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August 11, 2016

Equities

Market Recap

Yesterday was all about oil, as a drop following the

weekly inventory data weighed on stocks and offset a

further decline in Treasury yields. The S&P 500 fell

0.29%.

We said in yesterday’s Pre 7:00 Look that Treasury yields

and oil remained the short term drivers of stocks, and

that proved true yesterday as the bearish oil inventory

data caused a modest decline in the S&P 500.

Oil was actually a mild headwind on stocks from the

start yesterday as a 1% drop following the bearish API

report (out Tuesday after the close) and news that Saudi

Arabia pumped at a record in July weighed on oil, which

kept S&P 500 futures flat despite a mild global stock ral-

ly.

Away from oil, yesterday was a very, very quiet morning

as the headlines are currently being dominated by poli-

tics (and things may stay that way through August, at

least). JOLTS (Job Openings and Labor Turnover Survey)

was the only economic report, and like virtually every

other labor market indicator it was strong, and indicative

of near full employment. Since it didn’t tell us anything

we didn’t already know, it was summarily ignored by the

currency and bond markets.

Stocks basically drifted sideways throughout the morn-

ing and were little changed. But then the oil report

broke, and while the headline number wasn’t particular-

ly bearish (more on that later) the production number

was, and oil headed south following that release. Shortly

after oil moved lower, so too did stocks.

For the remainder of the day you could basically trace

Pre 7:00 Look

Futures are bouncing back a bit after yesterday’s modest dip in

stocks but overall it was another quiet night.

It was so quiet, in fact, that economically the Bank of New Zealand

cutting rates by just 25 bps (less than expected) is the headline

and the Kiwi is up 1% on the news. This won’t impact the US

much but it does anecdotally add to the idea that central banks

are running out of bullets.

In the oil markets, the IEA reduced 2016 demand by 100k bpd but

oil is largely flat after yesterday’s big drop.

Econ Today: Jobless Claims (E: 265K), Import Export Prices (E:

0.4%). Econ Tonight: China Retail Sales (E: 10.5%) & IP (E: 6.2%).

WTI crude oil futures failed at a seven-week long trend

line yesterday, after the movement in US production

continued to favor the bears in the weekly EIA report.

Market Level Change % Change

S&P 500 Futures 2178.25 5.50 0.26%

U.S. Dollar (DXY) 95.79 0.182 0.19

Gold 1351.90 0.00 0.00%

WTI 41.72 0.01 0.02%

10 Year 1.509 -.036 -2.33%


Dow 18,495.66 -37.39 -0.20% TSX 14,775.04 -26.19 -0.18% Stoxx 50 3,036.85 18.39 0.61% FTSE 6,846.11 -20.31 -0.30% Nikkei 16,735.12 -29.85 -0.18% Hang Seng 22,580.55 88.12 0.39% ASX 5,508.02 -35.69 -0.64%

Prices taken at previous day market close.


the S&P 500’s movement by overlaying it with an oil

chart. Oil steadied above $41.80 until the close of trad-

ing at 2:30, at which point the

price took a hit as traders

dumped into the close.

That, in turn, caused the S&P 500

to drop to new lows for the day

as we entered the final hour of

trading, before both oil and the

S&P 500 steadied a bit after 3:00.

Stocks then drifted sideways into

the close in quiet trading.

Trading Color

There was actually some movement internally (at least

relative to the past few days) as energy and financials

both got hit on lower oil and lower Treasury yields. XLE

(the energy SPDR) dropped 1% on lower oil as energy is

busy retracing last week’s rally while financials (and

banks specifically) dropped more than 1% as the 10-year

yield basically retraced the entire post-jobs-report rally,

implying once again that no matter the strong data, the

market simply does not believe the Fed will hike.

Looking forward, until XLE is able to break above $69.68

and the 10-year yield can move through 1.63%, XLE and

the banks will likely remain range bound.

Specifically, with our position in KRE we’re watching sup-

port at 1.50% in the 10-year closely. If that is given up in

the next few trading days, we will seriously consider ex-

iting our tactical KRE long as a break of that support in

the 10 year yield implies lower yields ahead, which will

help defensive equity sectors and hurt bank stocks.

Speaking of which defensive sectors, consumer staples

(XLP) was the best performing SPDR yesterday (up .4%),

and while there has been some mild underperformance

of late, rumors of the death of defensive sectors via a

“Great Rotation” in cyclicals remain greatly exaggerated.

Finally, super cap internet stocks remain the stars of the

market. FDN was fractionally higher despite a down

tape, and super cap internet names (FB, AMZN, GOOGL)

continue to be a consistent destination of capital for

money managers trying to add beta.

On the charts, the S&P 500 closed right on support at

2175, so that’s an important level to watch.

