Market Seeks Direction After Past Week Serves Up Platefuls Of News

If the past news week was dinner, investors and traders got served a few heaping platefuls, then went back for seconds and thirds. A Fed rate hike, Amazon.com, Inc. AMZN grabbing a shopping cart with its purchase of Whole Foods Market, Inc. WFM, a mixed data picture, and tech market weakness all highlighted the menu, and could remain on the daily specials list as the new week begins.

Lots of Fed speakers are on the agenda, along with more housing data (see below), but there’s still a good deal of buzz about the excitement last week brought.

The week ended with a big piece of merger and acquisition news, as Amazon (AMZN) said it planned to buy Whole Foods Market (WFM) for $13.7 billion. After the announcement, shares of other grocery stores fell, as investors contemplated the ongoing bricks-and-mortar vs. online shopping debate. There’s a lot of discussion about how much sense the deal might make for AMZN, and whether this is a major change in the retail sector as a whole. That could continue to ignite debate in the weeks ahead. For the moment, it put new fire into AMZN shares, which rose sharply on the news.

Market focus now shifts to when the next Fed hike might come after last week’s second increase of the year. Fed funds futures show chances for another hike by the end of the year below 50%. Still, Fed Chair Janet Yellen said the central bank expects to continue its trend of gradual rate increases over the next few years. The Fed’s plans to begin unwinding its $4.5 trillion balance sheet also remain a question mark. The Fed says it plans to start this year, but the market doesn’t have insight into exactly when or at what pace.

As if that wasn’t enough to digest, the markets also faced escalating political tensions out of Washington, D.C., and a suddenly wobbly tech sector.

By midday Friday, the Nasdaq Composite Index was down nearly 3% from a record close of 6,321.76 on June 8. Still, the info tech sector was up 14% for the year. Considering the size and leadership of some of the major tech stocks, the sector could continue to be of keen interest as we settle into summertime trading in the weeks ahead.

Elsewhere, the S&P 500 Index (SPX) reached a record closing high at 2,440.35 on Tuesday, before slipping about 0.5% by midday Friday. It’s still up about 8.5% this year.

Volatility perked up ever so slightly late last week, with the CBOE Volatility Index trading around 11, up from 10.7 the previous week. Still, the so-called fear gauge remains near historic lows.

Economic readings late last week raised eyebrows, and not in a good way. Consumer sentiment, as measured by the University of Michigan, fell in June to 94.5, the lowest level since the presidential election in November. May housing starts posted an unexpected 5.5% drop.

FIGURE 1: CRUDE FINDS SUPPORT Crude oil, tracked through midday Friday on the thinkorswim® platform from TD Ameritrade, remains near seven-month lows, but appeared to find some support at the $44.50 level by late in the week. Data source: CME Group. For illustrative purposes only. Past performance does not guarantee future results.

Oil Slick: U.S. crude oil futures experienced a modest bounce Friday from seven-month lows posted earlier in the week. But there appears to be little on the horizon to shake the market out of its bearish trend. U.S. drillers are ramping up production, with weekly rig counts rising steadily the past four months and putting in their 22nd-consecutive weekly gain, according to Baker Hughes. Industry analysts have said they see the global markets staying well supplied for months into the future. Stay tuned for this coming Wednesday, when the Energy Information Administration releases its latest weekly update of domestic production and supplies. These reports could gain more importance in the current environment, considering the concerns about hefty supplies and apparently weaker U.S. demand.

Faces and Voices of the Fed: At least seven Fed members hit the speaking circuit this coming week, starting with New York Federal Reserve Bank President William Dudley. On Monday, Dudley will speak at a business roundtable in Plattsburg, N.Y. Later Monday, Charles Evans, President of the Federal Reserve Bank of Chicago, will speak about current economic conditions or monetary policy at the Money Marketers of New York University event in New York City, with audience and media Q&A. Traders and investors are likely to listen closely for any elaboration on the Fed’s decision last week to hike its benchmark rate.

Creaky housing: The weaker-than-expected housing starts, combined with the slump in the Michigan consumer sentiment index, raised a few more red flags for the economy. Add another Fed rate hike and the prospect for more later this year, and you have to wonder how well housing might perform in coming months, and the potential impact on the market. Keep an eye on existing home and new home sales reports scheduled for next week.

Good Trading,
JJ