More Caution and Drift

US equity markets have continued to defy gravity over the past week despite a modest reset lower yesterday. All three majors gave ground in rather nonchalant fashion, led lower by the Nasdaq which shed 0.40% and the Russell 2K which fell 0.71%, both on unchanged and below average volume. The Dow Industrials (-0.20%) and S&P 500 (-0.29%) followed suit.

Much of the day’s narrative was dominated by the official Saudi oil outlook and by the weekly EIA Petroleum Status Report. Though hardly unexpected, the incremental build in US inventories (+1.1 Mbbl) as a result of increased production, was viewed as a trend confirming data point. The previous week’s report also reflected a build (+1.4 Mbbl). The balance of the EIA Petroleum Status Report was less of a concern. Gasoline Inventories contracted by 2.8 Mbbl and Distillates shrank 2.2 Mbbl.

Increasingly, the rebound in energy prices that has underpinned the energy sector’s dramatic rise over the past three quarters has seen some slippage in recent weeks as stable crude production and consumer driven consumption in the US have managed to build some equilibrium in the space. A weekly focus on these reports tend to benefit those trading crude daily though there is clearly some overlap into equities. In the broader narrative, the 52-week gain in US crude inventories has been roughly 15%. Truthfully, though the easy money has been made on the crude trade higher, my sense is that rather than seeing a meaningful trade lower in the near term, we will likely continue to see a range bound trade of $40/bbl – $50/bbl. The Energy Select Sector SPDR ETF (XLE) lost 1.09% on the day but the impact on energy issues was far more telling. Exxon Mobil (XOM) lost 1.75%, Chevron (CVX) fell 1.18% and Schlumberger (SLB) fell 1.20%.

Other than the drag provided by the crude oil narrative, US equities managed little in the way of a well defined trade yesterday. Earnings continue to channel volume into select names and sectors as was the case with the solar energy space. SunPower (SPWR) reported disappointing quarterly results and as a result traded dramatically lower on the day (-31%). Other names that sold off included Lumentum (LITE) and Dycom ((DY). Shake Shack reported disappointing results after the bell.

The balance of the week should provide for some interesting economic data, interesting and important. Today’s Weekly Jobless Claims will confirm the widely held view that the employment market is on solid footing. Bloomberg Consensus is calling for 265K weekly claims and a four week average that remains at a multi-year low. Import and Export Prices M/M are expected to reflect a modest tick lower (c. -0.4%). Friday is likely to drive a greater degree of relative volatility with PPI-FD M/M (c + 0.1%), Retail Sales M/M (c. +0.4%), Business Inventories M/M (c. +0.1%) all scheduled to be released.

A continued word of caution:

I continue to remain cautious on US equities over the near term as a result of stretched valuations, a stalled US 10-year yield, the calendar (August) and my sense that the post Brexit rally has lost momentum.

Additionally, Geopolitical risks to global market stability have the potential to emerge as a result of renewed saber rattling by Russia in Ukraine – ahead of Russian elections in mid-September. Cynically, I suspect that a small tactical military engagement ahead of elections may prove to be precisely the distraction and political electoral motivation that Putin needs at a time when the Russian economy is in dire shape.

Quarterly earnings and guidance have thus far delivered the support I expected and the support that has been needed to keep our recent run up in prices in tact.

However, they have not delivered a narrative that would dictate a “risk on” trading environment. A “risk on” trade is what will be needed for the market to continue any meaningful move higher from here. Look for equity market volume to remain well channeled into news-centric names and for equity prices to drift at these elevated levels, until something upsets the apple cart.

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flickr photo: scott?