Geopolitical Risks Shell-Shock Bulls Into Safety

Posted on Posted in Views From The Hill

Commentary

Despite the parade of positive earnings from bellwether stocks or data reflecting an improving labor market, today’s geopolitical events (see summary of bearish events below) were too much risks for bulls to ignore and shell-shocked many into the safety of bonds, cash, gold and crude oil.

A price-volume analysis of today’s final hour of trading reveals that the late afternoon news of Israel’s invasion into Gaza proved to be a tipping point for Wall Street as stocks violated intraday support levels and declined to lower lows on surging volume. Conversely, the demand for insurance put protection and the safety of bonds also exploded, thus reflecting a significant pivot in investor sentiment towards equities.

 

ETF Close 7/16 @ 3pm @ Close Vol %Chg Final-Hr Vol %Chg 1-D
SPY (SP-500) $197.96 $196.56 $195.43 +227% +81%
IWM (Russell-2k) $114.24 $113.11 $112.51 +343% -2%
TLT (20+ Yr Tsy) $113.46 $114.60 $114.89 +427% +136%
SH (Short SP-500) $23.09 $23.24 $23.36 +351% +223%

 

Of course, one hour of trading does not set the overall tone for a market. Tectonic shifts of capital require time, but these early signs of capitulation by bulls and aggressive accumulation of safety and insurance assets do not bode well going into the weekend. Neither conflict in Easter Europe or the Middle East will be solved before this weekend and at best one can only hope for initial containment, which in itself is asking a lot on such short notice.

Friday’s economic calendar is rather light and will provide some insight on consumer outlooks with the Michigan Consumer Sentiment reports. On the earnings front, we have General Electric (GE) reporting before the open, which is always an eye opener and catalyst for traders and investors. Other notable earnings announcement before the market are Bank of NY Mellon (BK), Ericsson ADR (ERIC), Honeywell Int’l (HON), Johnson Controls (JCI), and Kansas City Southern (KSU).

Below are my notes on the Market Direction and today’s events. Signing off for now…

 


 

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Asset Classes

Equities

The S&P 500 @ 1958.12 (-23.45 / -1.18%) continues to consolidate and while its longer trend remains up, it has violated its 20-day moving average and it is essential that it holds support @ 1952 levels to avert a new short-term downtrend.

Unlike their large cap cousins, the Dow Industrials @ 16976.81 (-161.39 / -0.94%) continue to display remarkable strength and maintain their uptrend. Although they are flirting with its 20-day moving average, it is more important to maintain support @ 16800.

The same could be said for the Dow Transports @ 8279.14 (-118.07 / -1.41%). However, they are showing some signs of topping after closing well below yesterday’s low. Failure to hold its 20-day moving average would not mean nearly as much as violating 8154-8128 support levels.

Meanwhile Dow Utilities @ 553.08 (-5.64 / -1.01%) continue their weekly bullish channel, but are undergoing short-term consolidation and are oversold. Because of this, they could find support near their 50-day moving average which they are currently testing since peaking June-30-2014.

The Nasdaq 100 @ 3878.01 (-54.32 / -1.38%) has shown us a rounding top pattern over last three sessions. Its bullish channel remains intact, but it is vulnerable to losing support at its 20-day moving average, thus a concern for more downside if it does.

The Nasdaq Composite @ 4365.45 (-62.52 / -1.41%) has demonstrated two lower highs and has now initiated a new short-term downtrend along with failure to hold support at its 20-day moving average. Momentum is extremely negative and it is capable of ceding another 50-75 points before finding any tangible support.  Be careful with this one, especially if it breaks 4350.

The Russell 2000 @ 1133.60 (-17.95 / -1.56%) could be the canary in the coal mine as it falling like a dead bird since forming a double top. I look for this to test support @ 1120 and then head to 1100-1090 levels.

Bonds

The flight to safety is on as the TLT @ 114.89 (+1.43 / +1.26%) gapped up and broke out above its June-2014 highs, despite its technically overbought condition. Its next test will be the May-2014 high @ 115.19. From a weekly perspective, it is still consolidating, but a breakout above this level could propel it towards 119-120 resistance levels.