Bottom Line

Trading is very quiet in the mar-

kets right now due to a lack of cat-

alysts (Yellen’s speech on Aug.

26th is the next big event) and the

calendar (we’re in the dog days of

summer). But, even within the

context of the calendar, it seems

that at least in the near term,

stocks are struggling a bit to continue positive momen-

tum.

Specifically, I’m surprised stocks aren’t higher given the

strong jobs report and still-low Treasury yields it’s lead-

ing me to believe that lower yields won’t create a Pavlo-

vian response to buy stocks like they did post Brexit.

Point being, an Equity Risk Premium of 4% and a market

trading at 17X earnings is not only historically expensive,

it’s borderline priced to perfection. And, by looking at

the tape, I’m getting the feeling that investors are hesi-

tant to chase up here, if all that’s going to happen is cen-

tral banks cram rates artificially lower (more on that lat-

er).

Perhaps we’re getting to the point where it will take ac-

tual, real earnings growth and/or actual real economic

acceleration to power stocks higher. Again, it’s too early

to declare that the case, but markets are feeling a little

stuck here, and I think that’s one of the reasons.

Economics

Boring But Important: Implications of a Failed GILT Pur-

chase Program

We and others have been talking about how market con-

fidence in global central banks’ ability to stimulate

growth is falling, and that’s important because we are in

a global stock, bond and currency market that has been

severely distorted by central banks. So, if confidence

goes in global CBs, that’s not good.

Japan has been ground zero for this eroding confidence

as the Bank of Japan, over the first eight months of

2016, has largely admitted that, practically speaking, it is


DBC 14.25 -.15 -1.04% Gold 1352.40 5.70 0.42% Silver 20.19 .34 1.71% Copper 2.1725 .0225 1.05% WTI 41.56 -1.21 -2.83% Brent 43.93 -1.05 -2.33% Nat Gas 2.568 -.047 -1.80% RBOB 1.3017 -.0445 -3.31%

DBA (Grains) 20.71 -.13 -0.62% Prices taken at previous day market close.


out of bullets to stimulate the economy, and that any

further material easing is 1) Can’t be effectively execut-

ed because of the size of various markets, or 2) Will

cause more harm than good (like when negative interest

rates sent global stocks plunging last week).

On Tuesday, the Bank of England became the latest cen-

tral bank to have egg on its face when, on the second

day of its newly expanded QE program, the bank was not

able to buy its daily quota of long dated bonds. The BOE

sent bids for 1.17 billion Pounds worth of 15 year and

longer GILTS (British Government Bonds), but it only re-

ceived offers for 1.118B of GILTS, falling short by over 52

million pounds worth of debt.

Because of how screwed up the global bond markets

have become, holders of long term GILTS were literally

unwilling to sell to the BOE because they know that 1)

There’s nowhere else in the market to generate a decent

yield, and 2) These GILTS are just going to keep going up.

This is a prime example of where economic theory un-

fortunately meets market reality.

Now to be fair, the BOE did buy its quota of bonds yes-

terday (1.17 of 7-15 year GILTS). That saw a massive

offering of nearly five bonds offered per one bond bid

for, but that was for medium-term debt, which isn’t

yielding anything, anyway. Point being, yesterday’s good

result doesn’t solve the problem of long-term bond in-

vestors holding on to the only asset that yields anything

in today’s market.

From a stock standpoint, this isn’t material in the short

term, although it is modestly positive for Treasuries be-

cause it shows just how starved for yield global investors

have become. Bigger picture, for

those investors with larger time

horizons, I feel like even lower

yields and more and more easing

is becoming a virtual pressure

cooker, and as yields grind lower

the cooker is starting to shake

and screws and nuts are starting

to fly off as the pressure gets too

great.

Perhaps that’s a bit over the top, but there are anecdo-

tal signs that this entire system is starting to show signs

of serious stress, and with global bonds, stocks and real

estate all at all-time high prices, I honestly fear for the

global economy if this thing blows up. I hope I am

wrong.

Commodities

Commodities were mixed yesterday as the metals

bounced with the weaker dollar while oil was the big

mover on the day, falling nearly 3% thanks to bearish

details in the government’s weekly inventory report. The

widely followed commodity ETF, DBC, fell 1.04% thanks

to the heavy weight that oil futures carry in the index.

Gold futures rallied 0.40% yesterday, trading almost ex-

clusively off of the price action of the dollar which de-

clined 0.53% on the session. On the charts, gold held the

uptrend that has been in place since early June for the

third day in a row (see chart), which suggests the benefit

of the doubt still remains with the bulls.

