U.S. markets closed lower for a second-straight session to extend February’s losses following a volatile month with plenty of whipsaw action. Today’s action showed market strength throughout the day before a recent pattern of final hour selling pressure emerged to stall momentum.

The Russell 2000 plummeted 1.6% after closing at its session low for a second-straight session and is less than 1% away from falling back below the 1,500 level. For the month the index swooned 4%.

The Nasdaq gave back 0.8% after closing below the 7,300 level. The index was down 1.9% for February, snapping seven-straight months of gains.

The Dow fell 1.5% after testing a low of 25,022 and the S&P 500 sank 1.1% while holding the 2,700 level. Both indexes declined 4.3% and 3.9%, respectively, for the month and were coming off 10-month winning streaks.

Energy was the worst performing sector after posting a loss of 2.3% while Materials and Health Care were down 1.8% and 1.6%. There were no sectors that closed higher for a second-straight session.

Energy easily led sector weakness for the month after sinking 13.7%.
Consumer Staples tumbled 8.1% and Health Care stumbled 6.6%. Industrials were the only sector that closed higher after posting a gain of 0.3%.

Global Economy – European markets fell for a second-straight session with the Stoxx Europe 600 and UK’s FTSE 100 dropping 0.7%. The Belgium20, France’s CAC 40, and Germany’s DAX 30 declined 0.4%.

The Eurozone February CPI estimate rose 1.2% year-over-year, matching expectations but the slowest pace of increase in 14 months. The February core CPI rose 1.0% year-over-year, also matching forecasts.

German Consumer Confidence fell 0.2 to 10.8, weaker than expectations for a dip of 0.1.

German February unemployment fell 22,000 to 2,393,000, better than expectations for a decline of 15,000. The February unemployment rate held at a record low of 5.4%, right on expectations.

Asian markets were lower across the board with wider losses than the prior session following weaker-than-expected economic news. Hong Kong’s Hang Seng and Japan’s Nikkei sank 1.4% while South Korea’s Kospi tanked 1.2%. China’s Shanghai fell 1% and Australia’s S&P/ASX 200 slumped 0.7%.

Japan January industrial production fell 6.6% month-over-month, weaker than expectations for a decline of 4%.

China’s Manufacturing PMI fell a point to 50.3, weaker than expectations of fro a slip of 0.2 and the slowest pace of expansion in 1-1/2 years. The government’s non-manufacturing PMI was down for the first time in four months, falling 0.9 points to 54.4 for the month.

Q4 GDP growth was trimmed to 2.5% from 2.6%, as expected, while core PCE was reported to have increased 1.9% quarter-over-quarter in Q4, also as expected. Personal consumption grew 3.8% in Q4, as previously estimated.

The Chicago manufacturing PMI dropped 3.8 points to 61.9 in February, which was weaker than expected.

January Pending Home Sales fell 4.7% to 104.6 in January, well below forecasts for a rise of 0.3% for the month, and the lowest level since 2014.

The annual pace of sales dropped to -3.8% year-over-year versus 0.4% previously. Pending sales declined in all four regions, with the Northeast leading the slide at 9.0%, followed by the Midwest with a decline of 6.6%. The South fell 3.9%, and the West region slipped 1.2%.

MBA Mortgage Applications were up 2.7% for the week ending February 23rd.

Chicago Manufacturing PMI dropped 3.8 points to 61.9 in February, weaker than expecation for a print of 65. It represented the first back-to-back decline since the spring of 2016 and is the lowest print since 59.5 in August.

Market Sentiment – Minneapolis Fed dove Kashkari wants to see wage growth build and inflation rise toward 2% before supporting another rate hike.

He believes there may still be some labor market slack and that the Fed should allow the tight labor market to continue to run in order to get more workers back to work.

The Fed will begin publishing Treasury Repo Reference Rate, a Libor alternative, on April 3rd, according to the NY Fed. Fed Chairman Powell discussed the need to be prepared for the potential end to Libor in Tuesday’s testimony in case the UK’s FCA phases out the key rate in 2021.

There are over $350 trillion in Libor based contracts globally, as noted by Powell. In December the FRB announced its final plans on three rates, the Secured Overnight Financing Rate (SOFR), the Broad General Collateral Rate (BGCR), and the Tri-Party General Collateral Rate (TGCR).

The Fed’s Alternative Reference Rate Committee recommended SOFR as the main rate, which will be published beginning on April 3rd, reflecting the SOFR, BGCR, and TGCR from April 2nd.

The iShares 20+ Year Treasury Bond ETF (TLT) traded in positive territory throughout the session while reaching a peak of $118.83. Resistance at $118.50-$119 was split with continued closes above the latter being a slightly bullish development.

Support remains at $118-$117.75 with a close below the latter getting $116.50-$116 in the mix.

Market Analysis – The Russell 3000 Index ($RUA) sank 1.1% after falling below 1,600 intraday but a level that held into the closing bell. The close below the 50-day moving average was a slightly bearish signal with near-term support at 1,590-1,580 if 1,600 fails to hold. Resistance is at 1,610-1,620.

RSI closed below 50 and with risk to support at 40, possibly 30, depending on momentum. Continued closes aback above 50 would be a slightly bullish development for another run at 60.

The Spider S&P Retail ETF (XRT) closed slightly higher after trading to a high of $45.96. Short-term resistance at $46-$46.25 and the 50-day moving average held.

A bullish signal would occur on continued closes above $46.75-$47. Support is $45.25-$45 with a move below the latter signaling additional weakness towards the $44.50-$44.

RSI is holding near-term support levels at 45 with a move close this level being a bearish development. Resistance is at 50.

Current Position Update

SPY expired uneventfully today.

APPLE remains stronger than expected and not feeling too much pressure from the sell off last few days.

FB is holding steady and the corrective pressure will help drive premium lower in the next few sessions.

I’m looking for anther spread and will have one before the end of the week.

I wanted to turn the APPLE position into an iron condor but the premium was much lower than anticipated AND the stock continued trading higher.

We may enter into a separate bear call spread – that expires beyond the current bull put spread – assuming price action continues trading higher over the near term.

The current increase in volatility will help us collect higher premium over the next 48 hours.

Roger Scott