By Pete Biebel, Vice PresidentPrint This Post
When I last published one of these commentaries, I suggested that the market’s forward drive might be losing traction (see Oh Come All Ye Salt Trucks). The market’s relatively steep run up since Election Day had been showing signs of stalling and backsliding. We now know that the instant the lights came on for 2017, the market shot out of the starting gate like a Top Fuel Funny Car. The starting light system used in drag racing, because it’s a sequence of blinking colored lights, is called the “Christmas tree.” When 2017 got the green light on Tuesday morning, stocks were off to the races.
With the traction issues resolved, all eyes turned to what has been the topic du jour for the past several weeks, “Is today the day the Dow Jones Industrial Average hits 20,000?” DJIA got to within 50 points of that level more than three weeks ago, and has made several attempts at inching closer since then. The market’s 2017 hole shot drove all the major averages to new all-time highs; DJIA’s high on Friday (also its high since the beginning of time) was 19,999.63. If DJIA can’t at least touch the magic level soon I’m going to have to take down the big, inflatable Dow 20,000 display from my roof. I’m not sure what I’m going to do about this tattoo.
Not surprisingly, the financial media has been focused on that objective largely because it’s such an easy thing upon which to focus. They’ve had the champagne on ice and the party favors at hand for the past month. The commentators get giddy each time the Dow creeps to near the 20,000 level. The fact is, it doesn’t matter. As a big round number, the 20,000 level of the Dow certainly has some psychological value, and that average has historically stalled at big round numbers, but actually touching or exceeding that level has virtually no predictive value.
The more important issues with respect to Dow 20,000 are: When the index finally reaches that level, by how much does it exceed it and for how long can it stay above it? Blowing through 20,000 by 40 or 50 points only to quickly drop back below that level would likely have negative implications for short-term market performance. Conversely, climbing through 20,000 and continuing for another 200 to 300 points before stalling would suggest that it could become an area of support.
The Dow ended last week at a record high, a measly 36 points below 20,000. It was up just over 1% for the week, but it leads the other large-cap indices with a net gain of nearly 9% since Election Day. Both the S&P 500 Index (SPX, +1.70%) and the NASDAQ Composite Index (COMP, +2.56%) had larger gains for the week, but are up less than 7% since the election.
A big part of the reason for the DJIA’s outperformance since the election is also a contributor to its underperformance last week: The performance of a few big-cap Financial sector stocks. The gains in just a handful of Dow stocks, including several Financials, account for nearly 50% of the index’s post-election gain, but those stocks have stalled over the past few weeks. A big part of the reason for COMP’s outperformance last week is also a big contributor to its underperformance over the past two months: the on-again-off-again rally in Healthcare generally and Pharma and Biotech stocks in particular. Those sectors relapsed in late-November, lagging other sectors in the post-election recovery, but they’ve been in much better health lately.
Lost in the holiday hoopla is one particular aspect of recent market activity that is noteworthy. It may be just a mere curiosity, but it nevertheless is a testament to the incredible operational efficiency of today’s U.S. stock market. For the last couple weeks of 2016 and continuing into the first week of 2017 the market absorbed amazing levels of volume in the last minute of trading each day. On each of those days, anywhere from 220 million to over 550 million shares traded on the NYSE at the closing bell. Those volumes represented from 35% to fully 50% of the day’s total NYSE volume. That’s mind boggling volume, but what’s really important is that those huge trades were absorbed with very little market impact.
Anyone who needs to make a yearend transition from hedges to actual positions or from ETFs to actual stocks can mitigate risk by executing both sides of the trade at the very end of the trading day. These orders are entered earlier in the trading day to be executed “market-on close” or “MOC.” A combination of year-end institutional rebalancing along with index and ETF reconstituting resulted in day after day of huge orders to be executed market-on-close. Some years ago the exchanges implemented rules to publish a list of any imbalances in the MOC orders late in the session. In the final half-hour of trading, no orders may be entered that increase the imbalance; only MOC orders that reduce the imbalance are allowed. Judging by the relatively small market impact that resulted from huge MOC volumes over the past few weeks, the system seems to be working very well.
I suspect that the next week or two will be highlighted by the struggle to clear Dow 20,000. Failing to blow through that level in just the next few days will likely lead to a brief phase of backing and filling before the market is ready for another run at new highs. Watch for strength to return to three sectors that have been among the post-election leaders—Basic Materials, Financials and Industrials. After impressive rallies immediately following the election, these groups have stalled; they need to get back into gear soon if they’re going to help power the averages higher.
|Economic Report Calendar||Prior Reading||Consensus|
|Tuesday 1/10/2017||JOLTS Job Opening Report||5.534mm|
|Thursday 1/12/2017||Jobless Claims||235K||255K|
|Import & Export Prices, Imports, M/M||-0.3%||+0.7%|
|Import & Export Prices, Exports, M/M||-0.1%||+0.2%|
|Friday 1/13/2017||Producer Price Index-Final Demand, M/M||+0.4%||+0.3%|
|Producer Price Index-Final Demand, less Food & Energy, M/M||+0.4%||+0.1%|
|Retail Sales, M/M||+0.1%||+0.7%|
|Retail Sales, less Autos, M/M||+0.2%||+0.5%|
|Consumer Sentiment Index||98.2||98.6|