Bottom line, we still believe the long-term outlook for

gold is favorable at this time, and buying any pullback

down towards $1300/oz. would offer a favorable entry

point for long-term accounts.

EIA Analysis and Oil Update (Fundamental and Technical)

WTI crude oil futures fell 2.81% yesterday after the de-

tails of the weekly EIA report continued to trend in favor

of the bears.

Beginning with the headlines of the data release, crude

oil stockpiles rose 1.1M barrels last week vs. (E) -800K

barrels, which on the surface is bearish, but the API

showed a larger 2M barrel build, so there was a limited

shock factor.

It was a similar story for gasoline

inventories which fell to -2.8M

vs. (E) -800K, which on the sur-

face is mildly bullish. However,

the API showed a 4M barrel

draw, so again the news was not

as convicted because of a more

dramatic API number.

Distillate inventories unexpected-

ly came in at -2.0M barrels last week vs. (E) +500. Again,

that was close to the API print of -1.5M, so was not a big


Dollar Index 95.600 -.532 -0.55% EUR/USD 1.1174 .0057 0.51% GBP/USD 1.3010 .0007 0.05% USD/JPY 101.31 -.57 -0.56% USD/CAD 1.3055 -.0064 -0.49% AUD/USD .7712 .0039 0.51% USD/BRL 3.1244 -.0210 -0.67% 10 Year Yield 1.509 -.036 -2.33% 30 Year Yield 2.227 -.030 -1.33%

Prices taken at previous day market close.


shock.

In the details of the release, US production in the lower

48 fell 13K b/d last week, which is in line with the four-

week moving average of -13.75K. But looking back at the

data from earlier in 2016, that pace is much slower than

the declines seen in early Q2 when oil really started to

rally (the average decline in May

was -35.6K b/d).

Bottom line fundamentally, with

OPEC clearly still pumping at “full-

throttle,” underscored by the

news that Saudi Arabia hit a new

output record in July, declines in

US production are the only path

to balanced market (barring some

shocking industry event). So, out-

put levels stabilizing in the US is the most important un-

derlying influence on the oil market right now, and it is a

bearish one.

Technically speaking, WTI futures rolled over after the

EIA release yesterday (and after testing a seven-week

downtrend line for the third straight day), which is bear-

ish and matches the current fundamental backdrop just

discussed. Near term, the next solid support zone on the

charts is back down near $40/barrel, which also is a very

important psychological level in the physical market

right now, as a break below that level could potentially

cause the pace of production declines to accelerate.

Currencies & Bonds

Price action in the currency markets picked up yesterday

as the dollar declined the most in two weeks to give

back all of its post-jobs-report gains. The Dollar Index

closed down 0.55% on the session.

The yen was the biggest mover against the dollar yester-

day as weak data in the US, and “ok” data in Japan have

reversed the recent pullback in the yen. The yen rallied

0.64% on the day and closed near a one-month high

against the dollar.

Looking ahead, the dominant trend in the yen is still a

bullish one, and if US data continues to disappoint a vio-

lation of the 100 mark in the USD/JPY pair will become

more and more likely.

Elsewhere in Europe, the strength in the euro was also

largely thanks to weakness in the dollar, based on the

recent underwhelming economic data in the US this

week (though most of the reports have been second

tiered).

The dollar continued to drop on profit taking, and fol-

lowing some mildly hawkish com-

ments from European officials.

Bigger picture, the dollar outlook

is more of the same sideways

grind in the trading range that has

been in place for over 18 months,

and 97.15 is initial trend re-

sistance while 100 is the longer

term “line in the sand” to the up-

side for the Dollar Index. Initial

trend support lies below near 94.25 while 92.00 is the

line in the sand to the downside.

Turning to the bond market, the strength continued in

Treasuries yesterday for the same reason the dollar

pulled back—underwhelming US economic data. The 10-

year yield sank almost 4 basis points to 1.509% while the

yield on the long bond fell 3 basis point to 2.227%.

After the price action over the last three days, it is look-

ing more and more like the pullback on Friday after the

jobs report was just that, a pullback in an otherwise still

upward trending market. For now, we remain bullish

government bonds, especially if economic data contin-

ues to disappoint.

Have a good day,

Tom


Technical Perspectives

(Updated 8/7/16)

S&P 500

Fundamental Outlook: Remains cautious based on valuations and a generally unfa-

vorable risk-reward scenario.

Dow Theory: Remains bearish (since week of August 17, 2015)

Key Resistance Levels: 2190, 2200, 2220

Key Support Levels: 2175, 2166, 2130

WTI Crude Oil

Fundamental Outlook: Modestly bearish as the situation is currently stable in the

Middle East and the pace of US production declines is slowing as rig counts rise.

