Technology, Small Cap Shares Lead in Volatile End to Volatile Week

The markets started the session looking like they might end it with hard landing. But, as we’ve seen during these volatile days of trading, what happens early on doesn’t always stick.

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(Friday Market Close) The tariff retorts reverberated Friday throughout the markets, which were subject to another rocky session. Deep dips early in the day gave way to a late upturn as some traders appeared to step back from risk ahead of the weekend.

Much of the volatility appeared to be tied to President Trump’s tough talk about tariffs on steel and aluminum. He introduced the notion of imposing double-digit tariffs on imports and appeared to double-down on it with early-morning tweets, according to market watchers. That might have been one of the things that led the downturn, but things appeared to calm down as the day proceeded.

Some analysts and big business were commenting continuously throughout the day, as was the saber-rattling by countries that could get hit with tariffs, all possibly lending strength to the volatility and then the calm. The pros and cons on tariffs look to be all over the board and it’s still unclear if any tariffs will be implemented. It might be wise for investors to avoid any quick actions. Something investors might want to consider is that President Trump has in the past turned more pragmatic in his approach on some issues. Tariff negotiations may proceed in a similar vein.  

Also, traders might have wanted to take some risk off the table ahead of elections to choose a government in Italy on Sunday. What many investors learned in the aftermath of the Brexit vote was that elections in Europe— particularly ones clouded with uncertainty— tend to give rise to volatility, much of it short-lived.

By the time the session had ended, the Dow Jones Industrials ($DJI) had given up  more than 1,100 points in the last three days. Friday’s pullback was down almost 400 points in the early going, but the Dow looked like it was moving aggressively off its lows at about the same time the markets closed in Europe, early afternoon in New York.

By the closing bell, the Dow’s pullback was only about 0.30% while the S&P 500 (SPX) reversed its early-morning course to finish on the upside by about 0.50% and the Nasdaq (COMP) settled solidly higher by better than 1%. In an unusual aside, all 11 sectors of the SPX finished lower on the week— something that did not happen even once all of 2017.

The selloff appeared to boost small-cap equities, helping to give a rise to the Russell 2000 (RUT), which ended the day with about a 1.7% gain, pushing it nearly 2% higher since early Thursday. (See figure 1 below).

Meanwhile, bonds sold off on Friday, pushing up yields (they move in opposite directions) on Treasury notes. The 10-year yield climbed by about five basis points to 2.86% while the two-year added about three basis points to 2.24%.

Wall Street’s worry measure, the Volatility Index (VIX), was all over the board this week as well. It started off Friday  sharply higher, nearly bumping 26, before also settling down on the session to finish the week below 20.

Among advancers, the so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google parent Alphabet) ended higher with Netflix (NFLX) up nearly 7%  to push its market capitalization to $130.6 billion, blowing past General Electric’s (GE) $122.6 billion. GE finished Friday’s session marginally higher but was down nearly 2% on the week.

Next week’s economic and earnings calendars don’t look as jammed as they were this week. It’s not likely this tariff talk is going to go away anytime soon; investors might want to take a steady approach to trading ahead. 

RUT vs. SPX, 3-2-18

FIGURE 1: SMALL CAPS WIN THE DAY.

Though the afternoon turnaround was the big story of the day, another item of interest was the strength of the Russell 2000 Index (RUT), plotted here vs. the S&P 500 (SPX - purple line). Data source: FTSE Russell Indexes, 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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