The 10-year Treasury Note @ 125’115 (+0-150 / +0.38%) also made a strong move today to confirm the flight to safety. If it takes out the July-1-2014 high @ 125’155, then a trade to 126′ plus is not too much of a stretch.

10-year Treasury Rates @ 24.75 (-0.63 / -2.48%) gapped down and appear to be headed for a retest of the May-2014 lows @ 24.02.

Currencies

The US Dollar Index @ 80.57 (-0.055 / -0.07%) initiated a new short-term uptrend 3 days ago.

The Euro @ 1.35290 (+0.00030 / +0.02%) is showing weakness as the EUR/USD continues its bearish pattern and breaches the June-2014 lows.

The Japanese Yen (USD/JPY) @ 101.06 has yielded some to the USD, but it is also consolidating.

Commodities

Gold @ 1316.70 (+17.10 / +1.32%) is making a bullish reversal, but needs to take out the June-2014 highs before I would consider this move to be a tectonic shifting of capital. For now, it is still a short-term bullish trade at best coming off a technically oversold condition.

Crude Oil @ 103.19 (+1.99 / +1.97%) was oversold and is trying to make a bullish reversal. It must reclaim support of its 50-day moving average to be considered a legitimate move. The intermediate trend remains bearish and will continue to weigh over any shorter time frames.

Real Estate

The Dow Jones US Real Estate Index @ 282.54 (-1.70 / -0.80%) is flashing some signs of early fatigue as its momentum begins to wane. The trend is still bullish, but it should be monitored closely. It could soon see a test of its 20-day moving average.

 


Bullish Events

Positive Earnings

Financials: Morgan Stanley (MS) reported revenue @ $8.6bn and EPS actual @ $0.94 vs. estimates @ $0.55 and @ last year @ $0.43. Blackstone Group (BX) reported EPS actual @ $0.85 vs. estimates @ $0.67 and prior year @ $0.36.

Energy: Baker Hughes (BHI) reported EPS actual @ $0.92 vs. estimates @ $0.89 and prior year @ $0.54.

Health Care: Baxter Int’l (BAX) reported EPS actual @ $1.26 vs. estimates @ $1.22 and prior year @ $1.16. United Health Group (UNH) reported EPS actual @ $1.42 vs. estimates @ $1.25 and prior year @ $1.40.

Consumer: Philip Morris (PM) reported EPS actual @ $1.56 vs. estimates @ $1.24 and prior year @ $1.30.

Economy

USA / Employment: Jobless Claims for the week of July-12-2014 were @ 302k actual vs. @ 310k estimates and @ 304k prior. The 4-week moving average also declined to 309k vs. prior @ 311.5k.

USA / Manufacturing: The Philly Fed Survey for July-2014 jumped to its highest level since March-2011. The survey registered @ 23.9 actual vs. @ 16.9 estimates and @ 17.8 prior.


Bearish Events

Real Estate

USA / Residential: Housing activity for June-2014 were weaker than expected. Building Permits were 0.93mm actual vs. 1.038mm estimates and 0.99mm prior. Housing Starts were 0.893mm actual vs. 1.026mm estimates and 1.001mm prior.

Geopolitical

Middle East: Israel’s Prime Minister Benjamin Netanyahu launched a ground invasion into Gaza after its shelling of the area and cease-fire proposals appear to have done little to stop rocket attacks into Israeli territory.

Europe: The U.S. and European Union issued further sanctions against Russia which will impact some of its larger companies involved in banking (OAO Gazprombank), energy (OAO Roseneft, OAO Novatek) and defense. By targeting these firms and hindering their ability to access credit (longer than 90 days) or equity financing, the goal is to end Russia’s support for the Ukrainian rebels. (Exacerbating market jitters is the report of a Malaysian jet plane carrying 295 passengers being shot down near the Ukrainian border by rebels.)