Proprietary Model: Bearish (since week of June 13, 2016)

Key Resistance Levels: $42.64, $43.24, $44.55

Key Support Levels: $41.17, $39.72, $37.55

Gold

Fundamental Outlook: Mixed near term as sentiment has improved, reducing safe-

haven demand while more accommodation is expected by central banks overseas.

Proprietary Model: Bullish (since week of April 4, 2016)

Key Resistance Levels: $1364, $1370, $1381

Key Support Levels: $1331, $1323, $1301

30-Year T-Bond Futures

Fundamental Outlook: Mixed as investor sentiment has improved and stocks are

trading at new highs but economic data remains strong, raising the risk of a rate hike.

Proprietary Model: Bearish (since week of August 1, 2016)

Key Resistance Levels: 172’04, 173’13, 174’29

Key Support Levels: 169'27, 167’21, 166’02

Dollar Index Futures

Fundamental Outlook: Bullish as the Fed is technically in a rate hiking cycle while the

rest of the world’s central banks are expected to ease further.

Proprietary Model: Neutral

Key Resistance Levels: 96.57, 96.91, 97.255

Key Support Levels: 95.75, 95.515, 95.075


Disclaimer: The 7:00’s Report is protected by federal and international copyright laws. Kinsale Trading, LLC is the publisher of the newsletter and owner of all

rights therein, and retains property rights to the newsletter. The Newsletter may not be forwarded, copied, downloaded, stored in a retrieval system or oth-

erwise reproduced or used in any form or by any means without express written permission from Kinsale Trading LLC. The information contained in the

7:00’s Report is not necessarily complete and its accuracy is not guaranteed. Neither the information contained in The 7:00’s Report or any opinion expressed

in The 7:00’s Report constitutes a solicitation for the purchase of any future or security referred to in the Newsletter. The Newsletter is strictly an informa-

tional publication and does not provide individual, customized investment or trading advice to its subscribers. SUBSCRIBERS SHOULD VERIFY ALL CLAIMS

AND COMPLETE THEIR OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN

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MONEY TRADING AND INVESTING IN SUCH INVESTMENTS.

Fundamental Market View (Updated 8/7/16)

Near-Term General US Stock Market Outlook

This is designed to provide a snapshot of our near-term (1 month) outlook for stocks. For general equity market ex-posure, we use a mix of SPHB (S&P 500 High Beta) and SPLV (S&P 500 Low Volatility) to create an aggressive, neu-

tral or defensive stance on general equity market exposure.

Near Term Stock Market

Outlook:

Defensive SPHB: 25% SPLV: 75%

Stocks hit new highs thanks to a Friday rally following the “Goldilocks” jobs report,

and barring any material surprises the S&P 500 will likely test the 2200 level. But,

from a risk/reward outlook there remains more downside risk than upside, as mar-

kets are basically fully valued, and last week may have signaled a bottom in global

bond yields. As a result, we remain cautious.

Tactical Allocation Ideas:

What’s Outperforming: Defensive Sectors (XLU/XLP, FXG), Short Duration TIPS ETF (VTIP), Super Cap Internet/Social Media Stocks (AMZN, FB, GOOGL, LNKD, FDN is a good internet ETF). Top Contrarian Idea (if you are a bull: Banks KRE).

What’s Underperforming: Europe (HEDJ/VGK), Retail (XRT), Tech (AAPL related supply chain), Healthcare (especially special-ty pharma and biotech stocks), Small Caps.

Long Term Fundamental Outlook for Other Asset Classes

Fundamental

Outlook Market Intelligence

Commodities Neutral

Commodities rallied last week following a midweek reversal in oil, courtesy of a big drop in gasoline

inventories. But, oil and the energy complex continues to face generally less positive supply/demand

fundamentals, as rising supply is now a legitimate headwind. We think oil is largely range bound

around $40/bbl. Turing to gold, the jobs report caused a pullback, but the trend generally remains

higher given low rates and bottoming inflation.

US Dollar Neutral

The Dollar Index rallied late last week thanks mainly to the jobs report, and last week signaled why

the longer-term trend in the dollar is still higher. Bottom line, virtually every other major central bank

is on hold or easing further (last week RBA, BOJ, BOE) while the next move in the US is towards hiking

rates. So, the trend remains higher into the high 90s.

Treasuries Bearish

Last week may have been an important one for US Treasuries, as a decline in Japanese bonds last

Tuesday following disappointing stimulus, combined with a strong jobs report may have marked a

low in global bond yields. For now, the benefit of the doubt remains with the bulls—but if the 10-year

Treasury yield can make a “higher high” above 1.63% that will signal a near-term uptrend in yields.

This page is meant to provide a general outlook for the path of each major asset class and is updated at the start of each week.

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