February is off to a fast start. The S&P 500 (SPX) rallied in three of the last five trading sessions and erased nearly all of its losses from January. SPX got a lift from the short-term recovery in crude oil prices despite a nearly 80-year high in oil inventories. A January employment report that blew well past most reasonable estimates helped last week, too. Now the next round of earnings, energy price swings, plus U.S. and global economic data and any ongoing speculation for the speed of expected interest rate hikes fill out a list of potential catalysts that could test the market’s resilience.
With volatility alive and well, the CBOE Volatility Index (VIX), which tracks the implied volatility priced into SPX options, shed 17.5% last week to 17.29, ending well below Monday’s high of 22.81 (figure 1). What’s most notable, VIX and the SPX aren’t so cozy these days. VIX, the market’s “fear gauge,” still hovers well above the levels seen two months ago when it traded in the mid-teens; in that same two-month stretch, the SPX itself is little changed.
In fact, while the SPX is little changed after two months of roller coaster action, the same can’t be said for every sector of the market. For instance, the energy sector rallied 5.7% last week and is up 3.6% from eight weeks ago. Yet, financials gained nearly 5% over the past five days and are down 3.2% from two months ago.
Figure 2 shows gains across most sectors of the market last week, with the exception of losses in the utilities. That’s a marked change from their two-month move. The broader SPX was up 3% last week but nearly unchanged from two months ago.
Market movement tells me there’s a lot going on below the surface of the major averages like the S&P 500 and upcoming earnings will likely help determine what sectors are winners or losers as the Q4 reporting season winds down over the next two weeks.
No Real Standouts?
Results have painted a mixed picture so far. For instance, according to Zacks Investment Research, two-thirds of financial companies have reported, with earnings collectively down 2.5% from a year ago. Yet, with 85% of tech names having released results, total earnings across the sector are up 14.4%.
Clearly, just as sectors of the market have been trading mixed over the past two months, earnings results are also all over the board. Up this week? Companies in the technology, health care, and consumer discretionary sectors. The soda battles (more like the soda alternative battles) continue with earnings from both Coca-Cola (KO) and PepsiCo (PEP) this week. Also on tap: TAP, that is, the results from Molson Coors, Starwood Hotels (HOT), Baidu (BIDU), and Tesla (TSLA).
As for the broader economic picture, this week starts with some geo-political implications as President Obama and German Chancellor Merkel meet up in Washington. Top of the agenda is likely to be Greece’s debt rebalance under new leadership there and the potential impetus on European Union health. The two powers are also likely to check in on the Ukraine situation, a major market driver late in 2014. Wall Street turns its attention to China, where consumer inflation figures are expected to show a significant contraction of as much as 0.7% year over year.
The U.S. economic calendar is light this week, but each data point hits in the context of a robust jobs report out last Friday. So, for instance, will the January increase in hiring and wages translate to stronger retail sales?
Action in the crude oil market, and weekly oil inventory data due out on Wednesday, could impact trading in the energy sector. Crude was a notable mover last week and, at $52.30 per barrel, is well above the late-January lows near $44.50 per barrel. The rebound is likely the key driver behind the relative strength in the energy sector.
Signals from the Bond Market
The upbeat jobs report sent Treasury bond yields sharply upward; the benchmark 10-year Treasury recaptured 1.9% after falling to one-year lows of 1.65% the week before. Rising bond yields, also known as market interest rates, initially are a reflection of stronger demand for stocks over bonds. Eventually, higher market rates could cause a ripple on nerves in the stock market as rates rising too far, too fast could stymie business growth. In other words, keep an eye on the bond market.
Developing stories related to the Greek banking bailout, economic data from other euro-zone countries, and peace negotiations between Ukraine and Russia are likely to remain headline items in the week ahead—a week capped with a Friday the 13th and a long weekend thanks to market closure for President’s Day next Monday. I expect plenty of volatility to continue to keep this market on edge.