The old month ended with a late barrage of selling, and weakness appears to be rolling into Thursday as Fed Chair Powell's remarks are awaited.
(Thursday Market Open) The shortest month of the year seemed extra-long on Wall Street.
February’s 28 days are finally over, but not without additional selling that might have evoked memories of how it began. Once Wednesday’s late selling barrage ended, February wound up as the first negative month for the SPX and $DJI since last March. Weakness seemed to roll over into pre-market trading Thursday.
March begins with more testimony by Fed Chair Jerome Powell, whose comments appeared to help put a dagger into stocks two days ago despite his generally bullish tone about the economy. Trading could be slow before he speaks. In the meantime, earnings keep rolling in, with Best Buy (BBY) and Kohl’s (KSS) both putting out strong results early Thursday. Nordstrom (JWN) is also on today’s calendar, and so are February auto company sales. It’s shaping up to be a busy day.
February’s final two sessions didn’t feature any 1,000-point drops in the Dow Jones Industrial Average ($DJI) like a few weeks earlier, but it still couldn’t have been much fun for bullish investors to watch. Major indices took it on the chin over the last 60 minutes of trade Wednesday amid higher volatility, but this time it didn’t look like yields could be blamed. The benchmark 10-year Treasury yield stayed pretty steady most of the day below 2.9%.
Instead, some of the late selling might have been profit taking after an 11-session rally that slammed to an halt Tuesday after remarks from Powell that seemed to trigger rate hike fears. One school of thought is that things came back a little too far, a little too fast. In general, markets still seem to be in an upheaval after the early-February sell-off, and unsure of a trading range.
The key technical level to watch appears to be the 50-day moving average for the SPX, which is around 2,735. To be under that is not necessarily a good thing, so we’ll see if the market can challenge that on the upside and possibly break through it. Psychology remains a potential impediment to that kind of scenario, though. If you think about three months ago, it seemed like every dip was meant to be bought. Now, it seems like every rally gets sold. It looks like a shift in sentiment. What Powell said pointed toward a strong economy, but the market sold off on interest rate worries. At this point, it looks like perception is reality.
As this uncertainty continues, volatility remains elevated. The VIX climbed above 19 in the final hour of the day Wednesday, and has solidly reversed the recent downward trend. By early Thursday, VIX was above 21. There’s a sense that choppiness could continue for a while.
On the other hand, today is a new month, and some of the tremors on Tuesday and Wednesday might have been the results of “window dressing” as some of the major institutional players may have taken profit on winning positions. That’s not too uncommon at month’s end, and the close of January saw similar action. Whether things stabilize in March is far from assured, though, and having Powell and his testimony scheduled this morning seems to have some investors feeling nervous.
One thing to watch as the new month begins (as if anyone needs reminding) is the interest rate complex. On Wednesday, as noted above, 10-year yields actually retreated slightly, and that might have been a reaction to some of the bearish economic data released this week. Yields kept falling early Thursday, ticking down toward what looks like a technical support level at around 2.83%. The yield hasn’t been significantly below that since Feb. 9.
Today’s personal consumption expenditures (PCE) prices data for January could have an impact on where yields go as the day continues. Inflation remains a major touchpoint, even though most measures haven’t really shown a revival. The data ended up being in line with Wall Street estimates, as PCE prices rose 0.4%. Core PCE prices were up 0.3%. Yields ticked up a bit after the data came out.
Wednesday’s government report of slightly weaker Q4 gross domestic product (GDP) growth of 2.5%, along with signs of deterioration in the housing market (see below), might cause some head scratching. You never want to make too much of any individual data point, but coming after sluggish retail sales in December and January, the data this week did raise questions about just how fast the economy is growing. Powell, however, said Tuesday he’s seen signs of increased growth since December, so you don’t necessarily want to discount that.
Another thing not to discount is the continued strength in earnings, marked by KSS and BBY today. Back when Wal-Mart (WMT) reported a disappointing quarter, one school of thought was that shoppers were moving up in quality. The KSS earnings might have been one sign of that, and we’ll find out next week if Target (TGT) helps confirm the theory.
Overseas, stocks mostly fell overnight. It’s been a rough week for many European and Asian markets, and one factor could be the rising U.S. dollar. The dollar index climbed to around 90.7 early Thursday, a six-week high.
FIGURE 1: THINGS SEEMED FINE, AND THEN CAME FEBRUARY.
This six-month chart of the S&P 500 (SPX, candlestick), shows how the stock market progressively moved higher over the months through January as Treasury yields (purple line) remained under pressure. But that unraveled in February, when rising yields helped end the market’s 10-month winning streak. Data sources: CME Group, Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Moody Market Persists: Looking back now at the Tuesday sell-off that some attributed in part to remarks about the economy by Powell, it’s a bit harder to see a direct correlation. Sure, Powell did say economic growth got stronger after December, and that appeared to ignite more worries about a possible fourth rate hike this year. Still, it might be more on target to say simply that the market had risen nearly 10% over 11 sessions before Powell spoke and may have simply been due for a bit of selling. As Briefing.com observed, “The stock market was short-term overbought just as it had been short-term oversold earlier in the month. It was ripe for a retreat of some kind and what better excuse could there be to take some money off the table than a reportedly hawkish-leaning Fed chairman?”
The takeaway is that the market seems a bit moody right now, with investors looking for excuses to take money off the table when things move higher but ready to pile in with more funds when stocks break down. If this is the case and investors remain fickle, that could imply volatility has more room to run. For long-term investors, all of this might end up being noise, but it might cause trading pitfalls for those who trade more often. Vigilance remains key.
Home Front: The question after Lowe’s (LOW) disappointing earnings Wednesday is whether more people are stepping up and buying new homes instead of remodeling the ones they’re in, or if there’s a general downturn in demand for home improvement with possible broader economic implications. Both LOW and competitor Home Depot (HD) — which reported earlier this earnings season — delivered lower full-year estimates than many analysts had expected. In its earnings call, a LOW executive said, "We expect higher job growth, higher income growth, and yes, higher mortgage rates. But with that comes higher home price appreciation and rising housing demand, which should drive home-improvement spending,” according to Investor’s Business Daily.
That sounded positive, and so did stronger than expected earnings results earlier this week from homebuilding companies LGI Homes (LGIH) and Toll Bros. (TOL). Still, new home sales last month were the weakest since August, so higher mortgage rates might be starting to take a toll. In addition, pending home sales for January fell nearly 5% to their weakest level in nearly four years, the National Association of Realtors said Wednesday. This all bears watching as we head into spring.
Less Cushion For Gas Market? Crude oil, which showed signs of new life late last month after slipping under $60 a barrel, is struggling again. Prices dipped back toward $61 early Thursday after the weekly U.S. crude inventory report showed a stockpile build of around three million barrels, when many analysts had expected supplies to drop. The stronger dollar also appears to weigh on the oil complex. That said, as of last week, the U.S. had 420 million barrels of crude stocks, down from 519 million a year earlier and the lowest for the third week of February since 2015. That means a little less cushion as the U.S. heads into spring and summer driving season, and could be a sign that gas prices might not come down too much from this point. Stay tuned.
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FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.
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