The wild month of October continues to send the market on a choppy ride. Tuesday saw big gains as chip makers and the rest of the tech sector appeared to provide leadership. Volatility seems likely to continue in days to come.
Market bounced back strongly Tuesday on tailwind from chip makers, tech sector
Facebook reported after close, beating estimates on earnings but missing on revenue
Volatility could continue to be a factor tomorrow, along with end-of-month position squaring
(Tuesday Market Close) The October roller coaster comes to an end tomorrow, and like many thrill rides, it’s been one unexpected move after another—twists, turns, drops and the occasional loop-the-loop.
Today began as another bumpy ride, but as the day progressed, it accelerated to the upside, with the major indices solidly in the green, led by the Dow Jones Industrial Average ($DJI) up about 1.8%. The Nasdaq (COMP) and S&P 500 (SPX) finished up over 1.5%. This came on the heels of yesterday’s wild ride, in which the market swung from sharp gains to steep losses, but closing on an upswing.
There didn’t appear to be any major news driving the late rise. Instead, a couple of positive remarks in the media from analysts might have helped trigger some buying interest, and momentum picked up as the session advanced.
As the October ride pulls into the gate tomorrow, one has to ask: Is there one more twist around the corner? One thing investors might want to consider as this turbulent month winds down is the possibility of some “position squaring.” This can sometimes happen at the end of the month as some traders offset short or long positions. At the end of a month like this, with major indices down about 9%, if traders decide to take profit on short positions, such position squaring could give the market a bit of a boost.
Once again, it was info tech that seemed to take the lead. Shares of some of the chip companies—which had initially moved higher yesterday before crumbling—got back into the green in a big way Tuesday, and that seemed to give the rest of the tech sector a boost that spilled over into the rest of the market by afternoon. Chip companies were truly the leaders Tuesday, with sharp gains from Nvidia (NVDA), which rose more than 9%, Intel (INTC), up 5%, and KLA-Tencor (KLAC), up 7%. Chipmakers have had a lot of momentum both up and down recently, and could remain worth watching for potential market direction in the days ahead.
FAANGs also seemed to find some positive interest, with Facebook (FB) rising ahead of its earnings (see more below), and Apple (AAPL) and Netflix (NFLX) inching higher. All the FAANGS still remain well below their highs for the year, and techs are one of the hardest hit sectors over the last month.
A better performing sector recently is staples, and that continued Tuesday as shares of CocaCola (KO) moved higher after a solid earnings report. Wal-Mart (WMT) has been climbing most of this month as it bucks the overall downward trend, and it rose about 2% Tuesday.
After the close, Facebook (FB) shares fell and then bounced in post-market trading following the company missing third-party consensus estimates on both revenue and user numbers. Though FB’s earnings per share of $1.76 was well ahead of analysts’ average $1.47 estimate, revenue of $13.73 billion fell short of the $13.78 billion estimate. Daily active users of 1.49 billion were up 9% year-over-year, but came in a touch below the average estimate, as well.
The FB earnings followed disappointing results from fellow FAANG stocks Amazon (AMZN) and Alphabet (GOOG, GOOGL) last week. It’s too soon to say whether the FB earnings—if they end up taking the stock lower overnight—might carry through with negative ramifications for the market tomorrow, the way GOOG and AMZN earnings hit the broader indices last week. It’s possible the effect might be a little less with FB, if only because many analysts and investors were well aware of FB’s struggles going into the report. AMZN’s weaker than expected outlook, on the other hand, was a surprise to many, and raised questions about consumer demand heading into the holiday season.
One thing to note about today’s rally is that it was broad-based. Each of the 11 sectors finished in the green. Though a few big tech names (as well as technology-heavy firms that nest under the new communication services sector) rung up decent gains, energy, materials and consumer staples each finished with a 2% gain.
As for the overall market, it’s way too soon to say if Tuesday’s solid closing gains can carry through into Wednesday’s opening bell well over half a day away. The last couple of major market rallies—one last week and one the week before—were met with follow-up selling the next day.
While that doesn’t mean we’re in for a down day tomorrow, it could serve as a reminder that the market remains volatile. That’s one thing that seems pretty predictable in this unpredictable month, and is likely to continue through the final two months of the year. Investors have a lot on their plates in the coming weeks, including the potential impact of U.S. midterm elections, two more Fed meetings, Brexit negotiations and an important meeting of international leaders—including President Trump and Chinese President Xi—at the end of next month.
Volatility eased slightly on Tuesday as the VIX fell 5% to below 24, but it’s still above the historic mid-teens average and elevated significantly from a month ago when it was below 12. Another thing to consider keeping an eye on is the 10-year Treasury note yield, which bounced to nearly 3.12% by the end of the session Tuesday from lows below 3.08% earlier. Any move back toward the month’s highs above 3.2% might be seen by some investors as a sign that higher borrowing costs could hurt companies.
In data Tuesday, consumer confidence from the Conference Board looked stronger in October, rising to its highest level in 18 years amid strong employment. However, higher mortgages and other borrowing costs remain something to consider watching for any potential negative impact in weeks to come.
FIGURE 1: DOLLAR AT 15-MONTH HIGH: After bottoming out at 88 earlier this year, the U.S. Dollar Index ($DXY) has been moving higher, today topping 97 for the first time since the middle of last year. A move higher in interest rates, combined with overseas weakness, may have contributed to the greenback's rise. Data source: ICE. The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
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