The market continues to grapple with a lot of issues each derailing the rally from time to time.

• Inflation

Yesterday, West Texas Intermediate (WTI) rallied to the doorstep of $70.00 a barrel before backing off but the upside bias remains, and higher gasoline prices will follow. Aluminum prices are at seven-year highs, in part to sanctions on Russia. 

Lumber prices are surging to all-time highs, crushing homebuilder stocks that already have labor and supply issues. 

PulteGroup (PHM) and D.R. Horton (DHI) were the worst performing names in the S&P Consumer Discretionary Sector.

On the issue of inflation, the Federal Reserve will have to use its bully pulpit to let markets know they will resist the urge to overreact with too many rate hikes.  Producer prices are gradually edging higher, as they are being passed onto consumers.  

I also continue to stress that there is a new consumer out there that learned valuable lessons from the Great Recession. Consumers are more confident but scared; while they will spend more, they will not get over their economic skies for a long time.

Pricing Power

An example of businesses not being able to pass along price increases came from Procter & Gamble (PG), which saw its shares slump on financial results that revealed price declines across all its business segments.

 

	Volume	Price
Beauty	—%	(1)%
Grooming	3%	(3)%
Health Care	3%	(2)%
Fabric & Home Care	3%	(1)%
Baby, Feminine & Family Care	(2)%	(1)%
Total Company	1%	(2)%

 

• iPhone

Weak numbers from Taiwan Semiconductor (TSM) sent shares of companies in the iPhone supply chain diving lower.  It’s hard to invest based on anecdotal news associated with Apple (AAPL) and suppliers because there always seems to be stories of lower demand.

Also, a lot of semiconductor names with minimum Apple exposure took it on the chin, as well creating buying opportunities. I’m holding my Apple stock in my retirement account - in many ways, it has been the most undervalued stock in the market for years.

 

• Intangibles

Headlines from the world of politics have wreaked havoc on the stock market this year. The Russia investigation has moved in so many directions that it feels like an old Vaudeville production; and yet every twist and turn is talked up as a potential constitutional crisis. 

Yesterday, the pendulum swung the other way with reports of Deputy Attorney General Rod Rosenstein informing President Trump last week that he isn’t the target of Robert Mueller’s investigation.

There are also reports that President Trump wasn’t the focus of the raid on his lawyer’s office, home, and hotel room. 

The market spurted on the news, albeit a lot less than it would have crashed if the news was the exact opposite. Hence, it’s one of the reasons investors must be leery of making investment decisions based on scuttlebutt and media coverage of Washington, D.C.

I suspect there will be more bombshells and even more speculation about these lingering investigations (remember its only noise).

Message of the Market

Don’t look now, but financials might be the new safe haven. The sector stood out among others in yesterday’s session after days of stumbling on good news. A part of the move is happening with a shift in conventional wisdom on inflation and interest rates, but I think smart money sees an undervalued group that has been unjustly sold after delivering good to great financial results.

 

S&P 500 Index	-0.57%
Consumer Discretionary (XLY)	-0.32%
Consumer Staples (XLP)	-2.89%
Energy (XLE)	+0.12%
Financials (XLF)	+1.53%
Health Care (XLV)	-0.84%
Industrials (XLI)	-0.28%
Materials (XLB)	-1.12%
Real Estate (XLRE)	-1.68%
Technology (XLK)	-1.10%
Utilities (XLU)	-0.06%

Today’s Session

The market looks antsy this morning as the street continues to digest the flow of earnings and continued pressure on tech from yesterday.

General Electric (GE) is higher on a real earnings’ beat and in-line guidance, and another also-ran company, Ericsson (ERIC), is higher on beating low expectations.

I think the stock of the morning is Honeywell (HON), which is interesting considering there was a time when the company was going to be acquired by GE until regulators blocked the potential deal.

We are busy this morning crunching numbers as well.  I’m spying chip names very hard and ready to pounce.  Overall, I like what I’m seeing in this market and how it’s held at pivotal moments, but it’s the inability to breakout that remains frustrating.

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