U.S. markets showed continued weakness on Monday’s open and a backtest towards the 50-day major moving averages before rebounding off session lows.
However, the selling pressure increased into the closing bell with late November support coming into play as the major indexes gave back all of their gains for 2018.
It remains to be seen if a short-term bottom is in, as other major pullbacks have been bought, and will depend on how much volatility settles down on any rebound.
The Dow dropped 4.6% after falling 1,597 points to a low of 23,923 and 10% off its all-time high of 26,616 set just 7 sessions ago. The S&P 500 sank 4.1% after testing a low of 2,638 and was 9% of its all-time high of 2,872, at one point.
The Nasdaq gave back 3.8% after testing a low of 6,967 late in the day. The index rebounded over 200 points shortly after the open to trade into positive territory before the selling pressure returned.
The Russell 2000 traded in negative territory throughout the session while bottoming at 1,491 to push early November support while closing below its 100-day moving average.
Financials were crushed for 5% while Industrials and Health Care were punished for 4.5% and 4.4%. There was no sectors that closed in positive territory.
Global Economy – European markets were down for a third-straight session with heavy losses. The Stoxx Europe 600 fell 1.6% while UK’s FTSE 100 and France’s CAC 40 dropped 1.5%. The Belgium20 declined 1.4% and Germany’s DAX 30 gave back 0.8%
The Eurozone January Markit composite PMI was revised upward to 58.8 from the previously reported 58.6, the fastest pace of expansion in nearly 3 years.
The Eurozone February Sentix investor confidence dropped 1 to 31.9, weaker than expectations for a rise of 0.3 to 33.2.
Eurozone December retail sales fell 1.1% month-over-month, weaker than expectations of for a decline of 1%.
Asian markets were mostly lower with China’s Shanghai bucking the trend after adding 0.7%. Japan’s Nikkei sank 2.6% and Australia’s S&P/ASX 200 stumbled 1.6%. South Korea’s Kospi tanked 1.3% and Hong Kong’s Hang Seng tumbled 1.1%.
The China January Caixin services PMI was up 0.8 to a record high 54.7, topping expectations for a drop of 0.4 to 53.5.
January PMI Services Index Level came in at 53.3, matching expectations.
January ISM Non-Manufacturing Index bounced 3.9 points to 59.9, a new record high, versus forecasts for a print of 56.2. The employment component surged 5.3 points to 61.6, also a fresh all-time peak, from 56.3. New orders jumped 8.2 points to 62.7 from 54.5. New export orders rose to 58 from 56.5 while imports were up 1.5 to 54 from 52.5. Prices paid also climbed to 61.9 from 59.9.
January TD Ameritrade IMX Level checked in at 7.79.
Market Sentiment – Fedspeak is back in focus following today’s swear-in of new Fed Chair, Jay Powell.
His comments afterwards stressed his commitment to explaining what Fed members are doing and why as they are tasked with achieving stable prices and maximum employment.
He talked about the supervision of financial institutions, including our largest banks by saying the Fed has played a key role in ensuring the stability of our financial system, and the integrity of our payment system.
He mentioned unemployment is low, the economy is growing, and inflation is low and that the Fed would support continued economic growth, a healthy job market, and price stability.
He went on to add that our financial system is now far stronger and more resilient than it was before the financial crisis that began about a decade ago and they intend to keep it that way.
Minneapolis Fed Kashkari said he would like to see inflation rise and wages climb before he would support another rate hike.
He also mentioned he was surprised by how much optimism tax cuts have engendered and noted that steepening of the yield curve is a good sign, as it gives the Fed more room to tap the brakes if needed.
Other Fed speakers this week include two voting presidents, Dudley and Williams, and six others.
Bullard will discuss monetary policy and the economy on Tuesday. Kaplan will speak on macro trends and monetary policy on Wednesday. Also on Wednesday, Evans will be giving his views on the economy and policy while Williams will be speaking to community leaders.
Harker, Kashkari, and George will talk about the economy on Thursday.
A 25 basis-point March hike is nearly fully priced in, so the market will be looking for any insights on the trajectory, where the Fed’s dot plot shows 3 tightenings this year, for now.
Former Fed Chair, Janet Yellen didn’t want to say stock prices are too high, but did in an interview in an interview over the weekend.
She went on to add that price-to-earnings ratios are near the high end of their historical ranges and said commercial real estate prices are quite high relative to rents.
She did not say equity markets were in a bubble as it was very hard to tell. However, she said it was a source of some concern that asset valuations are so high.
In other Fed news, Larry Lindsey has withdrawn his name for Fed VC consideration, citing personal reasons. Meanwhile, Mohammed El-Erian, John Taylor, and John Williams (San Francisco Fed President) are on the consideration list.
The iShares 20+ Year Treasury Bond ETF (TLT) showed continued weakness on the open after testing a low of $118.64. Backup support at $118-$117.50 held before the late day rebound to $121.81. Resistance is at $121.50-$122 on continued closes above $120.
Market Analysis – The Spiders Dow Jones Industrial Average ETF (DIA) fell for the 2nd-straight session with the low reaching $239.06.
Fresh support from late November and the 100-day moving average at $238-$237.50 held with a close below the latter signaling a additional weakness to $237.50-$235. Lowered resistance is at $245.50-$245.
RSI is approaching January 2016 support on the close below 30 with risk to 25-20 on continued weakness.
The Spider S&P Retail ETF (XRT) fell for the 6th-straight session with today’s low tapping $44 following Friday’s close below the 50-day moving average.
Fresh support from November at $44-$43.50 held with a move below the latter signaling additional weakness towards the $43-$42 area. Lowered resistance is at $44.50-$45.
RSI is pushing 30 and late August support levels with a move below this level being a continued bearish development. Resistance is at 35.
We are allocating the portfolio as follows:
25% in ROST closed on Monday at 76.90
25% in STX closed on Monday at 49.65
25% in DLTR closed on Monday at 105.31
25% in TMF closed on Monday at 19.17
Option Traders.. the following (regular monthly) options meet our criteria:
ROST – MAY 77.5 CALLS (Expiration Date MAY 18, 2018)
STX – MARCH 50 CALLS (Expiration Date MAR 16, 2018)
DLTR – MAY 105 CALLS (Expiration Date MAY 18, 2018)
TMF – MARCH 20 CALLS (Expiration Date MAR 16, 2018)
All the best,
Roger