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Could Five-Week Win Streak Be Broken? Street Lower On Weak Oil, Fed Remarks

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March 24, 2016

(Thursday Pre-Market) Pressure continued to stalk the Street early Thursday amid concerns about Fed policy, falling commodity prices, a stronger dollar, and weakness in overseas markets. The S&P 500 has gone up for five-straight weeks, but that could be in jeopardy if today’s early trends continue. U.S. stock markets are closed Friday for the Good Friday holiday.

Over the last few days, several Fed leaders have mentioned the possibility of an April interest rate hike. On Wednesday, St. Louis Fed President James Bullard became the latest Fed official to discuss a possible April rate move, telling Bloomberg in an interview that another strong jobs report could “probably make the case for moving in April.” Bullard spoke again early Thursday, and CNBC quoted him saying a rate hike is “not far off” provided the economy evolves as expected.

Dollar strength continued after Bullard’s hawkish comments, with the dollar now up 1.5% on the week against a basket of other currencies and on its longest run of gains since almost a year ago. The euro fell to $1.11 early Thursday, its lowest level in a week. With earnings season beginning soon, it will be interesting to see how U.S. companies, especially those reliant on exports, performed in this strong dollar environment.

The dollar rally, along with a bearish U.S. supply report, helped pressure oil early Thursday, with front-month U.S. oil futures recently falling below $39 a barrel. Yesterday’s weekly U.S. oil stockpiles data from the Energy Information Administration (EIA) showed a much larger than expected build of 9.4 million barrels, offering more evidence that heavy supplies haven’t gone away. All this year, we’ve seen equity markets slide when oil is weak, and the correlation between oil and equities appears to still be with us. There’s no reason to think that will change in the short term, though the correlation is a little lower now than it was earlier this year.

Weakness in Asian and European stock markets also helped contribute to the bearish mood early Thursday, with a number of overseas indices down 1% or more. Gold was also down, hurt partly by the strong dollar.

Despite the more hawkish comments from Fed leaders, yields on U.S. 10-year Treasury notes traded lower early Thursday, around 1.87%, down from highs of near 2% last week.

On the data front, February durable goods orders fell 2.8%. Non-defense capital goods orders excluding aircraft, decreased 1.8 percent after advancing by a downwardly revised 3.1 percent in January, Reuters reported.

S&P 500

FIGURE 1: TWO-DAY SLIDE FOR SPX.

The S&P 500 (SPX), plotted here through Wednesday on the TD Ameritrade thinkorswim® platform, fell Wednesday for the second-straight session, the first time that's happened in more than a week. Resistance remains at 2050. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Two-Day SPX Slump: Wednesday was the second-straight down day for the SPX, the first time that’s happened in more than a week. If you were wondering when the SPX last closed lower for more than two days in a row, you’d have to go back to the slump of mid-February, when the SPX closed lower for five-consecutive sessions ending Feb. 11. Coincidentally, that was the same day the index logged what so far has been its low for the year, at 1810.10. Even with this week’s losses, the index remains up more than 12% from the Feb. 11 low. Resistance now is at 2050, a mark that the index didn’t reach on Wednesday. Indeed, after reaching resistance above that at 2056 intraday Tuesday, the SPX has made an about face.

New Home Sales Rise, But Gains Concentrated in One Region: February new home sales rose 2% to a seasonally adjusted annual rate of 512,000 units, the Commerce Department said Wednesday. New home sales gains were concentrated in the West, where they rose more than 38% from the previous month. Other regions were weaker, with new home sales falling more than 24% in the Northeast. Existing home sales rose in January and fell in February, while new home sales fell in January and rose in February. Economists say rising prices and limited housing supplies are impacting the market.

Fed Funds Futures Eyed: With the hawkish remarks recently from Fed officials, Fed Funds futures are showing rising chances for rate hikes. The chance of an April hike is now at 14%, according to the futures market, with June at 34%. July is a 50-50 proposition.

Good Trading,
JJ
@TDAJJKinahan

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