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Safety Back in Play After Sell-off Driven By Perceived Weakness In Key Earnings

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August 18, 2017

(Friday Market Open) The safety trade is back in town after yesterday’s earnings-driven sell-off, with gold, bonds and the VIX all on the upswing. Markets tend to dislike uncertainty, and there seems to be plenty to go around.

While the bad news came on multiple fronts Thursday, the downward action should remind everyone of what we’ve been saying over and over about earnings driving the market. Though the sell-off had a political tinge, negative investor reaction to Cisco (CSCO) and Wal-Mart (WMT) results played a major role. The sad news from Barcelona was a contributor, but not a primary driver.

Every S&P 500 sector lost 1% or more yesterday. Info tech took the biggest hit, falling nearly 2%, while financials, industrials, consumer discretionary and materials all fell more than 1.5%. Not a single sector posted gains. However, it was a pretty orderly, methodical sell-off all the way down. WMT earnings helped get the selling started, but a lot of that concern centered on the company missing Wall Street’s estimates for its Sam’s Club unit. Keep things in perspective: Sam’s Club represents just 6% of WMT’s revenue.

As badly as the SPX performed Thursday, the Nasdaq did even worse as info tech shares took a fall. Weaker earnings from CSCO than Wall Street expected might explain part of that setback for tech. The small-stock Russell 2000 also posted a worse outcome Thursday than the SPX (see chart).

European stocks moved lower Friday in the wake of Thursday’s tragic Barcelona terror attack, with airline and hotel stocks particularly weak on concerns that terrorism might hurt the travel industry. Keep an eye on U.S. transport stocks today for any possible reaction.

There’s growing concern from many investors about the strength of this long rally that hasn’t seen a major setback in more than a year. The mentality many people have about buying stocks when they fall has helped keep the market climbing, but it is concerning if investors start to become complacent.

Retail remains in the spotlight from an earnings standpoint. Gap (GPS) reported strong results, with the company posting Q2 same-store sales that surpassed estimates from Wall Street analysts and raising its full-year profit forecast. Shares rallied more than 6% in post-market trading. On the negative side, Foot Locker (FL) missed analysts’ earnings and revenue estimates by a good margin and shares plunged 20% in pre-market trading. Other retail stocks fell in sympathy.

The other big earnings report this morning comes courtesy of Deere (DE), which could give insight into both the agriculture and construction industries. DE is a big multinational with a major export presence, so listen to its call for any insight into the trade environment. The numbers on its earnings report were mixed, with the company beating analysts’ average estimate on earnings per share but missing on revenue. DE did raise its outlook for the year.

Looking at the technical picture, yesterday’s setback took the S&P 500 Index (SPX) to new lows for the month, beneath the depths reached during last week’s North Korea-related sell-off and into the middle of a technical support range that research firm CFRA said lies between 2423 and 2441. Keep an eye on the bottom of that range Friday because a move below that might open the way to more selling. It looks like there may be additional support down around 2412, a level last tested in early July. That could make investors a little nervous, because there’s a large gap between where the SPX sits now and the 2412 mark.

Russell 2000

FIGURE 1: MISERY LOVES COMPANY.

The Russell 2000 (RUT) and Nasdaq (COMP, represented by the purple line on this five-day chart), fell pretty much in sync on Thursday and both performed worse than the S&P 500 (SPX). Small stocks and info tech suffered big losses on the day, and the RUT has been under pressure for some time. Data sources: Nasdaq, FTSE Russell. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.   

Big Growth Seen in Q3: We’re a long way from the end of the current quarter and a lot could still change, but it looks like gross domestic product (GDP) is growing at a pace not seen in a while. The Atlanta Fed’s GDP Now indicator predicts 3.8% GDP growth, up from the current government estimate of 2.6% in Q2 and 1.2% in Q1. If growth does hit 3.8%, that would be the strongest for any quarter in three years. Some recent economic data, like strong retail sales and jobs growth, might be a factor in rising GDP. However, the housing market bears watching, because last month’s housing starts and building permits data came in lighter than analysts had expected. If housing doesn’t improve, we might see that 3.8% prediction start coming down. Pay close attention to next week’s new home and existing home sales data for July.

A Hard Look at “Soft” Data: Although sentiment is sometimes considered “soft” data because it doesn’t measure anything you could potentially weigh on a scale like industrial output or retail sales, it can still be important when it comes to predicting how consumers might act in coming weeks and months. Today brings the first August reading for Michigan sentiment, and consensus is for a headline figure of 94.0, up from 93.4 in July, according to Briefing.com. Despite a small decline in July, the Sentiment Index is higher for the first seven months of 2017 than in any other year since 2004, but read the report carefully to see if it still reflects what recent reports have said about political partisanship possibly influencing consumers’ outlook.

Seeking Safety: With equities taking a blow, some of the flight-to-safety trade appeared to return. Bond prices rose, sending 10-year Treasury yields back below 2.2% by early Friday. Gold hit $1,300. The dollar fell vs. the yen and the VIX climbed more than 30% back toward last week’s highs around 16 before retreating slightly early Friday. Keep an eye on VIX, gold, and bonds as the weekend nears, because sometimes investors flock to safety in the closing minutes of trade. However, every time VIX has popped lately, it’s come right back down. We’ll see if that holds true today.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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