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Taking Perspective: One Bad Day Isn’t Entire Story, But Market Remains Nervous

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March 22, 2017

(Wednesday Market Open) More selling pressure could stalk the market early today following Tuesday’s plunge, but after the first 1% drop in well over 100 days, it’s important to take a big-picture look at the situation.

Yes, the market stumbled Tuesday and could slip again early Wednesday. But it was one bad day. Could it be the start of something more? Yes, but let’s keep things in perspective. Typically on days like this there’s some buying interest by midday, so keep an eye out for that possibility.

The important level to watch in the S&P 500 Index (SPX) is 2350. That had been a level of support, but the market closed below it Tuesday. The index isn’t too far off that figure, so it might be useful to watch 2350 today and see if the market can hold it.

Several factors combined to gang up on the markets yesterday. The first was weakness in crude oil. When oil turned lower, the rest of the market started to follow.

Also, concerns arose that trouble passing the administration’s health care bill could jeopardize the President’s future tax reform plan. Additionally, there’s still not enough detail around the tax proposal. Many investors are nervous about that, and it’s affecting confidence.

The retreat continued overnight, with Asian and European stocks falling in the wake of the U.S. sell-off. Japan’s Nikkei fell more than 2%.

Financials led the way down on Tuesday, falling nearly 3% as several big banks got hammered. It’s possible that slumping 10-year yields, which fell back toward the middle of their recent range, may be hurting the financial sector. The 10-year yield dropped to around 2.41% by early Wednesday, down from recent highs above 2.60% and not that far off of recent 2.3% lows. Higher yields tend to be positive for banks, which can make more money off of loans when interest rates rise.

Yields have been on the retreat pretty much since the Fed meeting last week, when the Fed sounded less hawkish than many investors had expected. And comments from Fed officials early this week about economic growth and inflation not being as rapid as expected only contributed further to that dovish takeaway.

With the stock market stepping back, volatility surged to two-month highs. The VIX pushed toward 13 for the first time since early January. While volatility remains low from a historic perspective, this sudden new life could roll into the coming sessions if investors continue to exhibit the kind of anxiety we saw on Tuesday. This week’s calendar is relatively light, but several key calendar items approach, including the March jobs report early next month followed by the start of earnings season. The key report today is existing home sales, due at 10 a.m. ET.

Speaking of earnings season, two important companies reported late Tuesday. FedEx (FDX) said its year-over-year earnings fell for the first time in four years, delivering the second disappointing quarterly results in a row. Operating margins slipped, and some analysts pointed toward fierce delivery competition the company faces from Amazon (AMZN) and other online vendors.

In addition, Nike (NKE) reported mixed results, coming in short of Wall Street analysts’ consensus on sales but beating big time on earnings. The stock plunged in pre-market trading.

Oil tumbled to a nearly four-month low below $48 a barrel early Wednesday as investors wondered whether OPEC would stick to output cuts and looked ahead to Wednesday morning’s U.S. weekly government report on domestic stockpiles. A Reuters survey of analysts projects a 2.6 million-barrel rise following last week’s surprise drop.

On the technical side, SPX support now lies near 2330.

S&P 500

FIGURE 1: GOLD AND COPPER TAKE DIFFERENT ESCALATORS

Gold and copper (purple line), tracked here on the TD Ameritrade thinkorswim® platform, have recently parted ways, as this 10-day chart shows. Copper sank Tuesday amid word of possible higher supplies and lack of news on the Trump infrastructure plan. Meanwhile, gold rose as the dollar sank. Source: CME Group. For illustrative purposes only. Past performance does not guarantee future results.    

Copper Slumps: While many focused on the stock market’s sharp losses Tuesday, the copper market — often seen as a proxy for the wider economy due to the metal’s use in so many industrial applications — also came under selling pressure, falling 2%. Some of the selling seemed related to supply news, media reports said, as supply disruptions in Chile and Indonesia could be coming to an end. But the Trump administration’s failure so far to unveil details of its infrastructure plans may also be having a negative effect on the metal. Copper remains up for the year, but is down more than 20 cents a pound from its mid-February peak.

Dollar Rally Stalls Out. After hovering around 102 through most of early March, the U.S. dollar index ($DXY) has been on a steady decline, finishing Tuesday at 99.72, around the lowest levels since early February, mostly on strength in the euro and British pound. The pound rallied above 1.25 versus the dollar as a fresh inflation reading came in at 2.3% - the strongest since 2013. Meanwhile, on the continent, a strong debate performance from French presidential candidate Emmanuel Macron, a centrist, sent the euro above 1.08. Combine that with U.S. Treasury yields drifting lower amid yesterday's downturn in equities, and it's easy to see why the dollar index is softening. While it didn’t help stocks much on Tuesday, a falling dollar, if it turns out to be a trend, could ultimately give some aid and comfort to multi-nationals and other companies that rely more on exports, including agricultural, health care, and info tech firms.

Foodies' Delight: Anyone shopping for their favorite recipes lately may have noticed a nice surprise: Lower prices. Prices of supermarket items declined 1.3% last year, compared to the year before, says the Agriculture Department's Economic Research Service. It was the first annual decline since 1967. Looking at specific retail food categories, prices declined 21% for eggs, 6.3% for beef and veal, 4.1% for pork, and 2.3% for dairy and related products. However, not all foods declined in price — fresh fruit prices rose 2.2%. All this may sound nice for shoppers, but it could be causing trouble for the food and staples retailing sub-sector of the S&P 500 consumer staples sector. This particular sub-sector is down more than 1% over the past month, trailing the overall S&P 500 by a wide margin. Some of the companies whose stocks have struggled include Whole Foods (WFM), Kroger (KR), and Costco (COST). Target (TGT), which has made a big commitment to groceries, has also seen its stock struggle of late.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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