July 12, 2016

The major stock market averages rose again this morning (Dow +95 pts; SPX +.6%). Cyclical sectors and industries are up the most (banks, transports, semiconductors, oil companies). And small-caps (Russell 2000 Index) have been outperforming large-caps for the last week. The SPX is now up 8% from its Brexit low on 6/27. The VIX Index has backed down to 13.5 and VIX August futures are down to 16.4. So less fear out there. The dollar is a bit weaker and commodities are broadly higher today. WTI crude oil is up 2.7% to $46/barrel. Bonds are selling off (finally), with yields heading higher. The 5- and 10-year Treasury yields are up to 1.06% and 1.49%, respectively. 

Alcoa (AA) kicked off second quarter earnings season with a fairly positive announcement (for Alcoa standards).  Sales and earnings came in ahead of Wall Street consensus forecasts. Earnings fell only 21% y/y after dropping 75% y/y in the prior quarter. And although the price of aluminum is down 15% YTD, it rose from first quarter levels. There were two main reasons the stock rose in the wake of the announcement. First, Alcoa will soon spin off its low-margin aluminum smelting business and will focus on higher-margin specialty materials. Second, results implied that global demand for industrial metals increased during the second quarter. The stock is up 4% this morning. 

On his show Mad Money last night, Jim Cramer outlined some stocks that could lead the stock market back to a sustainable rally. In fact, he said he won’t be convinced the rally is sustainable unless these names turn higher. Among them were Alphabet (GOOGL), Apple (AAPL), Starbucks (SBUX), Visa (V), Nike (NKE), Target (TGT) and Gilead Sciences (GILD). In other words, the cohort of high-quality, large-cap, dominant, growth stocks is critical. Of course, these stocks haven’t fared well in 2016, as investors shifted heavily into telecom and utilities sectors.   

Bob Doll, the chief equity strategist for Nuveen, says second quarter corporate earnings will likely surprise to the upside. He notes oil is up, the dollar is still a bit lower than it was at the beginning of the year, and year-over-year sales & earnings growth for S&P 500 companies will likely trend higher from first quarter trough levels. Finally, he says investors can still get meaningfully higher dividend yields from stocks compared with bond interest yields. And by the way, low bond yields aren’t signaling a weak US economy, but instead are simply a result of negative interest rates around the world. 

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