The Fed gift-wrapped gains for stock investors today when it announced that all 18 banks it has been reviewing have passed round two of their stress tests. The Fed conducts stress tests on important financial institutions each year to ensure that they are sufficiently capitalized to withstand a large economic shock.
The results of this year’s stress tests are especially bullish because they open the way for the country’s largest banks to return more capital to their shareholders in the form of increased dividends or expanded share buyback programs.
Traders have been rewarding stocks with strong dividends and aggressive buyback programs for the past few years as economic and geopolitical uncertainty have made forecasting organic revenue and earnings growth more difficult. Dividend payments provide a guaranteed yield, and with share buyback programs, you know that a company’s earnings per share (EPS) are going to increase.
Banking stocks jumped across the board today, as traders believe that the major financial institutions are going to increase their payout levels to greater than 100% of expected earnings.
You can see the bullish jump on the Financial Select Sector SPDR Fund (XLF) chart below. The fund completed a longer-term diamond bullish continuation pattern by breaking and closing above the downtrending resistance level that has been interacting with the fund during June. XLF was driven higher by Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM) and Wells Fargo & Company (WFC) – which rose on Friday by 2.80%, 2.72%, and 2.23%, respectively.
The financial sector helped drive the S&P 500 higher to close the week, but it wasn’t the only sector with bullish activity today. The top two performing stocks in the index – Western Digital Corporation (WDC) and Constellation Brands, Inc. (STZ) – are in the technology and consumer goods sectors, respectively. Western Digital gained 6.73%, and Constellation Brands gained 4.64% in Friday’s session.
The S&P 500 likely would have gained even more ground if two of the index’s largest companies – Apple Inc. (AAPL) and Amazon.com, Inc. (AMZN) – hadn’t pulled back. Apple stock lost 0.91% as traders continued to react to the news that chief designer Jony Ive is leaving the company to start his own firm. Amazon shares lost 0.56% as traders continued to take profits off the table heading into the weekend. Amazon stock has stagnated for the past week, but I would be surprised if the stock doesn’t resume its uptrend soon.
Risk Indicators – Crude Oil
I’ve been intently watching the price of crude oil for the past few months as it has been drifting lower. I think crude oil is a great barometer for the global economy. When traders believe the global economy is going to be growing, they tend to push crude oil prices higher in anticipation of higher demand. When they believe the global economy is going to be contracting, they tend to push crude oil prices lower in anticipation of lower demand.
However, global demand isn’t the only factor that impacts crude oil prices. The price of crude oil is also affected by the supply levels.
That’s why today’s decline in crude oil prices is so interesting. Crude oil hit downtrending resistance at $60 per barrel and started to pull back at the same time news was breaking that the Organization of Petroleum Exporting Countries (OPEC) plans to extend its oil production cuts through the second half of 2019.
OPEC officials will be meeting on Monday to officially announce the cartel’s plans, but it appears traders do not believe the extended cuts will be enough to offset flagging demand from China as the Chinese economy continues to struggle against U.S.-imposed tariffs.
Bottom Line – Structurally Fair Market
We continue to operate in what is often referred to as a “structurally fair” market. That means fundamentally sound companies are seeing their stock prices do well, and less-secure companies are seeing their stock prices struggle.
This should give traders confidence that, if they do their homework, they have a high likelihood of being rewarded.
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