Asia / Credit Risk

China: A Chinese company, Huatong Road & Bridge Group, forewarned that it might miss a 400mm yuan ($64mm USD) on July-23rd for a 1-year bond. If so, it would mark the second onshore bond default for mainland companies and cause concern for potential systemic risks.


Neutral Events

Economy

Europe / Inflation: The EU’s Consumer Price Index (CPI) remained unchanged mth/mth for actual @ 0.8% vs. estimates @ 0.8% and prior @ 0.8%. Year-over-year, it also remained flat with actual @ 0.5% vs. estimates @ 0.5% and prior @ 0.5%.

 


 

Volume Surging Stocks

 

Ticker Company Last Chg %Chg 1 Day Vol %Chg 1Day RS
SNDK Sandisk Corp $93.21 -$14.62 -13.56% 592% 17
FRC First Republic Bank $47.76 $1.06 2.27% 557% 25
MAT Mattel Inc $36.46 -$2.57 -6.58% 419% 41
FOX 21St Century Fox Cl B $32.46 -$0.11 -0.34% 382% 41
YUM Yum! Brands $77.01 -$5.70 -6.89% 378% 8
SAP SAP Ag $80.68 $1.04 1.31% 299% 54
CFX Colfax Corp $68.57 -$4.13 -5.68% 298% 70
SNA Snap-On Inc $123.87 $4.83 4.06% 249% 33
DHR Danaher Corp $74.07 -$4.43 -5.64% 237% 4
AN Autonation Inc $55.82 -$5.01 -8.24% 233% 17
BP BP P.L.C. $50.87 -$1.41 -2.70% 231% 16
SHW Sherwin-Williams Co. $210.95 $9.22 4.57% 215% 93
FITB Fifth Third Bancorp $20.28 -$1.27 -5.89% 214% 12
PUK Prudential Public Limited Co. $47.02 -$0.74 -1.55% 208% 3
GWW W.W. Grainger $241.39 -$3.49 -1.43% 178% 19
CP Canadian Pacific Railway $188.04 $4.13 2.25% 177% 42
TWX Time Warner Inc $86.12 $2.99 3.60% 174% 70
TRW Trw Automotive Holdings Corp $102.64 $1.44 1.42% 172% 33
A Agilent Technologies $55.15 -$1.81 -3.18% 168% 1
CF Cf Industries Holdings $250.85 $5.52 2.25% 164% 62
VIP Vimpel-Comm $8.70 -$0.28 -3.12% 162% 44
BX The Blackstone Group L.P. $34.14 $0.16 0.47% 159% 13
MSFT Microsoft Corp $44.53 $0.45 1.02% 157% 19
KEY Keycorp $13.62 -$0.57 -4.02% 155% 22
URI United Rentals $110.06 $1.83 1.69% 154% 18
SMFG Sumitomo Mitsui Financial Group $8.13 -$0.13 -1.57% 151% 14
MBT Mobile Telesystems $18.82 -$0.74 -3.78% 144% 26
ROST Ross Stores $62.19 $0.04 0.06% 138% 51
SID National Steel Corp $4.74 -$0.36 -7.06% 136% 11
FOXA 21St Century Fox Class A $32.77 -$0.23 -0.70% 135% 14
HAS Hasbro Inc $52.92 $0.37 0.70% 134% 95
NVS Novartis Ag $88.53 -$1.51 -1.68% 127% 39
GGB Gerdau S.A. $6.09 -$0.27 -4.25% 126% 17
LVS Las Vegas Sands $73.36 -$0.44 -0.60% 126% 63
WLP Wellpoint Health Networks Inc $113.44 $1.26 1.12% 123% 42
TSM Taiwan Semiconductor Mfg $20.20 -$0.73 -3.49% 121% 11
CI Cigna Corp $94.49 $0.53 0.56% 116% 38
AET Aetna Inc $83.74 $1.58 1.92% 116% 68
CPA Copa Holdings S.A. $152.88 $0.57 0.37% 115% 59
NFX Newfield Exploration Company $43.55 $0.87 2.04% 114% 13

 

 

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