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D.C. Haymaker: Market Licks Wounds, Investors Seek Shelter Amid Political Storm

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May 18, 2017

(Thursday Market Open) The market keeps shivering as icy winds of political controversy blow through Washington, D.C. Yesterday’s big sell-off generated lots of fear, and many investors gravitated toward safe havens as they sought shelter from the storm.

Market participants rushed this week to embrace the three pillars of risk: Gold, Treasuries, and the VIX — the market’s best-known fear gauge. All three remain well above last week’s levels, with VIX in particular posting sharp gains. Politics remains the story everyone is talking about early Thursday, and it’s unclear when the clouds might lift.

Why the rush to protect? People are nervous. Sometimes when the market takes a plunge it’s due to economic factors like earnings or weak oil. But this time it’s different because the focus of concern is politics. When there’s a political end to things, it tends to take people longer to figure out what to do.

Though the situation in Washington doesn’t promise any quick resolutions, on a day-to-day basis the first half hour of a session can sometimes give a good indication of the market’s collective mood. Watch what happens in those first minutes to see if the downside momentum continues or if there’s a bounce. The question is whether investors see this as a buying opportunity. Technical support for the S&P 500 Index (SPX) is at 2348.

There’s a lot of speculation now as to whether we’ll see investors buying this dip. People have used market bottoms as buying opportunities for the past five years, and it typically has paid off, so at some point we might see some investors take a stab at it. To borrow a football analogy: If you’re running a sweep and the defense can’t stop the sweep, you keep doing it. People tend to repeat patterns that work. We’ll see if that’s the case this time.

Thursday morning brought earnings from Wal-Mart (WMT), which looked mostly positive despite a slight miss of top-line expectations. U.S. same-store sales rose, earnings came in above Wall Street analysts’ expectations, and shares ticked up in pre-market trading. Consumers are out spending and it’s up to retail to figure out how to keep them coming. More key earnings hit the tape tomorrow morning (see below), and a couple of Fed speakers are on the agenda late this week. Stay tuned.

Selling was widespread in Wednesday’s decline, but financials took the biggest hit, falling more than 3%. The sector had already had been struggling to stay above the unchanged mark for the year, and slumped amid concerns that some of the president’s agenda items like bank reform might be delayed or even scuttled due to controversy swirling in Washington. Additionally, Fed funds futures showed lower odds of additional rate hikes this year, a bearish sign for the banking sector.

Other major sector slides Wednesday included high-flying info-tech, which fell nearly 3%, along with materials, industrials, and consumer discretionary. Only real estate and utilities gained. VIX, which had dropped below 10 earlier this month, recently traded above 15.

It’s important to keep Wednesday’s steep losses in perspective. While it’s worrisome to see markets tumble, indices remain near record highs and sell-offs like these aren’t rare at such lofty levels. Furthermore, there’s no crisis with the economy, as data have improved a little from softer numbers earlier this year and Q1 earnings easily exceeded most analysts’ estimates.

Additionally, a falling dollar could help U.S. exporters, while lower Treasury yields might help make stocks more attractive to some investors. Previous market slides this year have pulled in buying interest, and there still seems to be a lot of cash on the sidelines.

That said, the action over the last 24 hours shows why investors don’t want to get complacent, especially when we’re in what appears to be a more news-driven cycle. For a few weeks, it was relatively easy to say what the market would react to each day, with earnings and key economic data crowding the calendar. Now, earnings are over for the most part and there aren’t any major economic reports until after Memorial Day, so there’s better chance of distractions from events outside of the normal course of business. On Wednesday, it was the political environment in Washington, D.C., that took a big bite out of stocks, but in days to come it might be geopolitics or some other occurrence.

Times like these are good ones for investors to take a closer look at their portfolios, make sure they’re well balanced, and not necessarily go all in with new major positions. While it’s important to consider a cautious approach, it's never wise to panic, either.

 

FIGURE 1: FINANCIAL STRUGGLES

The S&P 500 (SPX) financial sector, plotted through Wednesday on the thinkorswim® platform from TD Ameritrade, plunged 3% on Wednesday, hurt by falling Treasury yields (purple line) amid growing concerns about political turbulence in Washington. Data sources: Standard & Poor’s, CME Group. For illustrative purposes only. Past performance does not guarantee future results.

Rate Hike Odds Retreat: A week ago, a June rate hike looked like a slam dunk. Fed funds futures projected a better than 80% chance of a rate increase after strong April jobs growth indicated economic strength. Now, things aren’t so certain. Odds of a hike have fallen to below 60%, and the market is beginning to also pull back on odds of future rate hikes this year, despite Fed speakers saying last week that two additional hikes are likely. Treasury yields headed back down toward recent lows Wednesday, a sign of possible concerns over the pace of economic growth. Cleveland Fed President Loretta Mester speaks later today and St. Louis Fed President James Bullard speaks on Friday morning, and it might be a good idea to listen to their remarks for any signs of more dovish tones regarding the June meeting. 

Deere, Foot Locker Highlight Friday Earnings: The earnings calendar tomorrow includes Deere (DE) and Foot Locker (FL). DE’s previous results were pressured by soft conditions in the farm and construction equipment sectors, so the question is whether the company saw any improvements in those categories. It’s also worth checking to see how DE did internationally. Commodity prices remain under pressure, which conceivably could affect the most recent quarter. FL, like a lot of retailers with a big presence in shopping malls, faces challenges, and retail sales early this year were rather light in general across the economy. Last time out, however, FL beat earnings and same-store sales expectations as sneaker sales raced higher.

Experiencing Technical Difficulties: Wednesday’s steep losses took the S&P 500 Index (SPX) below key technical support at the 50-day moving average of 2369. Additionally, the SPX once again topped out at around the 2400 mark this week, which also marked a previous high posted in March. The SPX’s failure to push beyond that 2400 level and the slide below support could spell further technical difficulties ahead, analysts said, but recent pullbacks have generated buying interest. The question is whether this time it’s different due to political uncertainties in Washington, D.C., and concern over possible related delays in market-friendly agenda items like tax reform.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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