Note: Our daily “S&P 500 Outlook, Forecast, and Trading plan for Tuesday, 01/22” will be posted around 8:30am EDT, Tuesday.
THE GIST (“THE WHAT”)
Building on previous session’s U.S. – China trade optimism, the S&P 500 index rallied higher to log a fourth straight weekly gain. Shrugging aside a weaker-than-expected University of Michigan’s Consumer Sentiment index that came in at its lowest since 2016 U.S. elections, the index extended its upward momentum on Friday following reports that China has offered to ramp up its imports from U.S. for the next six years in an attempt to balance out the massive trade imbalance and ease trade negotiations between these two disputing countries.
Robust earnings by big banks and a steepening yield curve were also the catalysts driving the index higher to retake the key resistance level of 50 DMA (now at 2625.45) and closing convincingly above it. OPEC reported the biggest monthly decline in output in two years, lifting Energy stocks and further fueling Friday’s rally to close near session highs at 2670.71, up 34.75 points, gaining 1.32% over previous session’s close and a solid weekly return of 2.87%.
THE DETAILS (The “How & Why”):
Big banks were the focus this week with Goldman Sachs Group Inc., Bank of America Corp and Citigroup Inc. posting solid weekly returns of 14.47%, 12.56% and 11.34%, respectively on beating fourth quarterly earnings estimates and painting a brighter outlook for the industry. Financial sector was the strongest performer this week with a 6.12% weekly return.
Signs of progress ahead of the U.S. – China trade talks also helped lift Treasury yields as investors gave up safe-haven bonds in favor of riskier equity assets. Long-term dated government bonds were sold-off more than the short-term dated bonds to steepen the yield curve and further boosting the Financials sector.
Oil prices jumped to a two-month high after OPEC reported a massive drop in production in the month of December, easing concerns of a supply glut in the global oil market. Optimism around U.S. – China trade negotiations also helped boost oil prices to register a third straight weekly gain. Energy sector led the broader index higher with a 1.93% gain intraday.
Trade-sensitive Industrials and Materials sectors were also strong performers in Friday’s session, up 1.86% and 1.64% with China-sensitive stocks making big gains. Deere & Company, Boeing Company and Caterpillar Inc. all extended gains, rising 2.84%, 1.57% and 1.53%, respectively. Lifting transportation stocks higher were J.B. Hunt Transport Services Inc. and Kansas City Southern, both jumping 6.19% and 6.13% on reporting solid fourth-quarterly earnings.
Semiconductor stocks also build on their previous session’s gains to boost Technology sector. The sector closed the session higher by 1.49%, led by Western Digital Corporation, Micron Technology Inc. and Fiserv Inc., all rising 7.49%, 5.55% and 4.46%, respectively.
Netflix Inc. weighed down on Consumer Discretionary sector, declining 3.99% after the video streaming giant fell short of revenue expectation, despite reporting a blockbuster subscriber growth. A rally in retail and department chain stocks, however, supported gain within the broader Consumer Discretionary sector to close the session higher by 1.30%. VF Corp. was the top gainer of the session; soaring 12.39% after the apparel and footwear company topped quarterly earnings estimates and raised its full-year guidance.
Consumer Staples and Health Care were the other notable gainers of the session, up 1.21% and 1.18%. Lagging the broader index were Real Estate and Utilities, up only slightly by 0.31% and 0.12% amid the on-going risk-on market sentiment.
While the market this week was primarily driven by bank earnings and headlines boosting trade optimism, the coming week will see the next wave of earnings by key Industrial and Technology companies. Investors will be watching the outlook provided by these companies looking for clues on the health of the economy.