Turkey of a Market: Stocks Hit Again Amid Weak Oil, Retail Earnings

After disappointing retail earnings and an apparent spread of concern from Apple (AAPL) to the rest of the tech sector, stocks fell across all sectors Tuesday.

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Key Takeaways

  • Stocks down for the year after another sell-off Tuesday

  • Retail, energy, and tech among the big losers as crude sputters, retail earnings disappoint

  • More choppy trading possible Wednesday as holiday approaches

(Tuesday Market Close) “Buy the dip” seemed to work for many investors over the last year or two.

There seems to be a sentiment shift away from this now, as stocks plunged again Tuesday and aren’t far above October’s lows.

However if you’re looking for a silver lining, this hasn’t been a selling panic either.  It looks more like an unwinding and repricing that’s moving along in an orderly fashion.

Anyone who bought into the market late last month hoping for a quick recovery could be losing money now. Negative sentiment continued Tuesday with all 30 Dow Jones Industrial Average ($DJI) stocks losing 1% or more.

Energy, consumer discretionary, and info tech all came under pressure as crude prices dove and retail earnings disappointed. Every sector in the S&P 500 fell Tuesday, but utilities only lost a bit of ground and Treasury note values rose as “risk-off” sentiment appears solidly in place. Stocks are now down about 1.2% for the year, as measured by the S&P 500 Index (SPX), but remain well above the February intraday low. The SPX closed at just below 2642 on Tuesday, more than 100 points above the February low point of 2533.

Tariffs remain the overriding fear, and there’s also concern about the so-called “Apple” (AAPL) effect on the economy as shares of that widely-held company crumbled another 4.8% Tuesday and are down about 24% from all-time highs posted earlier this fall. Some investors seem to already be starting to discount the holiday shopping season, fearing people won’t spend. Or fearing that people might spend, but at lower-priced retailers.

Another potential reason for the recent steady selling could also be related to the holiday season and the approaching new year. With stocks now back to where they were in October and down slightly year-to-date, those who work the trading desks of big Wall Street firms might be thinking about their bonuses and maybe lightening up positions so they can book some gains for the year. That’s obviously a guess, but might bear keeping in mind in coming weeks if pressure continues.

There was some choppy action Tuesday as the Thanksgiving holiday draws near, but volume wasn’t all that thin. This choppiness could continue tomorrow as people start to leave town and volume falls further. However, there is some data tomorrow, including existing home sales for October and leading indicators. With housing in a soft patch, that existing home sales report could get some extra attention.

Same Story As Tech, Energy, Retailers Get Hammered

Tech continues to take a lot of the beating, as investors seem to be repricing many of the names amid fear of possible tariff impacts and potential falling consumer demand in 2019. The FAANGs are all down 20% from their highs. That said, four of the five FAANGS traded in the green at times on Tuesday. These are momentum stocks, and if they do get some momentum back, it might spread some cheer to the rest of the market.

In retail, too, there’s been kind of a reversal of fortune. For a couple of years there, many investors seemed willing to reward retailers for good quarters even if their outlooks weren’t all that great. That’s over for now, judging by the market’s behavior recently. Retailers who disappoint with their forecasts have been getting punished, as Lowe’s (LOW) became the most recent company to learn the hard way Tuesday when it beat earnings expectations but cut its sales view.

Retail took a big hit Tuesday in part from disappointment over earnings from Target (TGT), but those need to be put into context. A year ago, the results from TGT might have been viewed as good news, back when investors were typically rewarding retailers for investing in their businesses. Now, it appears many investors want both sides of the coin: For companies to invest but to also have great quarters every time. The TGT results actually didn’t appear to be too bad a story, but analysts didn’t like seeing higher inventories. TGT had a positive outlook on the call. They’re a pick-up and delivery company now, not just a store. Wal-Mart (WMT) spent a lot of time getting to that point, and it’s starting to pay off. TGT is in the heart of a five-to-10-year plan.

