Trade with Caution: Little News to Influence Trading Could Cause Volatility

Markets looked like they were struggling for conviction in the early going. What swings an index early on might not hold it into the close.

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(Thursday Market Open) Where to go, where to go? That appeared to be the challenge facing the three major benchmarks in the early going today as they wandered in and out of positive territory ahead of the opening.

Without much news to influence trading in either direction, the markets initially looked like they were trying to shake off the jitters that appeared to take over in late-day trading yesterday as they moved higher early on. But they struggled for conviction and the open looked like it could go either way.

Jobless claims fell by 7,000 to 222,000, according to the Labor Department. That news appeared to juice the markets a bit, but there’s a full day of trading still ahead, and as we’ve seen recently, anything can happen

This might be a good time to remind traders that days like this might create a dangerous market game to be in—any piece of news has the potential to shift the tides in either direction. Yes, that’s volatility at play, so it might be worthwhile to define the time frame before going into the trades. If trading for the short term, it might be wise to limit investments; long-term trading, as usual, requires good due diligence.

Here’s something else to think about: derivative trading. As we’ve seen many times, what happens to one company could impact another. Some companies noted in the third quarter that the bankruptcy of Toys “R” Us impacted their sales and forecasts. Today, the Wall Street Journal reported that Toys is bracing for another round of store closings—200 this time around—and more layoffs. That could leave the toy store company with half the number of stores it had before the bankruptcy was filed in September. As investors carry out their due diligence, consider what’s going on with companies doing business with each other.

That Last Hour of Trading

Yesterday might be considered another example of how that last hour of trading could be a doozy. Most of the trading session looked like things were going well—if you consider market moves higher as “going well”—until they weren’t. The minutes of the Federal Reserve’s January meeting showed that some Fed members were a bit more optimistic about the economy than they were the month before. Some members even raised their forecasts that the 2% inflation target that was so mysteriously missing through all of 2017 was within grasp, according to the minutes.

Though the minutes, which undoubtedly were keenly parsed by Fed watchers, didn’t signal any sure sign of a change in the Fed’s stated path of rate hikes—three in 2018 and two in 2019—it had many believing that moving more aggressively this year could be in the cards. Four rate hikes in 2018? Fed needs to be careful, according to at least one Fed member. (See below.)  

That appeared to put the markets immediately on edge, as the Dow Jones Industrials ($DJI) lost its momentum, dipping into negative territory before firmly ending there. And that was after the blue-chip metric has surged more than 300 points higher in midday trading. It looked like the S&P 500 (SPX) and the Nasdaq Composite (COMP) might hold on to their gains, even if only some of them. But those tables turned, too, by the time the bell had rung. When the session’s finish shook out, all three benchmarks were down, with the Dow off in triple digits.

Here’s another nugget of the Fed minutes to chew on: The Fed doesn’t appear to be falling for the so-called “Amazon effect” that is often bandied about as a means of keeping prices low. In the minutes, the Fed noted that “The staff found little compelling evidence for the possible influence...of factors such as a more competitive price environment or a change in the markup of prices over unit labor costs.”

Meanwhile, back in the market, the Fed minutes’ apparent support of a rate hike next month—and the FedWatch Tool is registering a near-83% likelihood of an increase in March—appeared to help fuel the 10-year Treasury note yield to a session high and a four-year peak at 2.95%. The dollar index also moved higher, up 0.4% to 90.12. Both were marginally lower in the early going.

Dollar chart

FIGURE 1: DOLLAR'S DOLDRUMS UNDONE?

Probably not, but look at that choppy trade performance yesterday—first up, then paring gains, then down, then up again, down…you get the point. But the dollar rose for the fourth straight day yesterday, apparently amid concerns that the Fed is focused on rising inflation. The dollar index, which measures the buck against a basket of other currencies, is ­down nearly 12% since peaking in March on a year-over-year basis. Data sources: CME Group, Standard & Poor’s. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

Homes for Sale? Apparently, not enough, according to the National Association of Realtors (NAR). Sales of existing homes slumped last month by 3.2% from December and 4.8% on a year-over-year basis, the trade group said in its monthly report. Economists were expecting a tick higher. The year-over-year drop was the biggest since August 2014.

What happened? Tight inventories, according to the NAR. Bad weather, some economists suggested. Rising interest rates, others noted. The average rate on a 30-year fixed mortgage was 4.38% last week, according to Freddie Mac. That’s a place it has barely passed over the past five years. And Treasury yields are rising, some analysts note, potentially intimating that higher mortgage rates might make home buying a tougher nut to crack. Whatever the issues, it appears there’s an issue, or two, or three to the drop in housing sales.

SECs ‘Clearer’ Cyber Risk Disclosure: As expected, the Securities and Exchange Commission (SEC) yesterday asked companies to adopt policies that restrict executives from trading shares of their companies while they are investigating a cyber hack—and particularly, before it’s reported. The unanimous consent was attached with a promise to promote “clearer and more robust disclosure,” according to the SEC.

Coming on the heels of a number of high-profile hacks at major companies—many of which exposed millions of Americans’ personal information—some SEC commissioners called for “much more rigorous rulemaking to police disclosure around cyber security issues, or requiring certain cyber security policies at public companies,” according to Reuters.

Four Interest Rate Hikes in 2018? Seems like a bit much, according to St. Louis Federal Reserve President James Bullard, who spoke about the possibility of four rate increases in 2018 on CNBC this morning. With rates now in a range of 1.25%-1.5%, Bullard said four increases of 0.25 basis points each would mean things were “priced for perfection.”

"The idea that we need to go 100 basis points in 2018—that seems like a lot to me," he said. "Everything would have to go just right. The economy would have to surprise on the upside a bunch of times during the year. I'm not sure that's a good way to think about 2018." The Fed should stay reactive, he said, unless inflation spikes toward the 2% target with price pressures on the horizon. Stay tuned.t happened? Tight inventories, according to the NAR. Bad weather, some economists suggested. Rising interest rates, others noted. The average rate on a 30-year fixed mortgage was 4.38% last week, according to Freddie Mac. That’s a place it has barely passed over the past five years. And Treasury yields are rising, some analysts note, potentially intimating that higher mortgage rates might make home buying a tougher nut to crack. Whatever the issues, it appears there’s an issue, or two, or three to the drop in housing sales.

Good Trading,
JJ

@TDAJJKinahan

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Economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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