Risk-Off Redux: Volatility Storms Back onto the Scene in Stock, Oil Rout

After a 2% rally last week, stocks got off on a very different foot Monday. The tech and financial sectors helped lead the way lower amid geopolitical concerns and tech demand worries. A stronger dollar could be a sign that some investors are adopting more of a “risk-off” stance.

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Key Takeaways

  • Monday sell-off sends stocks down about 2% to wipe out last week’s gains

  • Geopolitical worries, including tariffs, among the factors helping push market lower


  • Tech and financials both get hit, with iPhone and chip demand concerns hurting tech sector    


(Monday Market Close) The calendar says November, but Monday felt more like October on “re-dial” as stocks surrendered last week’s forward progress amid a tech nosedive and gains in the greenback. These developments might indicate lower risk appetite as geopolitics continue to drum up uncertainty.

Info tech suffered another major hiccup Monday, falling more than 3% and helping lead a broader sell-off that took the Dow Jones Industrial Average ($DJI) down more than 600 points, or 2.3%. The Nasdaq (COMP), where many tech stocks reside, got hit even harder with a 2.8% plunge. Every FAANG stock took it on the chin, but none more than Apple (AAPL). That tech bellwether tumbled another 5% to well below $200 a share after Wall Street analysts expressed new concerns about potential falling iPhone demand.

Monday’s market turmoil pushed the S&P 500 (SPX) back below the 200-day moving average, and its close of 2726 (down nearly 2%) was the lowest since Nov. 2. That means basically all the gains from last week have vanished. Further technical support could rest near the psychological 2700 level, analysts say.

The turmoil didn’t spare too many names in the tech sector. Chipmakers also got slammed, with shares of Advanced Micro Devices (AMD) falling nearly double-digits and rival Nvidia (NVDA) falling nearly 8%. Shares of AMD are down more than 40% since mid-September, and it looks like the chip stocks might still be reeling in part from what analysts deemed AMD’s disappointing outlook for the holiday quarter last month.

Chip and iPhone demand can serve as “canaries in the coal mine” for the broader economy, because they often provide visibility into general consumer demand for tech products. With the holidays looming, weakness in outlooks from companies like AAPL and AMD might carry a bit more weight for the market as a whole. Remember, too, that Amazon (AMZN) gave a holiday quarter preview that seemed to disappoint many investors.

Slow Leak Continues as Oil Tanks Again

Another “canary” is crude oil, where futures sank for the 11th-straight day Monday to set an all-time record losing streak (see Fig. 1 below). The drop to below $60 a barrel for U.S. futures came despite plans by Saudi Arabia to cut shipments next month. A weak oil market might reflect concerns about potential falling overseas demand even as the U.S. moves into what’s traditionally a seasonal slow period.

Oil also could be under pressure from the rising U.S. dollar, which can help cause dollar-denominated commodities to fall in value. The dollar index, which measures the dollar vs. a basket of other currencies, climbed to 97.53 by late in the day Monday, a 16-month high and a big gain from lows of below 90 early this year. With about 40% of S&P 500 companies’ profit coming from overseas markets, the strong dollar—if it persists—could have a negative impact on future earnings if foreign customers cut back on buying U.S. products. 

Some investors seem to be flocking to the dollar and possibly Treasury notes as they might be seeking “defensive” investments in a market where high-flying tech stocks are under pressure and tariff and Brexit worries continue to raise concern. China’s slower recent growth and squabbles in Europe over Italy’s budget just add to the uncertainty. 

Yield Losses, GS Controversy Help Slam Financials

None of this is helping interest rates climb the ladder, it seems. The 10-year Treasury yield fell back below 3.2% Monday after a quick rally that had raised it by 15 basis points from recent lows at one point last week. The financial sector has been tough to trade lately, maybe because rates keep seeming to go higher but not getting traction. Financials were one of the worst-performing sectors Monday, with Goldman Sachs (GS) getting taken out to the woodshed with a decline of more than 7%. Drama at GS stemmed in part from media reports of a possible “scandal” involving the bank’s dealings in Malaysia, and the misery at GS combined with falling yields to form a tide that helped sink most of the financial boats Monday.

The one area that seemed to escape, at least a bit, from the Monday mayhem was consumer staples. If you look at some of the big names there—including CocaCola (KO), PepsiCo (PEP) and Procter & Gamble (PG)—the recent gains appear to be pretty impressive. KO, for instance, is up 12% in the last few months. These are old-school stocks that some investors appear to be coming to in times of uncertainty, arguably in part because they have stable products and pay dividends. 

This morning, we noted that the election and Fed meeting were now behind, and that the election had been one thing putting some clouds on the market’s horizon. Now the midterms are out of the way,

But until we get clarity on what tariffs might mean for the economy and corporate health, assets might continue to get re-priced lower. There’s been a really cautious tone among CEOs on their earnings calls this quarter. Nobody seems to want to sound a positive note, because they’re worried the numbers might go against them if they sound too optimistic and then tariffs end up having a big impact. That’s partly why the FAANG and momentum stocks continue to get hurt.

VIX Back Above 20

Meanwhile, volatility spiked again Monday after slowly falling much of last week to as low as the 16 area. The VIX is back above 20, and that’s a more historically normal level than the readings of 12 or below that many investors might have grown accustomed to a year ago. Remember, a year ago the world economy seemed to be growing in sync with the U.S., and that helped smooth out the markets. That doesn’t look like the case now, and if you need evidence check the spread between U.S. 10-year yields of 3.18% and the 10-year German bund rate of 0.4%. Or check the dollar index. Or look at oil prices. Maybe look at China’s GDP growth or read the latest headlines about Brexit. All of these might help tell you why U.S. stocks are struggling to keep the gains they made earlier this month after the quick rally back from October lows.

All this focus on overseas trouble doesn’t mean things are perfect back home, though U.S. growth has been impressive the last two quarters. Business investment slowed in Q3. Real estate continues to be a weak spot as it appears that despite great employment numbers, many people don’t seem to want to make a long-term financial commitment to housing. Inflation perked up on the wholesale side last month. Looking further into the week, retail sales and consumer price data might help tell more of the story, and some insight from Fed Chair Jerome Powell on Wednesday might also draw attention. That said, the market hasn’t had a history of responding all that well to what Powell says since he’s taken the helm. 

In addition, consider keeping in mind that some of the numbers from the retail sales and industrial production reports we get this week are direct inputs into the Q4 GDP number. 

Figure 1: Crude Still 0-for-Nov. The day began with the possibility of strength in the crude oil futures (/CL) market, after a weekend OPEC meeting in which production cuts were considered. By the end of the day, however, crude continued its November slump, falling in tandem with the stock market, including the S&P 500 Index (purple line), which fell 2%. 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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