Short-Term Summary:

 This week, the S&P 500 has consolidated last week’s gains that took the index back above its 50 DMA. Although the index is within 1% of its all-time highs, there has been some volatility beneath the surface. For example, the insurance subsector continued to come under pressure due to the effects of Hurricanes Harvey and Irma. Also, the U.S. 10 year Treasury yield broke to year-to-date lows, and the yield curve flattened, which pressured the banks. This underperformance of the Financials resulted in the S&P 500 Value index breaking to new relative lows versus the S&P 500. However, there have also been some positive developments as well. The S&P 500 Equal Weight index and S&P Small Cap 600 index both improved their relative performance over the past week. Also, the Health Care sector broke out to new highs (led by the biotech subsector), and the Technology sector is on the verge of breaking out again (maintaining its strong performance this year).

Hurricane Irma hits Naples, Florida. (AP Photo/David Goldman)

Overall, economic activity continues to improve globally and survey data suggests the momentum was maintained in August. Looking forward, the effects of the two hurricanes could lead to some volatility in domestic economic data, i.e. the jump in initial jobless claims today. On the political front, Congress passed a three month extension to the debt ceiling. While this removes a fiscal concern for the short term, investors continue to evaluate the path of tax reform. Geopolitical concerns, particularly with North Korea, remain a fluid situation as well.

 

S&P 500 earnings estimates for 2017, 2018, and 2019 all saw slightly positive revisions over the past week. Strong earnings growth, and stable revisions to forward estimates, continue to be tailwinds to the equity market. This has been important with valuations at lofty levels.

Technical: We continue to believe that upside price action as well as downside price action is likely limited for the short term- to the upside due to high valuations and geopolitical concerns, and to the downside due to improving earnings, low interest rates, and the potential for tax reform. Near-term overhead resistance levels include ~2478 (trend line resistance), ~2481 (closing high), and 2490.87 (alltime intraday high). On the downside, near-term potential support levels include 2454 (50 DMA), ~2439 (trend line support dating to April 13, 2017), ~2417 (August 21 low), and 2405 (horizontal support dating to May 16).

Macro:

Over the past week, August nonfarm payrolls were reported softer than expected, albeit within a solid trend. The jobs market remains healthy, and it is normal for softer increases in an economy near full-employment (unemployment rate is 4.4%). August survey data (ISM Manufacturing, U of Michigan Sentiment, and Markit PMI numbers)

remained strong, indicating continued improvement in economic activity. This was also the case overseas, where PMI numbers in the Eurozone, China, and Japan all reflected strength in August. Looking forward, the effects of Hurricane Harvey and Irma could lead to volatility in some domestic economic data- seen by the jump in initial jobless claims this week. Overall, positive economic data continues to flow through on a global level, and remains supportive to equity markets. Economic data reported in the past week (actual vs estimate):

U.S.

Change in Nonfarm Payrolls (Aug): 156k vs 180k, 189k prior

Change in Manufacturing Payrolls (Aug): 36k vs 8k, 26k prior

Unemployment Rate (Aug): 4.4% vs 4.3%, 4.3% prior

ISM Manufacturing (Aug): 58.8 vs 56.5, 56.3 prior

U of Michigan Sentiment (Aug F): 96.8 vs 97.5, 97.6 prior

Construction Spending m/m (Jul): -0.6% vs 0.5%, -1.4% prior

Factory Orders (Jul): -3.3% vs -3.3%, 3.2% prior

Durable Goods Orders (Jul F): 0.5% vs 0.1% prior

Durables ex Transportation (Jul F): 0.6% vs 0.5% prior

Markit US Composite PMI (Aug F): 55.3 vs 56.0 prior

Markit US Manufacturing PMI (Aug F): 52.8 vs 52.5, 52.5 prior

Markit US Services PMI (Aug F): 56.0 vs 56.9, 56.9 prior

ISM Non-Manf. Composite (Aug): 55.3 vs 55.6, 53.9 prior

Initial Jobless Claims (Week): 298k vs 245k, 236k prior

Continuing Claims (Week): 1940k vs 1945k, 1945k prior

Nonfarm Productivity (2Q F): 1.5% vs 1.3%, 0.9% prior

Unit Labor Costs (2Q F): 0.2% vs 0.3%, 0.6% prior

Eurozone

Markit Eurozone Composite PMI (Aug F): 55.7 vs 55.8, 55.8 prior

Markit Eurozone Services PMI (Aug F): 54.7 vs 54.9, 54.9 prior

China

Caixin China PMI Composite (Aug): 52.4 vs 51.9 prior

Caixin China PMI Services (Aug): 52.7 vs 51.5 prior

Japan

Nikkei Japan PMI Composite (Aug): 51.9 vs 51.8 prior

Nikkei Japan PMI Services (Aug): 51.6 vs 52.0 prior

Disclaimers and Disclosures

Investing Risks:  The risk of loss from investing in securities (stocks, ETFs, mutual funds, etc.), bonds, options, futures, and forex or related products, can be substantial.  Investors must consider all relevant risk factors, including their own personal financial situation, before investing.

Investments in bonds and fixed income products are subject to various risks (including liquidity, interest rate, financial, and inflation risks) and special tax liabilities.  

Options Risks:  Options involve risk and are not suitable for everyone.  Options trading privileges are granted at the account level by your custodial broker and are subject to review and approval.  Not all account holders will qualify.  Before trading options, a person must receive a copy of Characteristics and Risks of Standardized Options. Individuals should not enter into options transactions until they have read and understood the risk disclosure document, Characteristics and Risks of Standardized Options, which can be found on our website www.mscm.net.  Copies may be obtained by contacting your broker or the Options Clearing Corporation.

Spreads, Straddles, Strangles, and other multi-leg option strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return.  These are advance option strategies and often involve greater risk, and more complex risk than basic options trades.  

Portfolio Margin:  A portfolio margin account generally permits greater leverage in an account, and greater leverage has the potential to create greater losses in the event of adverse market movements.  Portfolio Margin, or Risk-Based Margin, is a margin methodology that sets margin requirements for an account based on the greatest projected net loss of all positions in a “security class” or “product group” as determined by the custodial broker’s theoretical pricing model using multiple pricing scenarios.  These pricing scenarios are designed to measure the theoretical loss of the positions given changes in both the underlying price and implied volatility inputs to the model.  Clients participating in portfolio margin will be required to sign an agreement acknowledging that their security positions and property in the portfolio margin account will be subject to the client protection provisions of Rule 15c-3 under the Securities Exchange Act of 1934 and the Securities Investor Protection Act.  Clients will be subject to minimum equity requirements by not only the custodial broker but also the managing firm.

General Disclosures:  Any strategies discussed in this presentation, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell specific securities or strategies.

Investors should carefully consider the investment objectives, risks, charges, and expenses before investing in any investment product.  To obtain a prospectus containing this type of information as well as other important information, contact your custodial broker.  Please read the prospectus carefully before investing.  

You should discuss any/all implications of investing in such products with your custodial broker, financial adviser/advisor, and/or tax advisor.  Past performance is not indicative of future results.  

Third Party Information:  This presentation may utilize or refer to third party data.  In such a case, let it be known that MSCM, LLC. does not control, nor has it developed the content being referred to, and does not make any warranty, express or implied, as to the accuracy, usefulness, timeliness or even the continued availability or existence of said information/content created or maintained by others.  Opinions expressed by others are not necessarily those of MSCM, LLC., nor does MSCM, LLC. endorse, warrant, or guarantee products, services or information described or offered by such firms.

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