Comeback Kid? Early Plunge Mostly Erased, But Geopolitical, Earnings Fears Persist

Despite a moderately lower close, the comeback that started around mid-session after an early gut-churning drop appeared to send a signal of market resilience.

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Key Takeaways

  • The market roared back to nearly even after a huge early plunge, but still ended moderately lower

  • Industrials and materials bore the brunt of the early selling after Caterpillar, 3M earnings

  • Buyers seemed to climb back in around midday, with FAANGs leading the way


(Tuesday Market Close) What a wild day on Wall Street. While the market did finish moderately lower, the big story was a major reversal that brought indices back to nearly even at one point following a huge early plunge.

After tumbling more than 500 points early on, the Dow Jones Industrial Average ($DJI) and other major indices came roaring back at midday, with the $DJI at one point coming within 30 points of the flat line. The markets still finished a good deal lower, but well off the early lows. 

There didn’t really seem to be much of a fundamental catalyst behind the reversal. Instead, technical factors might have played a bigger role. Buying interest appeared to perk up across the market once the S&P 500 Index (SPX) posted a new five-month low underneath 2710—the level hit more than a week ago. The SPX then flirted with that mark for a while before investors came pouring back into the FAANG stocks, with the rally spreading from there.

This is the biggest intraday turn-around in months, and from a technical standpoint could point to some possible strength in the charts. That doesn’t mean the pressure is over, because there’s still plenty of geopolitical stress (see more below) as well as concerns about U.S. corporate outlooks. What it does seem to indicate is that buying interest in the momentum stocks (like the FAANGs) may not be over and can potentially continue to put a charge into Wall Street.

Buying began in the FAANGS, particularly in Apple (AAPL), but it rapidly spread to other parts of the market, too. Most of the big banks recovered a good part of their losses, and automakers also performed well despite weak year-over-year car sales numbers. 

The rally in the momentum names that got things started looked like true conviction buying. Some might call it bottom fishing, but when you see the market reverse like this in high volume trading, it’s likely more than that. It could indicate that some people truly believe in these stocks, and might also help refute bearish ideas that the market had to move even lower. 

Even IBM (IBM), a company that got taken to the woodshed after analysts expressed disappointment in its earnings last week, made up some ground Tuesday afternoon. 

Meanwhile, McDonald’s (MCD) once again helped show that earnings truly drive the market. The company outpaced Wall Street analysts’ estimates on earnings and revenue, and reported a 4.2% worldwide rise in same-store sales, which looked like a home run. By late in the session, MCD shares were up more than 6% to the highest level since January. This news almost got lost in the shuffle early on as the rest of the market tanked, but it shows another major U.S. company that appears to be benefitting from the strong economy.

The late revival definitely put a different spin on the session, but that doesn’t mean the pain is gone. For one thing, the SPX closed well below its 200-day moving average of near 2768, a key support point on the charts that might now form a resistance area. And the news from Europe, Asia, and the Middle East remains troubling, to say the least.

Across the Pond

Overseas issues keep popping up to raise pressure on the U.S. market.  The situation in Italy, particularly, seems to be on many investors’ minds. The bond market there slid early Tuesday after the European Commission rejected Italy’s budget. In addition, the Italian prime minister said there’s no “Plan B” on a budget that raises the country’s deficit, Bloomberg reported.

This looks troubling for the euro and European stocks, both of which traded lower and helped contribute to the U.S. market washout early Tuesday. While Brexit negotiations continue to be a source of worry across the Atlantic, Italy’s bonds arguably represent an even hotter issue. At this point, the 10-year bond yield in Italy stands at 3.59%, or about 317 basis points above the yield of the German bund. A 400-point spread, Bloomberg says, would put unsustainable pressure on Italy’s banking system. A bank blowout in Italy would probably put the entire European financial sector in a perilous place, with unknown impact on the markets.

If you’re a U.S. long-term investor, Italian bonds might not seem as exciting as, say, the latest social media company earnings report. Still, it’s probably worth it to keep monitoring news out of Europe, especially now when the economy there seems so shaky. As we saw early this week and back in 2016 with the Brexit vote, European issues have a way of blowing across the Atlantic. If Italy can find a way in the next few weeks to meet the European Commission’s demands on its budget, its bond yields would potentially start to fall and perhaps remove one source of stress. Brexit negotiations, which remain stalled, aren’t necessarily going away anytime soon, however, and these issues might continue to help keep a cap on U.S. market rallies.

China and Trade Still Weigh

Europe isn’t the only outside factor troubling U.S. investors. Emerging markets are also getting thumped. Chinese stocks, which had risen late last week on signs the government there was taking steps to support the market, were back to their old ways Tuesday with a more than 2% drop amid continued trade tensions and concerns about China’s economy and consumer demand there.

While concerns keep percolating over in Europe, China, and Saudi Arabia, the worries back home can’t necessarily be dismissed, either. Caterpillar (CAT), which if you’ll recall was part of the story earlier this year when stocks corrected, got some people worried Tuesday when it said manufacturing costs rose due to increased material and freight costs. The company blamed the higher material costs mainly on increases in steel prices and tariffs. CAT shares had their worst day since 2015 with a nearly 8% plunge.

The news wasn’t good at some other industrial firms, either. 3M (MMM) shares dropped dramatically after the company missed Wall Street analysts’ estimates and lowered guidance. The company cited slower sales growth. 

Those kind of reports from some of the heavy hitters in the industrial sector that highlight growing costs and weaker sales were just what many investors had worried about heading into earnings. Despite the big comeback Tuesday, they can’t necessarily be dismissed. Those worries about tariffs and inflation that dogged the market much of the year are coming home to roost, at least looking at what a number of companies said about Q3 and their forecasts. 

Also, energy names came under pressure as the crude oil market got rapped on the knuckles. Prices for crude fell 4% to below $67 a barrel after Saudi Arabia sent signals it would support higher production.

Still, it’s unclear how much lower things can go for the stock market. About 75% of S&P 500 stocks have now had a 10% correction, according to media reports Tuesday. October has been the worst month in years for all three major indices. The failure to hold lows today could arguably indicate some lack of selling interest down at those levels, though it remains to be seen if that can hold up over time.

On the rate front, the 10-year Treasury yield crept back up to around 3.16% late Tuesday after slipping  to 3.12% early on. Atlanta Fed President Raphael Bostic was quoted in the media Tuesday saying “there is little reason to keep our foot on the gas pedal,” a reference to the Fed not needing accommodative policy as economic growth remains “on a strong trajectory.”

Figure 1: FIGURE 1:  Support Broken? Some analysts had seen the 200-day moving average (purple line) as a strong support area for the S&P 500 (SPX), but that level at around 2765 didn’t hold up Tuesday, and perhaps could form a resistance point on the charts now. Data Source: S&P Dow Jones Indices.  Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.    

Good Trading, 

JJ

@TDAJJKinahan 

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