Wednesday, March 13, 2019, 12:31 PM, EST
- Durable Goods orders rose 0.4% vs. -0.4% estimate, helping stocks
- European shares rose despite uncertainty around Brexit; U.S. stocks largelyunaffected
- Both headline and core Producer Prices rose 0.1% in February below the 0.2% survey estimates
Stocks rose this morning as the U.S. took its cues from a higher Europe despite overnight weakness in Asia. Economic data in the U.S. moved stocks higher and helped Europe look past weaker Asian consumer confidence data and a messy Brexit vote. All eleven S&P sectors are in the green and it’s telling that defensive Utilities are lagging (see "Technical Take" below for more).
The market is watching the situation in the U.K. after lawmakers there rejected another Brexit proposal from Prime Minister Theresa May. We don’t profess to know anything about that situation but the politics there almost make the U.S.’s situation seem normal. Still, stocks in Europe rose despite the U.K. Parliament rejecting a retooled deal that was supposed to facilitate the country’s orderly exit from the EU on March 29th. Now things get more chaotic, with the possibility of a “hard Brexit” on March 29th but more likely a delay to that date as the U.K. asks the EU for more time to get its act together.
Other scenarios include a third vote, a change in government or even another referendum. The Pound fell sharply on the news but has gained back most of that ground against the U.S. Dollar. Incidentally, I have “half a crown” today but it’s not the British coin. Blame a dental mishap this morning – ouch. Today, so far, shows the third straight day of gains for equities. Stocks are trying to shake off a tough last week helped by tech stocks which are outperforming, Today, the S&P moved above 2,800, which many watch as a key resistance level for that index.
The Nasdaq Composite bounced off the 200-day (8,340) earlier this week and is now again above 8,500. The Russell 2000, while higher, is still below its 200-day moving average. So let’s talk about index divergence for a moment. We’ve noted the Dow has lagged the other major indexes this week largely due to Boeing’s price decline, which took 319 points off the index over the past two days. The other 29 stocks in the index have been positive and collectively added 433 points for a net gain of 103 through last night. Percentagewise this works out to a 0.4% gain, 136 basis points behind the 1.77% gain in the S&P 500 and 206 basis points behind the Nasdaq Composite’s 2.47% gain. Mainly this is due to index construction since the Dow’s price weighting counts Boeing’s move more than it would if it were market cap weighted like most others. More relevant to our audience, the WSJ today points out that small caps as measured by the Russell 2000 are lagging large caps, falling twice as much last week as the S&P 500. The concern here is that small caps are more U.S.-focused so the weakness might be a harbinger of expected weakness in the U.S. Also, small caps tend to be “riskier” for a number of reasons so the action might indicate more risk aversion by investors. If there is a bullish case for stocks driven by a U.S. economic recovery, small caps would be expected to participate. With U.S.-focused small caps weaker, some seem to be questioning the domestic recovery - or so the thinking goes.
Lately some of the wonky data out of Washington, not to mention the negative revisions to S&P 500 earnings expectations for Q1 (now negative) and Q2 (hanging on by a thread) mean investors are holding out hope for the second half of the year and a U.S. China trade deal. One week does not necessarily a trend make and the Russell 2000’s YTD gain of 14.9% still beats the 11.4% gain for the S&P 500 through yesterday, but the warning signal is there. In the economy, producer prices for February rose 0.1%, lighter than the 0.2% expected by economists. Cooler is better if you want the Fed to not raise rates (Core CPI yesterday also rose 0.1% vs. 0.2% expected). Core PPI also rose 0.1% vs. the 0.2% estimate. Mortgage applications rose 2.3% last week compared to a 2.5% decline in the prior week. Durable goods orders rose 0.4%, well above the consensus for a 0.4% decline helped by a 16% increase in orders for commercial aircraft. Excluding transportation orders fell 0.1%, below the 0.1% increase expected. Meanwhile, Capital goods orders rose 0.8%, higher than the 0.2% consensus while construction spending was also higher than expected, 1.3% vs. 0.5%. In total, the releases showed economic growth and helped sentiment this mornng.
Small Caps Underperforming In March
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Brian’s Technical Take
This year’s bullish price action has largely being led by the cyclical or high growth sectors like Technology, Industrials, and Communications, yet the defensive groups have performed well themselves. From a technical perspective, one could argue the two most attractive looking groups are the defensive REIT and utility sectors which are the only two Level I GICS sectors making fresh all-time highs today. Since we highlighted the strong price action by the REIT sector in early February, let’s take a look at the “Utes” (said in a Joe Pesci voice).
The strength in utilities and REITs is partly attributed to interest rates which, despite the widespread risk-on sentiment throughout most of 2019, are trading at the lower end of their 52-week range. The dovish Fed pivot has helped increase demand for treasuries which along with equities have been moving higher in 2019. Accordingly the bond proxy S&P 500 Utilities Index is +9.7% YTD. While this lags the aforementioned cyclical sectors which have gained between 14% and 17% YTD, the utilities index is coming off a solid 2018, unlike the cyclicals, with an annual total return of 4.1%. In fact the S&P 500 utility index is the top performing sector since the end of 2017 with a total return of 15% vs. this year’s leader, technology, which has a total return of 13.5% over that same period. And the “utes” may have plenty left in the tank.
Last week the utilities index started its breakout above its prior all-time high, 289.46, made in November 2017. And this week the “utes” index is seeing healthy upside follow through to the tune of +1.6%. Breakouts from long corrective bases, in this case 16-months, are often followed by strong momentum over the intermediate to long term. Momentum is already strong with a weekly RSI reading of 68. Sometimes the best offense stars with good defense.
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Nasdaq's Market Intelligence Desk (MID) Team includes:
Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).
Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.
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