer price inflation trend in April, yet it wasn’t significant enough to alter the Federal Reserve’s perspective pertaining to the presumed path for inflation and monetary policy. Wholesale inventories increased 0.3% in March versus consensus of 0.5% on top of a downwardly revised 0.9% increase (from +1.0%) in February. And the weekly MBA Mortgage Applications Index declined by 0.4%. On Thursday investors will receive the April Consumer Price Index that came in at +0.2% versus consensus of +0.3%.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
As of this past Wednesday, three of the four major averages are in positive territory year-to-date, with the Dow just shy of also turning positive. The Nasdaq and Russell 2000 are clearly where fund flows are most pronounced, and rightly so. They have considerably less exposure to the recent strength in the dollar than do the heavily weighted multi-national Dow and S&P 500 indexes.
A chart of the PowerShares DB Dollar Index Bullish Fund (UUP) tells the story of a potential stiff forex headwind for companies the derive over 50% of revenues from overseas sales. The recent 5% rally in the greenback, if sustained, will most definitely impact second quarter earnings since the rally is occurring early in the quarter. There is little chatter from the financial media about the fresh dollar spike, but I assume it will be a center of increasing attention if the rally extends itself.
The chart above tells of what has already happened. But what about the future? As for the near-term direction for the dollar, my Stock Forecast Toolbox below has shares of UUP trending higher throughout the majority of May. How much the market will ignore or tolerate this move is uncertain, but it stands to reason that it will be a hot topic of discussion if my forecast chart holds true. A weak dollar has been a strong tailwind for America’s biggest blue-chip companies, padding profits from favorable exchange rates, and a firm dollar will create an equally strong headwind that will eventually be a growing obstacle for the bullish narrative. This is a case where the trend is not our friend and needs to be monitored closely.
By most indicators, the S&P 500 is trading at 2,700 and is at an inflection point, where if it can clear the 2,720-2,730 level on rising volume, it could usher in a fresh uptrend following three months of consolidation. If this level is not cleared, the trading range gets tighter as the underlying 200-day moving average comes back into play at 2,620 where if breached to the downside will invite technical selling pressure.
Considering the resurgent tech, aerospace/defense, industrial and financial sectors are making a collective move higher as of mid-week, the bulls have the upper hand, and yet there will almost be a guaranteed rash of headlines, both financial and geopolitical, that will invite further volatility to the mix. It’s for this reason that I’ll be doing some hedging in the days ahead.
Just for the record, the RoboInvestor Portfolio scored another excellent short-term profit, this time in MasterCard, where we booked a 4.74% profit in 26 days. This follows successive bigger gains of 5.59% in Amazon.com over just 10 days and 7.92% in Microsoft in only 24 days. The power of my Tradespoon AI system is showing how investors can carve out great profits in a market that is mired in a tight range. While the NASDAQ is up +6.3% over four months, my AI platform is producing similar results (6.08%) in the span of just four weeks. At this rate, we are annualizing 73%.
That sounds good going forward, but we’ve back-tested our track record going back to January 1, 2013. While the S&P 500 has averaged 13.1% per year for the past five years, my Tradespoon Model Portfolio has averaged 26.8% or more than 2X that of the stock market’s benchmark index. That’s 134% return, not including dividends,versus 65.5% that includes dividends. The case for AI assisted trading and investing with a system that is proven over five years to be strong and deserving of all investors’ attention.
The numbers speak for themselves and after many years of hard work, dedication and refining an AI platform that performs so consistently well, it truly brings incredible gratification and personal reward to me to be able to extend this money-making formula to those that come alongside us at RoboInvestor. Money never sleeps and neither do my ‘always learning’ machines. Coming into work every day and sifting through the findings of where our next best investing strategy exists is wonderful to experience.
With that said, we will be entering the summer months soon and with it comes thinner trading and invariably higher volatility. When liquidity dries up, stock and index moves are more pronounced, and I don’t expect this year to be any different. It doesn’t mean the market can challenge the early February highs, as that is quite possible. Getting there will be a rockier trail than that of a smooth path. And it’s this point that I want to address this week.
Coming up in this Sunday’s edition of RoboInvestor, I’ll be adding a high-power industrial transportation stock to compliment our six other open positions, but I’ll also be adding a hedging instrument to layer on some portfolio insurance. While the market is trying to give a green light to investors, the primary short-term threats I see are a furthering of the dollar and crude oil rallies and seeing the 10-yr Treasury yield push higher. While the macro-economic data and corporate earnings data is wonderfully healthy, these three factors have to be taken seriously as potential obstacles that individually could amount to just speed bumps, but collective could be a rally killer.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
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