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Is the Sell-Off Pain Over? Markets Slump in Early Going; Can They Recover?

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October 12, 2016

(Wednesday Market Open) The three major benchmarks were treading to the downside again in early trading today after a brutal bruising Tuesday in the worst sell-off since early September.

What’s likely to put a fire under the markets today? With little earnings and economic news on the agenda, it may be when investors begin to scrutinize the Federal Reserve’s transcripts of last month’s FOMC meeting later today. You remember it: Fed members voted to continue the stimulus policy but the vote was far from unanimous. Was it a contentious meeting? (See below.)

The 1% Club was in play yesterday when nothing appeared to get a trading break as all three major benchmarks lost 1%-plus in value and crude-oil prices took a tumble alongside them. Even the usual safe-haven assets like gold, silver and copper stumbled. Meanwhile, the fall-out from Brexit appears to still be pulling down currency as the dollar rose and yields fattened to 1.76%. Not surprising, the so-called fear gauge, the VIX, soared 16%.

In the early going, West Texas Intermediate (CLX6) futures were edging above $51.00 a barrel ahead of tonight’s start of OPEC meetings in Istanbul. Commodities were heading lower again, with platinum prices marking six-month lows while the dollar moved higher. In Britain, the pound touched record lows in the European markets but began to recover somewhat after the U.K. government offered relief by easing fears of a “hard Brexit,” according to MarketWatch.

What also may concern traders now is where the S&P Index (SPX) may be headed. All 11 sectors dipped yesterday to push the index below 2,138, a key support level, in intraday trading. It tapped a low of 2,128 before settling at 2,136, which some market analysts worry may send a negative message about what’s ahead. Typically, if SPX can’t hold at key support levels, it may set the markets up for more weakness ahead. What may be worth noting, however, is that it did hold at that support level. What’s ahead today?

S&P 500

FIGURE 1: HOLDING THE LINE.

The S&P 500 (SPX), plotted here through Tuesday's close on the TD Ameritrade thinkorswim® platform, touched the 2,128 support level and closed above it. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Retail Traders Jump in with Both Feet. Another month, another uptick in net stock buyers among TD Ameritrade’s investors, according to my colleague Nicole Sherrod, managing director and active trader here. TD Ameritrade’s Investor Movement Index®, or the IMXSM, climbed higher for the second straight month and the fifth in six as traders tracked by TD Ameritrade were net buyers of equities.

The IMX climbed to 5.49, up from 5.26 in August. That puts it about 25% higher from the 52-week low recorded earlier this year. The index hasn’t been at these levels since September 2014. It tumbled to a trough of 4.33 in March before its upward march.

“September’s 4.37% rise in the index from August was a bit more subdued than the previous month’s 12% jump,” she said. “But looking at the data, there’s little doubt that retail investors have had more appetite lately for stocks, especially those that are a little beaten down or offer attractive yield.

“And market volatility remained low in September, despite a brief spike in the middle of the month prior to the Fed meeting, which kept relative volatility of widely held positions elevated,” she added. “For the most part, they’re not charging in to buy stocks that are achieving new highs,” she said. “They’ve taken profit on some of those names and, instead, seem to be looking for good dividend opportunities and stocks that have fallen out of favor for one reason or another.”

Was there a Fed Fight? How will the markets react to the Federal Reserve’s release of the minutes of its September FOMC meeting? The Fed, as we all know, held its interest-rate policy intact, but the meeting apparently was not without contention, as evidenced by the three dissenting votes. How prickly was the discussion, especially among a group of economic thinkers who don’t tend to be terribly boisterous?

In a press conference after the announcement, Fed Chair Janet Yellen characterized the meeting as calm with a majority thinking it was prudent to hold interest rates tight. But a three-member discord represents the largest opposition bloc in at least two years, according to Fed watchers. Were there fireworks or were the arguments friendly and polite? The transcripts will be out at 2 p.m. ET. Yellen also will share her thoughts on Friday at a conference in Boston.  

At this point, the markets appear to have all but given up any thoughts about a rate hike in November, but December’s probability now sits at just under 70%, according to the CME’s FedWatch tool.

The Real Earnings Kick Off. Yesterday’s market routing was fueled, in part, by Alcoa’s (AA) surprising early release of results that fell short of Wall Street’s expectations. The biggest miss was in sales, and Wall Street has shown time and again that it will punish companies when the top line isn’t pretty. AA shares plunged deeper than 11% and appeared to set a grim tone to the unofficial kick off of the third-quarter earnings season.

But the real fireworks will start on Friday, when three of the nation’s largest banks—Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC)—open their books. The low-interest rate environment and WFC’s scandal issues aside, the financials have a tendency to offer a good barometer of what’s happening in the economy and to consumers.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 1:

Source: Briefing.com

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JJ Kinahan

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

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