Spring Sling: Q2 Kicks off with Tech-Led, Broad-Based Selloff

Q2 2018 begins with a thud as weakness in the technology and consumer sectors pull the S&P 500 (SPX) and other indices into correction territory.

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(Monday Market Close) That clunking sound you hear is Q2 trying to get its engine going.

Markets didn’t even make it out of the driveway on Monday as tech stocks led a broad-based selloff that gave investors a serious case of the Mondays. When the dust had settled, all 11 sectors of the S&P 500 (SPX) finished lower for the day—10 of which are now in correction territory relative to recent highs.

If there's one theme of the day, it might be "resetting expectations." Recall that 2017 was marked by historically low volatility, and virtually a one-way ride upward. Thus far in 2018, we've seen a return of volatility to historical levels, and some compression of earnings multiples that some analysts say had gotten difficult to justify. Some of the big tech names are in the process of maturing as companies. And as companies mature, it's natural to see price-to-earnings ratios more in line with the market as a whole. In short, now may be a time not for panic, but for a re-evaluation of expectations.

Amazon (AMZN) led the charge lower, finishing down about 5.2% after the President continued criticism of the company via Twitter. Shares of Intel (INTC) added to the tech woes, falling over 6%, as Apple (AAPL) said it might move away from Intel chips in favor of an in-house chip for it Mac computers. Shares of Facebook (FB), still reeling from a recent data security issue, also lost ground, as did Tesla (TSLA), on concerns of a recent recall, plus production setbacks on its Model 3, could further impair its financial condition.

Tech woes helped drag the Nasdaq (COMP) down to negative for the year and into correction territory. The S&P 500 Index lost 59 points, or 2.23% and fell below its 200-day moving average and the Dow finished off 459 points, or 1.9%.

SPX 4-2-18 - through 200-day moving average

FIGURE 1: SPX THROUGH THE 200-DAY MOVING AVERAGE.

After bouncing off its 200-day moving average (blue line) a couple of times, the S&P 500 Index (SPX) crossed through it in earnest today. Some trend watchers may be asking what's next. 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.

Meanwhile trade worries continued to plague the market as China hit U.S. products including steel pipes, meat, nuts and wine with around $3 billion in tariffs in response to Trump’s tariffs on steel and aluminum from China and other nations.

That got equities started off on the back foot for the week, after last Thursday's end-of-quarter rally, and a couple somewhat disappointing numbers helped keep the market under pressure Monday. The Institute for Supply Management’s index of national factory activity declined to 59.3 in March from 60.8 the previous month. That still shows growth, as any number above 50 does, but the new figure came in slightly below expectations, according to Briefing.com, and which might indicate that growth has been contracting. Also, growth in construction spending came in at 0.1%, below Wall Street consensus of 0.5%, according to Briefing.com.

It's worth noting, especially to longer-term investors, that today's weakness has not materialized into any meaningful flight-to-quality. The 10-year Treasury yield finished the day relatively flat at 2.74%. Those looking for a silver lining here might point to this steadiness as evidence the market is simply returning to earth after a period of frothiness. The dollar, too, was relatively flat on the day. Gold, however, rose 1.3% but, even still, a muted blip considering the size of today's equity selloff.

But with Treasuries steady, and the Fed still in rate hike mode, the financial sector may be one area to keep an eye on.

And if you're looking for another positive sign? Though stocks finished sharply lower, they finished well off session lows, indicating a possible late-day momentum shift. 

Looking ahead, auto and truck sales numbers filter in Tuesday from the major manufacturers. U.S. auto sales looked a bit disappointing in February, so we’ll see if people headed back to the showrooms in March. However, bad weather across much of the East Coast that month might have depressed activity a bit. But the big release this week is Friday's jobs report, and after that, earnings season is just around the corner.

Good Trading,

JJ

@TDAJJKinahan

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