Dow Jones, S&P 500 Skew Optimistically Higher

Prepared remarks from Comey's testimony weren't quite as hard-hitting as expected

U.S. equities moved higher Wednesday as headlines were filled with lowered expectations for former FBI director James Comey’s testimony to Congress on Thursday.

The Dow Jones Industrial Average gained 0.2%, the S&P 500 wafted up 0.2%, the Nasdaq Composite added 0.4% and the Russell 2000 finished 0.1% higher to remain in a seven-month stasis, as shown below. Treasury bonds weakened, the dollar recovered slightly, gold lost 0.3% and crude oil collapsed 5.1% for the worst one-day loss since May.

Comey’s official testimony not only backs up comments from President Trump (regarding the “three separate occasions” Comey allegedly told Trump he wasn’t under personal investigation), but also falls far short of the impeachment level offences Trump’s opponents were hoping for (regarding pressure on Comey to drop an investigation into former national security advisor Michael Flynn).

After weeks of breathless anticipation, tomorrow is shaping up to be a big, fat nothingburger in Washington D.C. Europe, however, could be a different story ahead of elections in the United Kingdom and a policy decision by the European Central Bank.

Breadth on the NYSE was negative, with 1.1 decliner for every advancing issue while volume was at 101% of the 30-day average. Financials led the way thanks to a slight rise in long-term yields, gaining 0.8%. Energy fell 1.5% to lead the downside. HD/4K camera maker Ambarella Inc (NASDAQ:AMBA) fell 10.3% despite reporting better-than-expected revenues and margins. But forward guidance was soft amid soft demand for video drones.

Energy was hit on an unexpected U.S. inventory build of 3.3 million barrels (versus expectations for a 3-million-barrel decline), the largest in three months. There were also gains in stockpiles of distillate and gasoline.

This comes amid already weak sentiment as a rise in U.S. shale output, weak gasoline demand, and the viability of OPEC’s recently extended supply freeze agreement all weigh on prices. Recent geopolitical turbulence in the Middle East, from an ostracization of Qatar by Saudi Arabia and her allies to a terror attack in Tehran risks a further decline in OPEC deal compliance.

Conclusion

The breakdown in crude oil looks serious here, threatening an end to the two-year consolidation range near the $50-a-barrel threshold. A return to the early 2016 lows would not only slam the brakes on the recent energy-led corporate earnings rebound (with the first-quarter reporting season the best in years, justifying the market’s rise to record highs), but would call into question widespread expectations of a second-half rebound in the economy as well.

Crude oil is just the latest asset class sending a very pessimistic signal; adding it to the list that now includes Treasury bonds, rate futures, precious metals and currencies — all of which have posted risk-off year-to-date moves. The stock market, buttressed by the persistent strength in the Big Tech “FANG” stocks, is the major exception.

As I said on Tuesday: According to Bank of America, if the bond market is correct in their dour outlook stocks are at risk of a 20% downside move. If equities are correct in their optimism, then long-term rates should increase upwards of 0.6%.

Check out Serge Berger’s Trade of the Day for June 8.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.


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