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Market Update

Housing, Quadruple Witching In Focus As S&P 500 On Four-Day Loss Streak

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March 16, 2018

(NOTE TO READERS: JJ Kinahan is traveling today, so the following is a guest Market Update column written by Shawn Cruz, Manager, Trader Strategy at TD Ameritrade).

(Friday Market Open) It’s been nearly eight months since the S&P 500 Index (SPX) finished a whole week without recording even a single day of gains, but it has a chance to do that Friday if the current malaise continues. Quadruple witching and housing numbers could help drive the market as investors start gearing up for next week’s Fed meeting.

Losses were kind of limited Thursday as the SPX fell just two points. Still, it was the fourth day in a row of declines for the index. The Dow Jones Industrial Average ($DJI) actually scampered up more than 100 points for the day, helped by strength in the industrial and financial sectors. However, the Nasdaq (COMP) and Russell 2000 (RUT) also enter Friday coming off of weakness, and the SPX hasn’t had a positive day since its fierce rally at the end of last week. That rally continued early Monday, but the SPX couldn’t hold gains above 2,800 and it’s been pretty much downhill since then.

The last time the SPX managed to fall every day in a calendar week was the week of July 31, 2017. The markets had a mini-slump at that juncture, but revived by early autumn. A key marker to watch on Friday is the 50-day moving average for the SPX, which lies just above the indice’s current level at 2,748. Any sustained move above that could potentially generate some buying momentum, but failure to break through this important technical road sign can sometimes weigh on the market. At times like this, when news is rather thin, the technical factors sometimes can come into play a bit more than usual.

Another factor to watch today is quadruple witching, which represents the quarterly expiration of futures and options on indexes and individual stocks. The last time “quadruple witching” took place, on Dec. 15, the market had the busiest day of the year with 10.7 billion shares changing hands, Bloomberg News pointed out. S&P Dow Jones expects $23.1 billion in securities to change hands as a result of quadruple witching today. Sometimes volatility can spike on quadruple witching days, so caution might be warranted. Volatility slid slightly on Thursday but the VIX remains above 16. 

Outside factors continue to blow some chill winds on Wall Street as the week advances, with trade war worries still in the headlines along with some additional developments related to the Russia investigation and potential Administration reshuffles. The 11 S&P sectors finished mostly lower yesterday, with three advancing and eight declining. The industrial sector (+0.3%) was the top performer, while materials (-1.3%), consumer staples (-0.6%), and energy (-0.4%) finished at the bottom of the sector standings, Briefing.com noted.

The news on housing looked bearish Friday, though one month’s report is never enough to be a trend. Housing starts declined 7% to a seasonally adjusted annual rate of 1.236 million units in February, the Commerce Department said. Before the report, economists had forecast housing starts falling to a pace of 1.283 million units last month, according to Briefing.com. Permits for future home building decreased 5.7% to a rate of 1.298 million units in February.

The numbers marked a sharp turn-around from big gains in January. Though some analysts said February’s data meant the housing market is slowing, it would take a few months of similar numbers to confirm that kind of observation. Existing home sales and new home sales next week suddenly look more important, however, as investors try to get a sense of the full housing picture. 

Also on the data calendar, keep a lookout a little later this morning for University of Michigan preliminary sentiment for March. The headline number is expected to be 99.5, according to consensus among Wall Street analysts, down just a touch from the prior 99.7. Both are strong figures, but it’s also sometimes interesting to check the press release that goes with the report for any qualitative observations about how the average consumer is feeling.

A bunch of minor data came out Thursday, and it looked like a mixed bag. Low weekly jobless claims added to the bullish picture around employment, while the Empire Manufacturing Survey rose nicely from weakness the prior month. However, the Philadelphia Fed Survey for March decreased, and many of the surveyed companies reported labor shortages. If that trend continues, it could raise inflation concerns.

Speaking of inflation, a lot of the buzz going into the new week is probably going to center on the Fed meeting, which starts Tuesday and could provide a fresh look at the Fed’s inflation and economic projections. It also means a new “dot chart” showing where Fed officials expect rates to be in the coming quarters. Yields in the interest rate complex settled back toward the lower end of their recent range Thursday, trading near 2.82% for the benchmark 10-year Treasury bond. The yield was at 2.83% by early Friday.

Tiffany (TIF) reported this morning, and that’s always one that’s fun to look at for a sense of how “the other half” are living, so to speak. The company’s results topped Wall Street analysts’ expectations in the holiday quarter. Shares of TIF rose 2% in pre-market trading Friday, and are up 14% over the last year. That’s just a touch below the SPX’s year-over-year rise.

Transports

FIGURE 1: TRUCKIN' ALONG.

The transport sector, sometimes viewed as a proxy for broader market health, has been choppy lately but basically has gotten back to where it was a month ago (candlestick chart). The S&P 500 (SPX, marked by purple line), has traded pretty much in sync with transports lately. If the two diverge, it could provide a better sense of where the market is going. Data sources: Dow Jones, Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Talking Technicals: As stock indices struggle to get into the green, it seems there might be a technical factor at work. Namely, the S&P 500 rallied sharply last Friday and then followed through with a strong open Monday. At one point Monday, the index climbed above 2,800 for the first time since early February, but then it abruptly lost ground and ended up finishing the day lower than Friday’s close. In technical terms, this kind of move is sometimes seen as a reversal, putting the market on shaky ground. Volatility has also charged higher this week, with VIX mostly staying above 16 after falling under 15 last week.

Gap Closing: No, not the clothing chain! The yield curve, which measures the gap between two-year and 10-year Treasury bond yields, has fallen back below 55 basis points this week, approaching the decade lows posted in January. Sometimes when longer-dated Treasury yields decline while shorter-term ones rise, it can reflect a “flight to quality” as investors seek to tie up their funds in longer-term investment options (remember that bond prices move inversely to yields). People who are nervous about economic fundamentals often are willing to take a lower yield if they can put their money away for a longer period in something they consider “safe,” though it’s important to remember that no investment is truly “safe.”

This week, lower-than-expected readings on inflation and retail sales, along with fear of a possible trade war, seem to be driving some investors toward the long end of the fixed income complex. In times of uncertainty, yield curves can flatten and even invert, which is when shorter-term bond yields rise above yields of longer-term bonds. Many economists see an inverted yield curve as a possible recession indicator, though it’s fair to point out that the curve is still well above those levels. However, it does bear watching, particularly if more weak data hit the news.

P/E Watch: Another “gap” worth watching is the one between stock prices and projected S&P 500 earnings, or the price-to-earnings (P/E) ratio. The SPX’s forward P/E has moved up over the last few weeks and once again is approaching 18, according to research firm CFRA. At the depths of last month’s sell-off, it had fallen to around 17, but it was back at 17.7 by mid-week. These levels are below the ones earlier this year before the market corrected, but remain historically high.

A high forward P/E might be warranted if you think earnings have more room to run. Many Wall Street analysts are pretty bullish about earnings growth this year, particularly in light of corporate-friendly tax cuts. For instance, CFRA predicts overall earnings growth of nearly 19% in 2018. In addition, Q4 earnings exceeded many analysts’ expectations. If earnings continue to light up the Street, perhaps the forward P/E might start to look a little cheaper, assuming stock prices don’t start galloping higher again. Keep in mind that although stocks have come back from their early-February lows, the SPX remains about 4% below its all-time high of late January.

All the best,
Shawn

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Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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