The Silence Speaks Volumes - Today's Stock Market Factors

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Includes: ADI, BOBE, BOND, CHS, DIA, FIVE, GLD, GLNG, IWM, QQQ, SPY, USO, UUP, VTI, VXX, WDAY
by: Markos Kaminis

Summary

Stocks recovered intraday yesterday and market index futures were moderately up in the premarket Wednesday.

Fear faded as the North Korean provocation aged, and as greed fed renewed risk asset purchases.

However, the Administration's uncharacteristic silence on the issue and the North Korean threat to Guam require portfolio risk assessment again today.

Tax reform discussion and economic data will weigh for stocks as well, with the key GDP revision due, and data on private employment growth and more.

I expect equities to reassess risk again today, and for equities to decline into the close of trading, though depending on developments.

Stocks recovered intraday yesterday, as investors grew increasingly comfortable that the worst was over regarding the North Korea provocation. However, I'm not so sure that is true, and I believe the silence of the President speaks volumes to that. Today offers a test of market constitution, and also a bit of important economic data in the GDP revision, the monthly private employment estimate from ADP, oil inventory data and more. The President is expected to speak on tax reform today, an important possible positive catalyst for equities this year or next. Still, before the day is through, I expect risk to come back off as investors contemplate the follow-through statements from Pyongyang regarding Guam, and just why the President and the Administration are so uncharacteristically quiet.

Yesterday we indicated that the unprecedented North Korean provocation was serious enough of a geopolitical factor to significantly impede stocks. However, we noted that the response of the U.S. President and Administration would factor significantly in how stocks responded. Well, to-date, the President has yet to tweet a response (uncharacteristic), and the Twitter silence speaks volumes given the President's prior statements about not tipping off our enemies regarding military actions. For this reason and the renewed North Korean threat to Guam, I continue to caution against risk taking.

Security Premarket 07:00 AM EDT
SPDR S&P 500 (NYSE: SPY) +0.2%
SPDR Dow Jones (NYSE: DIA) +0.3%
PowerShares QQQ (NASDAQ: QQQ) +0.2%
iShares Russell 2000 (NYSE: IWM) +0.1%
Vanguard Total Stock Market (NYSE: VTI) NA
iPath S&P 500 VIX (NYSE: VXX) -0.3%
PowerShares DB US Dollar Bull (NYSE: UUP) +0.1%
PIMCO Active Bond (NYSE: BOND) NA
United States Oil (NYSE: USO) -0.4%
SPDR Gold Trust (NYSE: GLD) +0.2%

Still, stocks are reflecting a key investor characteristic this morning. That characteristic is greed, as investors seek to buy back their favorite securities at discount or to take advantage of perceived value at risk in volatility instruments. Let's note, though, that gold has not sold off, where volatility came back in on equity recovery yesterday. Gold (NYSE: GLD) is again showing stability today, I believe reflecting that ongoing risk I am speaking about.

Still, if nothing changes for a few days, fear will fade, and investors will increasingly look to some of today's data as reasoning to buy stocks. Most important among today's data points is the second quarter GDP revision. Economists expect Q2 GDP to be revised higher, to 2.8%, from the 2.6% initially reported. That's good news and it is accompanied by more of the same; economists expect quarterly consumer spending will be revised higher to 3.0% for Q2.

Economic robustness is the reason I like stocks once we are through this seasonally soft period through September, within which I have serious concern we might mark significant correction. But, stocks should recover into the close of this year and through 2018 nonetheless on economic gains, holding all other factors constant.

Another important economic data point to be released this morning is the ADP Private Employment Report. Economists expect ADP's estimate of August private employment growth will show 185K jobs added through the month. That would compare to the 205K private payrolls added in July.

Interestingly enough, economists see the government data for private employment growth showing 179K jobs added (vs. the 185K estimated for ADP's estimate of the same data). More economists likely forecast the government data than do the ADP estimate of it. Expect the market to compare the economists' estimate of the government data against ADP's data reported today. Even though ADP's data point is an estimate that is released two days before the government data, it can matter for stocks if it strays significantly from expectations.

We will also get a reminder that U.S. corporate profits are doing mightily better these days, as that data is again reported with GDP today. After tax corporate profits were reported up 11.5% in Q2, year-to-year, at last check.

The regular EIA Petroleum Status Report can move the market, but investors will weigh the likelihood of anomalous influence this week and next due to the impact of Hurricane Harvey on supplies and production. Thus, I think it could provide less of an impact for energy and relative stocks.

Every appearance of Fed-members matter as we approach the significant September meeting of the Federal Open Market Committee (FOMC). Soon we will enter the quiet period, so Fed Governor Jerome Powell's speech today in Chicago will be closely watched for clues to Fed policy.

The corporate earnings schedule can always influence stocks more broadly, depending on who is reporting and what is reported. I do not see any market-moving reports in today's schedule though. Still, I see today's most important earnings releases emanating from Analog Devices (Nasdaq: ADI), Bob Evans Farms (Nasdaq: BOBE), Chico's FAS (NYSE: CHS), Five Below (Nasdaq: FIVE), Golar LNG (Nasdaq: GLNG) and Workday (Nasdaq: WDAY).

In conclusion, despite yesterday's intraday recovery and this morning's early indication from stock index futures, I expect caution to supersede greed today. The still pending response of the United States to the North Korean provocation is an overhanging concern providing uncertainty for risk assets. The threat of North Korea regarding Guam is a significant threat to stocks as well.

I continue to recommend the building of cash reserves, the hedging of portfolio risk and the preparation for extraordinary volatility through September and possibly into October. I remind followers that I would view any correction as a buying opportunity, given my expectations for economy driven gains for stocks into the close of the year and through 2018, holding all other factors constant. For more of my regular work on markets, readers are welcome to follow the column here at Seeking Alpha.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.