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Market Flash: Rough Start to 2016; Jobs Report a Looming Test

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January 4, 2016

U.S. stocks tumbled to start 2016, a drubbing once again at the hands of Chinese news that provides a not-so-gentle reminder about the intimacy between all major markets.

It’s also an urgent reminder to stay calm in your trading endeavors, even on days that may feel like a punch in the mouth. There’s potential psychological baggage when a big move (in either direction, but especially down) kicks off a new trading year. Already, this market may have felt a little vulnerable following the oil-obsessed, mixed and murky finish to 2015. But no one should feel like they have to be the first on Wall Street--or even on their own street--to call the bottom for this long-running bull market. Let’s repeat: It is only the first day of the year.

The U.S. slide followed an almost 7% drop for China’s Shanghai Composite Index, a move that triggered China’s recently implemented circuit-breaker system. Chinese stocks trading in mainland China were locked down for the remainder of that session, but the impact carried on throughout the global trading day. The Dow Jones Industrial Average ($DJI) shed over 400 points at one point. The S&P 500 (SPX) fell some 45 points (figure 1), shaving over 2%, led by a drop for its technology share listings. In fact, the tech-heavy NASDAQ Composite (COMP) fell some 2.9% near midday. In a departure from the chief factor driving late-2015 trading, the SPX’s energy sector was a Monday gainer. It rose when the latest Middle Eastern tensions helped lift crude-oil prices.

The market’s so-called “fear gauge,” the CBOE Volatility Index (VIX), pushed above 22. That’s territory it did briefly tickle in mid-December, but otherwise is the highest reading for the gauge in a few months.

S&P 500 stock chart

FIGURE 1: NEW DEPTHS?

The S&P 500 (SPX), plotted here on the thinkorswim® platform, dropped below 2000, and next could challenge major support at 1989. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

The Trigger?

Some market watchers are arguing that the sloppy finish to 2015 left many participants looking for a reason to sell and China was simply the easiest catalyst to finger. But closely watched data from this growth engine has been a touchy subject for stocks. Remember August?

As reported today, privately held Caixin Media Co. said Monday its China manufacturing purchasing managers' index was at 48.2 last month, down from 48.6 in November. This is the 10th straight month of a below-50 reading for the index. That’s the line that separates expansion from contraction.

Chart Points

Chartists will likely point to downside support at SPX 1989 as the next potential major test for this broad-market measure. Shy of that, a finish above the 2000 line pierced earlier today could be declared a minor victory for the bulls as that line tends to hold psychological significance for the stock market.

As for VIX, which tends to move opposite the SPX, resistance lies in wait near 27.

Let’s see where trading shakes out in coming sessions, considering oil’s influence and the looming job market report at week’s end. See our full look at the week ahead and the economic calendar, below.

economic report calendar

FIGURE 2: ECONOMIC AGENDA.

This week’s U.S. economic report calendar. Source: Briefing.com.

JJ Kinahan

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

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