Robo Street – January 11, 2018
Robots Lovin’ Bank Stocks Heading into Earnings Season
This past Wednesday saw the market undergo its first real test of how it would manage headline risk. A Bloomberg report that China may trim or halt its purchases of U.S. Treasuries prompted overnight selling in the Treasury market, sending the yield on the benchmark 10-yr Treasury note to its highest level since March 2017. The higher yields pushed equity investors to take some profits at the start of Wednesday’s session.
The Dow, the S&P 500, and the Nasdaq hit their worst marks of the day shortly after the opening bell, holding losses between 0.5% and 0.7%. It looked for a moment that emotional selling would heat up and feed on itself. The notion that China would stop buying U.S. debt sent shivers through the bond market and all manner of speculation hit global trading desks.
However, investors quickly bought the dip thanks in part to a CNBC interview with legendary investor Warren Buffett, who stated that he remains a net buyer of stocks, citing low interest rates and the recently passed tax reform legislation. Interestingly, the two stories had nothing in common, but emotions were calmed and the ‘buy the dip’ mentality that has characterized this bull market for the past ten years prevailed once again.
Equities eventually reached their flat lines in the afternoon but slid back into the red following a Reutersreport that Canada believes that U.S. President Donald Trump will soon pull the United States out of the North American Free Trade Agreement (NAFTA). General Motors, which was flat ahead of the report, finished lower by 2.4% due to its heavy exposure to Mexico’s auto market. Again, without verifiable commentary from the White House or State Department, rumors create an unknown quantity of risk and fear sets in.
The market made one last run in the final minutes, but ended just short of its unchanged mark. Nine of eleven sectors finished in negative territory with the financials (+0.9%) and industrials (+0.1%) groups being the only two advancers. Isn’t it interesting that these are also the two sectors I’ve been consistently highlighting in my analytical models to lead the market in the first quarter of 2018 ?
The financial sector- the second heaviest group by weight- advanced at the opening bell due to rises in Treasury yields and managed to keep the bulk of its gain even though yields returned to their flat lines. A $20 billion 10-yr note reopening was met with strong demand, causing the return in yields. The benchmark 10-yr yield settled unchanged at 2.55% after trading as high as 2.59%.
It is notable that earnings season officially kicks off today with the release of fourth quarter 2017 earnings from JPMorgan, Wells Fargo, and PNC Financial. As a hard rule, I do not recommend holding stocks as trades on those specific days when companies report. You just don’t know how they will react. There is no pleasure in being on the wrong side of investor sentiment when the numbers cross the tape. Here again, emotions take precedent and logic can go right out the window. So, I always defer to digest the market’s reaction and then determine if and how we should trade.
We can fully participate where the bullish action is within the financial sector without having to expose ourselves to headline risk. On Wednesday, our featured stock was SunTrust Banks, Inc. (STI). STI wasshowing solid bullish signals in our Stock Forecast Toolbox’s 10-day forecast. This stock is assigned a Model Grade of (B)– indicating it ranks in the top 25th percentile for accuracy for predicted support and resistance, relative to our entire data universe. Our 10-day prediction model generated vector figures rising above +3.15% within the next two trading sessions.