As bad as it got for tech and retailers, energy was by far the worst performer of the day Tuesday, falling more than 3% as crude oil hit 13-month lows below $54 a barrel in the U.S. Some of the pressure on oil might have come from a statement by President Trump that many analysts viewed as supportive of Saudi Arabia despite recent controversy involving the death of a journalist. From a fundamental standpoint, U.S. supplies have been building rapidly, so consider checking Wednesday’s weekly crude stockpiles report to see if that continues.

The next major event for oil might be the OPEC meeting coming up Dec. 6, when some analysts expect an output cut. That’s another “if,” however, because it’s not clear that Russia, a non-OPEC member and one of the world’s biggest producers, would go along. Also, U.S. production keeps climbing, which could continue to limit OPEC’s ability to quickly raise prices.

Bear May Be Growling, But Still Deep in the Woods

A lot of people are starting to ask if we’re in a bear market. By mathematical definition, of course, the answer is no. A bear market means a 20% drop from highs. Even now, the S&P 500 is down only a little over 10% from the September high, meaning a correction, not a bear. At this point, it looks like people are starting to price the market as if a deal on tariffs with China won’t get done. The pessimists seem to be carrying the day. If the tariff issue does get solved, however, it could be a quick piece of ignition that sends things right back up, and put the market in rally mode.

Long-term investors need to keep this in mind. If you’re trading at all, consider keeping your positions manageable. There’s a lot of volatility around the tariff issue, and it could mean swift moves one way or the other in coming weeks.

Also, even after the pounding of the last two months, stocks aren’t necessarily cheap. Entering Tuesday, the 12-month forward price-to-earnings ratio for the S&P 500 stood at 15.6, according to Factset. That was down from the five-year average of 16.4, but still above the 10-year average of 14.5 One thing to keep in mind, however, is that the 10-year average includes the bear market of 2008-2009, and those numbers won’t be in the 10-year mix much longer.

There was a bit of light in the forest Tuesday as Best Buy (BBY) earnings looked solid. Their earnings per share blew away analysts’ estimates and the stock rose 2%.

Yields Looking at 3% Again, But From Above This Time

As stocks retreat, the closely-watched 10-year Treasury yield is once again knocking at the door of 3%—but this time from the other direction. Earlier this year, investors watched intently as the yield, which had been well below 2% as recently as 2016, inched toward 3%. Though the initial approach was kind of tentative, it eventually leaped to a decade-high above 3.25% this fall. That’s now a distant memory as the yield fell to 3.05% today, the lowest it’s been in nearly a month as investors gravitated toward the supposed “safety” of the fixed income market (though no investment is truly “safe”).

Treasury prices, which move opposite of yields, are also rising in part because of lower perceived odds of Fed rate hikes moving into 2019. However, just because stocks are diving doesn’t mean the Fed necessarily departs from its strategy in the near term. The Fed is driven mainly by economic data, and there’s been no real sign of a turndown on that front, except for housing. Chances of a rate hike next month still stand above 70%, according to futures prices. Traditionally, when odds are above 70% in the futures market, that’s been a pretty good indicator that a hike is coming.

Can Fed Keep Hiking As Energy Prices Dip?

Still, if you’re looking for reasons for the Fed to continue its approach of gradual rate hikes, one missing element might be inflation. The 25% drop in crude oil prices over the last month could lower prices not just for gasoline, but for lots of other items either made with crude or shipped using energy from crude. Transports could benefit, and people might end up paying less for plane tickets and shipping costs if this continues. That’s a big if, of course, because oil prices tend to be flighty and many companies buy their supplies well in advance, meaning one-month changes in the market don’t necessarily have an immediate impact.

From a technical angle, the SPX has fallen well below what had been some support around the 2700 level. Still, it’s above the 2603 low hit in late October. A drop below that might set up a possible test of the 2018 low of just under 2533 posted in February.

Figure 1: Watching SPX Technicals. Tuesday's fall takes the S&P 500 Index (SPX) well below its 200-day moving average (blue line), but it closed above the October low. As of the close, the SPX is down about 1.2% on the year, but still well above the 2018 low of 2533 (red line). Data Source: S&P Dow Jones Indices. 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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