After yesterday's big rally, pressure surfaced in pre-market trading as the high volatility levels keep sending stocks on a ride.
(Tuesday Market Open) The pendulum keeps swinging on Wall Street, where pre-market trading indicated possible weakness early Tuesday after Monday’s big rally. European markets fell, the dollar slipped, and closely watched Treasury yields also pulled back a little.
Looking at the lower pre-market trading this morning, it’s not really too surprising after the incredible rally yesterday. Remember, volatility of this magnitude doesn’t simply vanish overnight or when the stock market rallies a couple of days. The VIX remains elevated, up above 26 early Tuesday. Until it sinks back to normal levels, this see-saw type of action might be the story for a while, especially on a day like today when there aren’t a lot of data numbers to draw attention.
We said volatility was likely to continue, and it is. Not a big shock. Investors should consider strapping in and keeping their trade sizes manageable until this starts to blow over.
Earnings and the Fed share the spotlight today, with Cleveland Fed President Loretta Mester scheduled to comment on monetary policy this morning and a bunch of companies presenting results. Some of the ones reporting so far today include PepsiCo (PEP) and Under Armour (UAA).
Tomorrow brings key inflation data with the January consumer price index (CPI), but consider not getting too hung up on that. It’s getting all kinds of scrutiny right now because it’s the first number after the big volatility event, but it’s just one data point, and its meaning is likely getting overblown.
Shares of UAA jumped 12% in pre-market action after the sporting goods company beat Wall Street analysts’ average estimate on Q4 revenue. Earnings per share met analysts’ forecasts. Here’s a company that’s really been struggling, with shares down 30% over the last year, and one quarter doesn’t necessarily change that. The company still has some work to do. Still, it was encouraging to see better shoe and apparel sales.
PEP stock barely budged after it reported earnings that met analysts’ expectations. Beverage sales were a bit “flat,” however, falling 6%. People get caught up in PEP’s beverage business, but really it’s all about Frito-Lay. That’s the company’s primary source of income. People think sugar, when they should think salt.
An old song goes “Bye, Bye, Bye.” Change the spelling and you’d probably have a good description of the atmosphere on Wall Street Monday.
Looking back at last week’s plunge, the market seemed to experience a burst of pent-up selling demand. Many people hadn’t sold in a year, perhaps in part because they didn’t want to sell into a rallying market. Once the selling began, it was exponential. Now, after two days of strength from the lows, it looks like the market might be a little overdone to the up-side, and might be trying to find a trading range. The question is where that upper and lower limit might be.
The action Friday and Monday, in which stocks essentially marched upward in a major buying spree, seems to back the theory that many people took profits earlier last week and are now re-deploying capital. Some of the sectors charging to big gains Monday included energy, materials, technology, and industrials, with materials and info tech leading the way. These were all parts of the market that got hit hard last week. Meanwhile, sectors that did better last week — including utilities, real estate, and telecom — were the laggards Monday. Still, nothing ended up in the red.
From a fundamental standpoint, those who attributed last week’s sell-off to higher interest rates probably lost sight of the fact that rising rates can often be a good thing. It tends to mean the economy is healthier. While there’s no way to read minds, maybe the comeback on Friday and Monday even in the face of higher rates could be evidence of people realizing the bullish side of the rate picture. The benchmark 10-year Treasury yield, which hit a four-year high above 2.9% on Monday, retreated slightly to around 2.85% by the end of the day. By early Tuesday, it was at 2.84%.
What investors should remember is not to get caught by surprise if more volatility blows into prices over the coming days and weeks. Volatility is likely to continue. If you’re getting ready to dive back into the investing pool, remember that old rule about diving feet first, not head first.
One factor to watch continues to be crude oil, which rose above $60 a barrel early Monday but couldn’t hold its gains and finished back below that level. By early Tuesday, crude was down to nearly $59. The relatively weak oil market action might suggest that people aren’t fully convinced yet that the markets have actually shaken off their funk. The energy sector had been one of the early market leaders Monday based on higher oil prices, but we’ll have to see if that can last in the face of higher production from many countries.
FIGURE 1: A PICTURE WORTH 1,000 WORDS.
Volatility (represented by the candlestick on this three-month VIX chart) was chugging along near all-time lows, minding its own business as the S&P 500 (SPX - purple line) rallied away. Then the SPX stumbled and volatility spiked. Though VIX is down since its initial rally, it remains elevated, so choppiness in the SPX like we’ve seen over the last week isn’t too surprising. Data source: CBOE, Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
The Price Is… A big question after last week’s stock market plummet is whether inflation is starting to rear its head now that wages are up nearly 3% over the last year. The year-over-year CPI as of December was 2.1%, down from 2.2% in November. Core CPI rose 1.8%. It’s these year-over-year numbers that might be getting a lot of the headlines, but investors might want to consider paying attention to the monthly rise, too. At this point, Wall Street analysts surveyed by Briefing.com expect a 0.4% rise in total CPI for January, but just a 0.2% climb in core CPI, which strips out volatile food and energy prices. In December, it was housing prices that arguably contributed most to the rise in CPI, so we’ll see if that trend continues. Remember once again: It’s just one data point. People might be making too big a fuss.
Oil Embrace: Oil prices and the stock market seem to be back in sync, with oil descending quickly along with stocks last week. Another thing that seems pretty clear is an intense correlation between oil prices and U.S. production. As front-month oil futures climbed 55% between June and late January, the number of rigs drilling for oil in the U.S. also picked up. According to Baker Hughes, active U.S. oil rigs have jumped by 234 from a year ago, rising 26 last week alone to the highest level since 2015. At the same time, U.S. oil production topped 10 million barrels a day this month for the first time since 1970. This could be a sign of producers responding to higher prices by deciding to pump out more product.
Until the last week, all this extra supply didn’t seem to make much difference in the oil market, because demand appeared to drive prices. With the stock market reeling, however, questions surfaced about how much demand can continue to support high prices. If stocks continue to take it on the chin in weeks to come, people might start feeling less excited about spending. When consumer spending dives, gasoline demand tends to follow. That could be one reason prices are down.
Earnings Action Easing: The earnings season is starting to slow down after three weeks of frantic reporting. There’s still a lot on the calendar, but many of the biggest ones, especially in info tech, are now behind. That leaves some of the biggest, like Deere (DE) and CocaCola (KO) for Friday morning. Others to watch before then include Cisco (CSCO) on Wednesday afternoon and Kraft Heinz (KHC) early Friday. Despite all the fireworks over the last week or two on Wall Street, earnings just keep coming in strong. To date this earnings season, 77% of companies are beating Wall Street analysts’ estimates on earnings per share and 76% are beating in sales, research firm CFRA said. That’s above historic averages.
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FIGURE 2: THIS WEEK’S ECONOMIC CALENDAR.
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