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This Stock Market Phenomenon Could Trigger Trading Hell on Monday: Market Recon

"The world may end up under a Sword of Damocles on a tightrope over the abyss." -- Andrei A. Gromyko

Balancing Act

The 10-year Treasury Note opened July at a yield of 2.348%. This morning that note yields 2.293%. Treasuries have put in gains for the month, but not like stocks. The S&P 500 has gained 2% month to date, while the tech-laden Nasdaq Composite has absolutely run with the bulls. That index, with one trading session left in the month, closed out Friday's session sporting an increase of 3.8% for July. The small-caps? A tougher road to travel, of course, but still gaining an approximate 1% for the month. What does it all mean when equities outperform debt securities to such a degree over the course of a month? Well, many types of funds, particularly pension funds, have a mandated balance between debt and equity investment that must be adjusted every month or quarter. That depends on the rules that said fund has laid out for itself. It also means that the broader markets may have to swim upstream today in order to hold the early gains sported this morning by equity index futures markets.

I have seen several estimates for equity outflows going into month's end. There seems to be no consensus on an aggregate dollar amount. Major investment banks that I have looked at suggest outflows of anywhere between $5 billion and $17 billion from equities and into, for the most part ... fixed income. Now, these funds generally do not have to wait until the last day to get started on these moves, so the ones facing the harshest rebalancing act may have gotten started last week. There has been no fire sale, but there has been some weakness in the tech sector, as well as materials and health care. This would suggest organized profit taking, which does make some sense. The question for us today will be just how much pressure will be placed upon the market broadly, and these sectors specifically, this afternoon? Will that "artificial" supply develop into a trading opportunity?

P.S. How much does a North Korea with the ability to strike inland U.S. cities change things? Got gold?

Tis' the Season

Earnings! The second quarter is running even hotter than expected. More than half of the S&P 500 has now reported quarterly numbers. The beat rate is running at 72.3% for actual earnings per share versus expectations. Earnings growth? Hot. Cruising at a growth rate of 10.3%. The pre-season consensus hovered around 9.5%, and many analysts are now ratcheting up their expectations to something closer to 11%. Revenue? Broadly positive. Growth there is coming in at 5% versus a consensus view...


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