“Risk on” Dominates as New Year Begins

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Happy New Year, indeed! At least if you’re in the stock market.

Most of the closely watched indexes rallied more than 1% in the holiday-shortened first week of 2018. The Nasdaq-100 led the charge with a rip of almost 4%, while the S&P 500, Dow Jones Industrials and Dow Transports followed with moves of about 2 percent. All of those also hit new record highs. The only major benchmark that lagged was the Russell 2000, which remains below last month’s peak and eked out a gain of less than 1 percent.

If traders had to sum up the price action in a single phrase, they’d say “risk on.” Segments of the market that benefit from a stronger economy fared well: Semiconductors, materials, energy. Meanwhile “safety plays” like utilities, consumer staples and REITs skidded lower.

The data seemed to back that sentiment, even though non-farm payrolls and weekly jobless claims were both weak. Private-sector job gains beat estimates and employers continued to beg for industrial workers. Manufacturing activity also surprised to the upside and remains near levels last seen in 2004.

Another “risk on” theme last week was the continued influx of money into global equities, with most country-specific ETFs outpacing domestics by a wide margin. Top dog? Russia (RSX), finishing nearly 7% higher. Runner up? Brazil (EWZ), up 5%. China was close behind. India just needs to catch a bid and the Street will be buzzing with memories of last decade’s iconic BRIC group.

This week represents a calm before the earnings storm in the second half of January. Tech will be in focus with the Consumer Electronics Show starting tomorrow. Wednesday brings oil inventories and results from homebuilders Lennar (LEN) and KB Home (KBH). Jobless claims are due Thursday, along with Delta Air Lines (DAL) results.

Friday is the first major session for financial earnings, with JPMorgan Chase (JPM), BlackRock (BLK) and Wells Fargo (WFC) all slated to report. Monthly retail sales are due as well. And don’t forget that markets are closed the following Monday, Jan. 15, in observance of Martin Luther King Jr. day.

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.