Late Selling Surge Erases Some Shine, But Rally Still Intact Into Weekend

Despite a late selling surge, the S&P 500 (SPX) managed to hold on for its sixth-straight session of gains. A three-day weekend is next, and then retail earnings.

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(Friday Market Close) Friday’s big early rally flamed out by the end of the day, but the S&P 500 (SPX) still had its sixth-straight daily gain and the stock market enjoyed its best week since 2013. Stocks have charged back nearly 8% since last Friday’s intraday sell-off low, recovering about two-thirds of their losses.

The Nasdaq really took it on the chin as it fell 50 points from its intraday high and ended up in the red. It’s possible some profit taking wandered in as the end of the week approached. The SPX and Dow Jones Industrial Average ($DJI) also settled well below their highs for the day.

Some of the early momentum faded after news of more indictments in the Russia investigation, which seemed to shake up some investors. The market almost reflexively took a tumble when the news hit with about two hours left in the session, and never fully recovered. It’s a reminder that Washington, D.C.-related jitters can still spread anxiety.

Another cause of anxiety might be volatility refusing to take a seat. The VIX fell toward 18 early Friday, but clawed back to above 19 by the end of the day. VIX continues to hang in there, and bears watching as the new week begins. It’s not too surprising to see this, because typically volatility of the type seen last week doesn’t fade right away.

From a sector point of view, the best gainers over the last five days are info tech and financials. This could be seen as constructive, considering these two have often been ringleaders over the last year or two and seem to have an outsized influence on the rest of the market. Financials could be getting a boost from climbing yields in the interest rate complex. The benchmark 10-year yield fell to 2.87% Friday, up about four basis points from a week earlier but down from recent highs near 2.91%.

Looking at Friday’s sector performance, some of the ones that didn’t see as much interest earlier in the week moved higher, including utilities, real estate, and telecom. The performance of those so-called “defensive” sectors, along with the upward move in some interest rate complex products, could signal investors looking for protection heading into a long weekend. Markets are closed Monday for President’s Day.

Next week is short, but earnings continue on Tuesday with some of the biggest U.S. retailers on parade. Among the biggest of them all, Walmart Inc. (WMT), is expected to open its books Tuesday before the session starts. According to some analysts, strong sales across business segments and channels are expected to boost WMT’s bottom line. The company said that store traffic has improved, and favorable currency trends also could help juice the bottom line.

Another closely watched company, Home Depot (HD), also reports early Tuesday. When the company last reported, earnings came in a few cents above analyst expectations and revenue beat estimates by $504 million.

It’s easy to look at the recovery this week and say cooler heads prevailed after the storm of volatility that helped cause the market correction. But did they? It seems like people are jumping back into stocks just as enthusiastically as they bailed out earlier this month, even though fundamentals haven’t really changed all that much. After optimism prevailed in January,  many investors seemed to look for an excuse to sell. They appeared to find it in rising interest complex yields, but now the higher yields aren’t upending the market as they did a few weeks ago.

That could partly reflect some investors realizing higher rates can be a good thing, frequently signaling economic strength. It could also mean we’re getting to the point where many people feel more comfortable with rates heading back toward somewhat “normal” levels after years of central bank bond purchases that kept yields at effectively zero. Some analysts expected a lot more movement in yields last year and were surprised to see the 10-year spend most of its time tracking back and forth between 2% and 2.6%. What’s happening now, they argue, is what many expected to happen a year ago considering stronger earnings and economic growth.

Another thing the quick comeback could reflect is the impact of corporate buybacks. The financial media reported Friday that so far this year, corporations have announced they’re buying back $171 billion in their own shares, more than twice as much as during the same period a year ago and the biggest amount in history as of this date. Now, it’s hard to say how much of these buybacks have actually been executed so far, but you can’t necessarily rule out an impact, especially when stocks dipped more than 10% earlier this month and might have started looking a bit cheaper. For instance, the last time a year started with heavy buybacks was in 2016, when the market also went into correction.

Despite the rebound, now isn’t the time for complacency. Even before the sell-off, many analysts had been advising investors to make sure they were checking allocations and not venturing beyond their comfort zone for stock ownership considering how far the market had come. That’s no different now, even if it seems like stocks weathered the breakdown so well. As Briefing.com pointed out this week, all the fears that shook the market earlier this month — including rising interest rates and heavy volatility — are in hibernation. They haven’t gone completely away. Caution should still be a watchword for anyone trading this market.

That said, enjoy the long weekend and perhaps consider taking a break from worrying about the markets. There’s been a lot of stress over the last two weeks, and the next three days could give investors a chance to refresh and recharge before coming back to more earnings news early Tuesday.

SPX

FIGURE 1: LOTS OF GREEN, BUT VIX HANGS IN.

The S&P 500 (SPX) cruised to a sixth-straight session of gains Friday, though just barely thanks to a late-day selling surge. At the same time, VIX (purple line) is down a lot from its highs but keeps hanging in at close to 20, so choppiness might continue. Data source: Standard & Poor’s, CBOE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Good Trading,
JJ
@TDAJJKinahan

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FIGURE 2: NEXT WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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