TRADING THE WEEK: Limited Upside Despite Sentiment


Trading in the equity markets was quiet last week and could drift higher this week as bullish sentiment remains. However, any moves higher would likely be on thin trade.

Traders contacted by Markets Media reported that activity was modest last week as the prior week’s  economic data deluge left the market somewhat tired and in need of a respite. Given the continual testing off new highs by the major stock indexes, few were willing to add too much to their current holdings and would rather watch corporate earnings reports or headlines out of Washington.

“The market continues to feel ‘toppy’, so few are willing to buy significantly into the rally at this point,” said a trader in New York. “However, no one wants to sell either for fear of being on the wrong side of the trade and rally. People would rather listen to anything on interest rates or Trump.”

William Mingione, Drexel Hamilton

Leading into last Friday, the Dow Industrials gained 1.4% for the week, while the Nasdaq Composite and S&P 500 posted gains of 1.1% and 1.2%, respectively.

This comes as all three major stock-market benchmarks finished at record levels for a fifth straight session for the first time since 1992, said William Mingione, Managing Director – Head of Equities at Drexel Hamilton.

“Financials have led the way once again, as Janet Yellen’s commentary this week seems to have left the door open for a potential move by the Fed in the upcoming March meeting,” Mingione said. “The odds of a rate move higher in March have increased substantially post Yellen’s commentary.”

Alastair George, Edison Investment Research

And speaking of Chairman Yellen, one floor trader also cited her remarks last week where she reminded that rate hikes are essential to keeping the US economy healthy and on track, regardless of what taxation and spending policies are enacted by the Trump administration, Federal Reserve Chair Janet Yellen told senators last week. It is the economy’s “solid progress” that is “driving our policy decisions,” she said.

Alastair George, chief strategist at Edison Investment Research, noted that Yellen’s prepared statement to the US Senate committee leaned hawkish.

“We believe this statement puts a March interest rate increase back on the table, as a mere continuation of current trends is now a sufficient condition to raise interest rates,” George said. “Taken together with previous comments indicating the desirability of raising rates earlier and more gradually rather than later and abruptly, deferring a rate increase in March would raise questions over the Fed’s communication policy. If anything, this represents a micro-flip/flop in Fed thinking towards a more hawkish stance, perhaps in response to rising equity prices.”

George added that he believes investors should maintain a cautious view on equity markets globally as high valuations are likely to be at risk from tighter U.S. monetary policy. It was a point echoed by traders.

“No one is really afraid of any type of hike this year,” one trader said. “The market has grown comfortable at these levels knowing well a rate hike is coming and that, along with positive earnings expectations, are driving the market higher. But actual volume has been light.”

A salesman at a N.J.-based broker agreed, saying that despite some hints of volatility as measured by the VIX index, which normally should prompt trading activity, have not given traders any impetus to alter positions – either trim or add.

“The market seems very quiet out there,” he said. “A lot of the desks I am talking to are able to take my calls, which while good for me, signals they aren’t all that busy.”

Drexel Hamilton’s Mingione also noted the VIX index’s lack of movement and its effect on trading.

“In addition to the market sitting at record highs, we have been experiencing historically low volatility,” he said. “The last time the S&P 500 closed down by at least 1% was 86 trading days ago on October 11th. This is largely the result of complacency among investors, and potentially an indication that we could be due for more aggressive market moves in the very near future.”

Trading on U.S. equity exchanges drifted higher on the aforementioned sentiment as investors failed to pare back holding. Trading levels averaged 6.70 billion shares per day for the week ended February 17, compared with 6.61 billion shares the prior week, according to Bats Global Markets data.

Also to note were comments made recently at the Security Traders Association of Florida annual conference in Miami, where a rosy outlook for both the economy and equity markets was given. In prepared remarks, keynote speaker Yousef Abbasi, Global Market Strategist at Jones Trading said that the one-two combination of Trump’s anti-regulatory, pro-business leanings, a consumer who has much less debt than 10 years ago and savings can overcome higher interest rates and mediocre employment.

In other market news, CBOE Holdings and Bats Global Markets announced that the companies expect to complete CBOE’s acquisition of Bats on February 28.

Earlier this month, CBOE Holdings received its final remaining regulatory approval from the United Kingdom’s Financial Conduct Authority (FCA), meaning that all U.S. and European regulatory clearances and approvals relating to the transaction have been received.

This Week’s U.S. Economic Indicators of Interest

Monday  U.S. Markets Closed for Presidents Day
Tuesday Purchasing Managers Index

Patrick Harker Speaks

John Williams Speaks

Wednesday Redbook Retail Sales

Existing Home Sales

FOMC Meeting Minutes

Jerome Powell Speaks

Thursday Jobless Claims

Dennis Lockhart Speaks

Friday New Home Sales

Consumer Sentiment




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