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Seeking Safety: Cautious Tone Prevails Amid Geopolitical Tension, Rising Volatility

August 11, 2017

(Friday Market Open) Fear awoke from its summer vacation and once again stalks the markets as tension sizzles between the U.S. and North Korea. Volatility, which forged record lows just a few weeks ago, reached its highest levels since last November.

International policy concerns remain a hot topic after North Korea outlined details for a missile strike near the U.S. territory of Guam, adding fuel to an uneasy situation. Every sector fell Thursday except utilities. Even defensive sectors like consumer staples and health care finished with significant declines, and the dollar showed weakness. Caution ruled the day as flight to safety continued, with gold, bonds, and VIX all gaining. Volatility, as measured by the VIX, rose 45%. The Nasdaq (COMP) is on track to have its worst week of 2017, barring any major rally today.

As we step back and consider this week’s action, it’s important to keep a few things front and center. We’re not seeing a major pullback. Rather, it appears to be profit taking. That’s not to say it can’t turn into something bigger, but right now it looks relatively small and is part of the normal cycle of trading. 

Saying a 200-point down move in the Dow Jones Industrial Average ($DJI) is “small” might sound strange, but it’s the market’s first 1% move in 55 trading days. That’s what makes it feel big. Historically, the normal pattern is to experience one of these types of days every few months, and that’s simply what happened. That said, geopolitical risk sometimes is a little different than market risk, and that’s something people should consider heading into Friday’s close. There could be a run for protection going into the weekend amid foreign policy tensions, so investors might want to be careful during the last hours of the trading day.

Earnings released Thursday and early Friday delivered a decidedly mixed picture. Kohl’s (KSS) and Macy’s (M) outperformed analysts’ expectations in Q2, but the outlook from M disappointed and shares fell. Snap (SNAP) reported a bigger loss than Wall Street had expected and didn’t see users rise to levels predicted by the Street. J.C. Penney (JCP) shares tumbled 16% in pre-market trading Friday after reporting Q2 losses that exceeded analysts’ expectations.

On the plus side, Nordstrom (JWN) topped earnings and revenue expectations and reported better than expected same-store sales growth after disappointing on that front the prior quarter. Nividia (NVDA) also had a good quarter. Shares of both these stocks rose in post-market trading.

Looking back at Thursday, there were lots of moving parts for a quiet summer day in August, as commodity prices (outside of gold) plunged on a bearish crop report. Economic data was mixed, though U.S. wholesale inflation, as measured by the Producer Price Index (PPI), dropped in July for first time in 11 months. That contributed to rate hike probabilities falling below 50% for the year, according to CME Group futures. The Consumer Price Index (CPI), released early Friday, rose 0.1% in July, below consensus estimates for 0.2%.

From a technical standpoint, the S&P 500 Index (SPX) fell below its 50-day moving average support of 2,448 on Thursday, while the NASDAQ plunged below its 50-day moving average of 6,271.

Info Tech


The info tech and financial sectors (purple line) were hardest hit by Thursday’s sell-off, with info tech falling more than 2% and financials off by 1.76%. Data source: Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Straight and Narrow: There’s been some scuttlebutt lately about how the recent rally has been too dependent on a few massive stocks, notably some info tech names, making it vulnerable to sudden pullbacks if investors lose their appetites for big game. Maybe people shouldn’t be so worried, though. Over the last 12 months, nearly twice as many companies in the S&P 500 have hit daily 52-week highs as we saw back in 1999 during the final year of the tech bubble, wrote Sam Stovall, of research firm CFRA, in a note to investors this week. In other words, this rally appears to be broader. In another positive sign, the number of S&P 500 stocks hitting new 52-week lows over the last year has been down two-thirds from 1999 and 50% less than the long-term average.

Earnings Estimate Up Again: The stock market might be getting slapped around this week, but that doesn’t mean earnings estimates aren’t rising. S&P Capital IQ consensus estimates now point to a 10.7% year-over-year rise in Q2 EPS, exceeding the 6.2% projected increase at the start of the quarter. The firm now sees all 11 sectors on the path to a positive Q2. Leading sectors include energy, info tech, and financials. S&P Capital IQ now sees EPS growth at 6.6% for Q3 and 11.9% in Q4. Strong earnings the last two quarters helped drive stocks to record highs before this week’s stumble. If and when some of the current noise dies down a bit, investors will likely resume their focus on company performance.

Do Your Homework: The stock market’s setback this week serves as a reminder to take another look at your portfolio and consider your allocations. The rally that’s carried stocks to record highs may have given you more exposure to stocks than you planned for at the start of the year or when you did that mid-year check-up we discussed a few weeks ago. Your weekend homework assignment is to review your positions and make sure you’re where you want to be.

Good Trading,

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