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Stock Market Update: China Chaos Persists but Cooler Heads Emerge

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January 7, 2016

The S&P 500 (SPX) tested chart support near 1960-68 in Thursday’s session before a mild bounce that leaves both bulls and bears taking a new look at prospects for 2016. China’s growth concerns and oil’s slide have stained the broader financial markets, but intraday bounces for this closely followed commodity can invite spurts of volatility for stocks.

The biggest lesson for stock traders? Separate the need for small adjustments to your plan from tossing a plan out wholesale. You may not have to dump your longer-term perspective and your approach to trading markets. Instead, volatility bouts like the ones to open 2016 may encourage you to cut back on trading size, or to widen your stops and targets. Remember, much of the global markets’ biggest volatile moves are happening during the U.S. overnight, which can be a harder trading period to defend unless you’ve put the proper precautions in place.

And another important take-away? Intermarket analysis matters. Even with stocks under early pressure Thursday, waves of selling hit the bond market as well. That’s a departure from the “flight to safety” that had propped up bond prices, and drove down yields, to start the week and may be a sign that widespread market concerns are abating. There’s contradiction in one volatility measure. The CBOE Volatility Index (VIX), nicknamed the “fear gauge,” remains up some 13% near midday Thursday even with demand for “lower-risk” bonds waning. Another flight-to-safety stash is gold; it did break above $1100 an ounce on Thursday.

Near midday, leading stock averages, including the SPX, are down around 1.3% to 1.8%. The SPX is off 26 points, to trade near 1,964 (figure 1), improving from earlier weakness. Near-term SPX support may attract a few more pokes; another area of potential chart support lies in wait near 1922.

SPX stock chart

FIGURE 1: MORE TESTS?

The S&P 500 (SPX), plotted here through midday Thursday on the thinkorswim® platform, trades at its lowest since early October as volatility continues to grip financial markets. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Oil’s Impact. London-traded Brent crude recovered some during Thursday’s session, while U.S.-traded crude remained slightly lower, trading just below $34 a barrel. It had touched $32.10 earlier. Wednesday’s settlement price was the weakest since February 2004 as China’s economic bombs this week renewed concerns that an oversupplied global crude market could see demand from this giant consumer slump. Note that energy markets are also twitching in a bit of back-and-forth action considering how far they’ve fallen in a relatively short time. On Thursday, natural-gas prices rallied on the back of a much-bigger-than-expected drop in weekly U.S. supplies.

Macy’s, Yahoo Expected to Cut Staff. Energy shares have been the dominate market movers of late, so it’s been hard to drill down on company news outside of that sector. A few notable headlines added to the nervous mood on Wall Street Thursday. Macy's (M) shares, clobbered some 44% over the past year, gained traction after the department store chain announced steps to try to shore up its struggling sales.  Macy’s said its holiday quarter was worse than expected, so it outlined plans to cut $400 million in annual costs by closing stores and cutting thousands of jobs. The company also hired a bank to help reshape its real estate portfolio. Yahoo (YHOO), whose turnaround efforts have faced tough Wall Street tests, is reportedly preparing to slash another 10% of its workforce, according to Business Insider. And, KB Home (KBH) is down sharply Thursday after the home-construction firm missed Street expectations with profit and revenue figures.

Payrolls On Tap. Global market volatility set the tone in a week that initially was expected to feature Friday’s payrolls report and possibly little else. In the December release, due out at 8:30 a.m. Eastern, economists polled by MarketWatch expect a 204,000 increase in non-farm payrolls, which would be off November’s 211,000. Those economists believe 2015 finished with close to 2.5 million new jobs, which would be the second strongest growth year in this millennium. Keep an eye on Friday’s number; some industry economists may have upped their Friday payroll predictions after Wednesday’s private-sector hiring readout from ADP crushed Wall Street’s expectations.

economic report calendar

FIGURE 2: ECONOMIC AGENDA.

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

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