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Stocks Are Rocky as Yellen Sweats Valuation, Europe’s Bond Yields Rise

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May 7, 2015

U.S. stock markets flashed a deep-in-the-red open early Thursday then clawed back to near even as a better-than-expected jobless claims reading paled next to a flurry of market-moving headlines starting overnight.  It’s hard to pin the weakness on just one event. But one biggie was U.S. Federal Reserve chief Janet Yellen’s concern for “high” stock valuations. Her remarks looked to have kicked off selling in Asian markets. Europe picked up the torch as investors grew nervous over rising bond yields there.

What’s more, oil’s rise to above $60 a barrel changes the “cheap oil” conversation. While crude bounced between $45 and $60, stock markets only paid cursory attention. That changes now that $60-plus is back in the picture. The CBOE Volatility Index (VIX) pierced 16 Wednesday, its highest in over a month and the “fear gauge” could continue to tilt higher heading into Friday’s potentially market-moving jobs report.

The fundamental news drag could trigger some significant chart action for the S&P 500 (SPX).  We’ve talked about the notable 2100 line for SPX ad nauseam over recent sessions, with support at 2080 now in play. Tuesday’s close was a whisker above that line after several tough tests in that session. That finish was a potentially important achievement for the bulls. Some technicians say there’s not much in the way to slow a retreating SPX if it drops below 2080, with support next stepping in at 2040.

think_or_swim-SPX-support

FIGURE 1: TESTING SUPPORT.

The S&P 500 (SPX) tested support at 2080, closing near that level Wednesday. Data source: Standard & Poor’s. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Just What Did She Say? Here’s the likely stock-market trigger courtesy of the Fed chief: “I would highlight that equity market valuations at this point generally are quite high,” she said in a conversation with Christine Lagarde, the managing director of the International Monetary Fund, at an event, according to news coverage. “They are not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there.”

Jobless Claims Rise, Still Near 15-Year Low. The latest weekly tally of jobless benefits claims rose a slim 3,000 to 265,000, but the less-volatile four-week average slipped 4,250 to 279,500. All job market data is closely watched in the lead-up to Friday’s jobs report. In Wednesday’s ADP private-sector hiring tally, April’s sub-200K reading followed another sub-200K reading a month earlier. That was the first time for back-to-back results below that line in about two years. There are bright spots in the job market, there’s no denying that, and this pause could be transitory, but there’s no denying that the pace of job creation has slowed over the past several months. Now, what does that mean for stocks? Remember, it’s not uncommon to slip into that “bad news” is “good news” mindset. That’s because reports like these could slow down the Federal Reserve’s interest rate plans. March’s ADP report was pretty close to the Labor Market’s March version. Wall Street economists think Friday’s April payrolls tally will come in at 233,000. Are they rethinking?

Tesla Shares Lose Speed. The luxury electric-car maker gained late Wednesday after its latest earnings report beat Street expectations. But the light of day brought out different market analysis, including a couple of analyst notes picking on TSLA’s cash burn. Shares are down early Thursday.

Good trading,
JJ
@TDAJJKinahan

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