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Update: Healthy Haircut for Stocks? SPX 2000 Must Hold

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August 21, 2015

Is this the stock market’s healthy back-to-school haircut? Or a butch that will force the bulls (and the Federal Reserve) to take a good look at the global economy? That test may come with the broad S&P 500’s (SPX) ability to hold key chart and psychological support at 2000, a line it was tickling as of midday Friday.

Thursday’s stock retreat  was extended, flavored by another round of weakening Chinese factory data (one measure fell to a 6 ½-year low) and a surprise resignation from Greek Prime Minister Alexis Tsipras who called snap elections in his economically embattled homeland.

Stock and volatility measures are chewing up the charts. The CBOE Volatility Index (VIX), the broader stock market’s “fear gauge,” is up some 30% Friday, poking 24, and reflecting some trader demand to play volatility changes given the sharp about-face for stocks. For the week, VIX is up nearly 87%, making it the largest weekly percentage jump ever for the mood monitor.  VIX soars as the Dow Jones Industrial Average ($DJI) and the SPX have turned negative for the year and are on track for weekly declines of more than 4%; the tech-heavy NASDAQ Composite looks headed for a weekly loss topping 5%.

What’s interesting is this is clearly a risk-off scramble, likely reflecting some uncertainty among traders about where to put assets. The typical flow into fixed income is just not happening with this rout, likely because of interest rate unknowns. And gold is up only modestly. The biggest move is into volatility contracts, such as the VIX, as reflected in its huge run-up to end the week.

Friday’s move seemed to be cemented when China’s Shanghai Composite closed down 4.3%. Europe’s broad stock averages technically flirted with correction territory on Friday, on track to log their worst week of 2015. Oil shed another buck to trade just above $40 a barrel. And check this out: Oil is on track to log its 8th straight losing week, a streak last seen in 1986.



The S&P 500 (SPX) as of midday Friday is flirting with a drop below the closely watched 2000 line. Its late-week move did push SPX below the 200-day moving average, a key technical level. Data source: Standard & Poor’s. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Will They or Won’t They? The latest turn adds another layer of complexity to the Federal Reserve interest rate debate. Some analysts were quick to drop the odds of a September rate hike to below 50/50. Others think a September rate hike could still be a go because the Fed won’t want to spook markets by looking too worried about global deflationary pressures. Still, most industry analysts do feel the U.S. economy is currently less likely to reach 2% core consumer inflation in the medium term. Low inflation could keep the Fed sitting on its hands.

Farm Downturn Hits Deere. Deere & Co. (DE) earned $1.53 a share in its fiscal Q3, down from $2.33 a share a year earlier. But Wall Street was prepared. In fact, Deere’s result topped the Street expectation for $1.42. Sales fell 20% to $7.594 billion, topping Street expectations for $7.21 billion. The company said these results “reflected the continuing impact of the downturn in the farm economy as well as lower demand for construction equipment.” Deere expects Q4 equipment sales to fall about 24% from its year-ago comparison. Shares shed some 2% in the morning response to the report as investors worry about the continued drag from weakening global markets. This stock is up 2.5% in the year so far, outpacing the S&P 500’s (SPX) 1.1% loss.

Mixed Tech-Sector Results. Tale of the old versus new tech economy? Shares of cloud computing firm (CRM) gained after it raised its full-year outlook. Hewlett-Packard (HPQ) slipped in early action Friday after the PC maker logged its 15th revenue drop in the past 16 quarters.

Good trading,

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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