Market Update: Thursday, December 8, 2016

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  • U.S. near flat after fresh highs; ECB spurs European rally. (10:05am ET) Domestic indexes are little changed in early trading after major averages logged new record highs on Wednesday, with the Dow now within 500 points of 20,000. Nine sectors gained more than 1%; with healthcare (-0.8%) the lone decliner after comments from President-elect Trump brought scrutiny back to drug pricing practices. Overseas, Asian markets rode U.S. sentiment higher overnight; the Nikkei advanced 1.5%, though the Shanghai Composite fell modestly after mixed data out of China. Meanwhile, European stocks legged higher in afternoon trading following the European Central Bank’s (ECB) announcement to extend its quantitative easing program. Treasuries sold off on the news, pushing the yield on 10-year notes up 6 basis points to 2.41%; COMEX gold ($1172/oz.) and WTI crude oil ($50.47/barrel) also moved higher after the announcement, but gold has since retraced its gains.

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  • ECB policy changed. The ECB extended its quantitative easing (QE) policy this morning, but also changed the terms. The ECB will now buy bonds until December 2017, but will reduce the amount purchased from 80 billion euro to 60 billion euro beginning in April 2017. Even after this announcement, the market expects additional QE after December 2017 and is interpreting this announcement as dovish. The euro fell approximately 1% after the announcement with European bond yields and equities gaining.
  •  Initial claims remain near frictional lows. At 252,000 per week over the past four weeks, first time claims for unemployment insurance remain near 43+ year lows and indicate a solid labor market, keeping the Federal Reserve Bank on track to raise rates by 25 basis points next week and by a total of 50 basis points in 2017. Through year end and into the first few weeks of January 2017, the claims data are likely to be choppy and volatile as they often are around the holidays and at quarter end. Over the past 26 weeks, claims have dropped by 6,000. In the past, an increase of between 75,000 and 100,000 in claims over a 26 week period has indicated a recession, so there is clearly no such signal from claims today.
  •  New high for the transports. The transports finally joined the party and made a new all-time high, the first in more than two years. As we noted before the election, transports had quietly been one of the strongest groups and this has continued since the election, with the Dow Jones Transportation Average up 12.5% versus a gain of 4.8% for the S&P 500 since November 8. Additionally, with both the Dow Jones Industrial Average and Dow Jones Transportation Average making new all-time highs, you might hear about a Dow Theory buy signal. We took a look at this 100-year old indicator on the LPL Research blog last month. The bottom line is that the transports are a more economically sensitive group and also a group that has lagged for the past two years. This new leadership could be a plus for equities in general.
  •  New highs everywhere. It was a day full of new highs yesterday, as the Dow, S&P 500, S&P Midcap, and Russell 2000 all closed at new all-time highs. Looking at the number of issues making a new high, 108 components of the S&P 500 made new highs, the most since December 2014. Turning to the NYSE, 422 issues made new 52-week highs, the most since October 2013. The NYSE data can be skewed by interest rate sensitive instruments like preferred stocks; looking at common stocks shows 386 new 52-week highs, again the most since October 2013.
  •  A strange day. The S&P 500 gained 1.3% to close at a new all-time high, for the best one-day gain while also making a new high since March 2014. What was strange about the action yesterday was the CBOE Volatility Index (VIX) also gained 3.6%. Historically, the VIX and the S&P 500 tend to trade inversely. In fact, you have to go clear back to July 2009 the last time we saw the S&P 500 up this much and the VIX up more than 3%. Why was this? Odds are with the big ECB announcement pending the next day, this sparked some defensive positioning among derivatives traders.

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Thursday

Flow of Funds (Q3)

Eurozone: European Central Bank Meeting (No Change Expected)

China: CPI (Nov)

Japan: Economy Watchers Survey (Nov)

Friday

Consumer Sentiment and Inflation Expectations (Dec)

Click Here for our detailed Weekly Economic Calendar

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