Mid Week Update – After Market Close – 12th Sept 2019

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The market starts a new wave of optimism following the analysis I posted at the start of the week.

The S&P 500 advanced 0.7% on this 18th anniversary of 9/11, boosted by strength in growth and value stocks alike. Apple (AAPL 223.59, +6.89, +3.2%) carried the benchmark index back to the 3000 level and helped boost the Dow Jones Industrial Average (+0.9%) and Nasdaq Composite (+1.1%) to solid gains.

The small-cap Russell 2000 (+2.1%) outperformed again to extend its weekly advance to 4.7%. The S&P MidCap 400 increased 1.4%.

There were few developments on Wednesday to interrupt the market’s placated views on trade and growth. Regarding trade, China released a list of U.S. products it will exempt from a higher tariff rate, although key farm products were not included. Central banks also appear on the market’s side, with China reportedly set to start an easing cycle later this month and the ECB expected to cut rates on Thursday.

There were no big winners from a sector standpoint, but today’s advance was broad-based, evidenced by the 1.0% gains in the information technology (+1.0%), health care (+1.0%), utilities (+1.0%), industrials (+1.0%), materials (+1.0%), and communication services (+1.0%) sectors. The real estate sector (-0.3%) was the lone holdout on Wednesday.

Apple provided the leadership in the tech sector, and broader market, as investors and (some) analysts remained content with its product event yesterday. Needham raised its AAPL price target to $250 from $225, while Maxim Group lowered its AAPL price target to $204 from $211. Strength in Apple tricked over to the Philadelphia Semiconductor Index (+1.5%).

The underperformance in the energy sector (unch) was an interesting development. The sector was up as much as 1.2% in the early going, as it continued to benefit from a value-oriented mindset, but it quickly fell from its highs amid a drop in the price of oil ($55.74, -1.63, -2.8%). Oil took a hit on reports that President Trump was in talks to ease sanctions on Iran. OPEC also downgraded its forecasts for oil demand in 2019 and 2020.

The continued rise in Treasury yields reflected some of the improved sentiment on Wall Street, as investors showed less interest for the safe-haven asset. The 2-yr yield increased one basis point to 1.67%, and the 10-yr yield increased three basis points to 1.73%. The U.S. Dollar Index advanced 0.3% to 98.62.

Separately, ZScaler (ZS 49.67, -11.93, -19.4%) was a notable laggard, with shares plunging 19% after the software security company guided earnings below consensus.

Reviewing Wednesday’s economic data, which included the Producer Price Index for August, Wholesale Inventories for July, and the weekly MBA Mortgage Applications Index:

The Producer Price Index for final demand was up 0.1% m/m in August, as expected, but the index for final demand excluding food and energy, was up 0.3% (Briefing.com consensus +0.1%), which was hotter than expected. The month-over-month changes left the index for final demand up 1.8% yr/yr, versus 1.7% in July, and the index for final demand excluding food and energy up 2.3%, versus 2.1% in July.

The key takeaway from the report is that it could stoke concerns about margin pressures for producers that curtail earnings growth and/or bleed through to higher prices for consumers.

Wholesale Inventories increased 0.2% in July (Briefing.com consensus 0.2%). The June reading was unrevised at 0.0%.

The weekly MBA Mortgage Applications Index increased 2.0% following a 3.1% decline in the prior week.

Looking ahead, investors will receive the Consumer Price Index for August, the weekly Initial and Continuing Claims report, and the Treasury Budget for August on Thursday.

Nasdaq Composite +23.1% YTD
S&P 500 +19.7% YTD
Dow Jones Industrial Average +16.3% YTD
Russell 2000 +16.8% YTD
NYSE Adv/Dec 1916/789.
NASDAQ Adv/Dec 2297/767.

My view is in line with the optimism, which should propel the major indices to retake their previous all time high in the immediate wave up.