U.S. markets opened in negative territory and fell below major support on Friday with the indexes suffering their biggest one-day pullbacks in more than a year and posting the steepest weekly losses in nearly two years.
The weakness was attributed to higher bond yields, global profit-taking and disappointing quarterly earnings from a few of the biggest names in the Tech sector.
The Dow dropped 2.5% after tapping a low of 25,490 while closing below the 26,000 level for the first time in 13 sessions. The blue-chip index declined 4.1% over the week as all 30 Dow components closed in the red on Friday.
The S&P 500 sank 2.1% after trading down to 2,759 and closing below the 2,800 level for the first time in 11 sessions. Friday’s decline was the biggest one-day drop since September 2016 and widened the weekly loss to 3.9%.
The Nasdaq tanked 2% after kissing 7,238 late in the session while closing below the 7,300 level for the first time in 11 trading days. The index was down 3.5% over the week.
The Russell 2000 fell 2.1% after testing a low of 1,547 while closing below its 50-day moving average for the first time since last November.
The weekly loss was just over 4% with the index just 12 points away from giving up all of its 2018 gains.
Energy and Technology were punished for 4.1% and 2.9%, respectively, while Materials sank 2.7% and Financials were off 2.2%. There were no sectors that closed in positive territory.
For the week, Energy and Materials were down 6.5% and 5.7% while Healthcare and Technology gave back 5.1% and 3.9%. The Financial managed to post a 0.2% gain for the week and was the only sector that funished higher.
Global Economy – European markets showed continued weakness with heavy losses led by Germany’s DAX 30 and France’s CAC 40 with both tanking 1.7% and 1.6%, respectively.
The Stoxx Europe 600 dropped 1.4% and the Belgium20 fell 1.2%. UK’s FTSE 100 declined 0.6%.
ECB Executive Board member Coeure said that from a financial stability perspective, a low inflation risk premium may be a matter of concern if it indicates complacency about future adjustments.
Eurozone December PPI came in at 0.2% month-over-month and 2.2% year-over-year, with expectations at 0.2% and +2.3%, respectively.
Asian markets were mixed with South Korea’s Kospi sinking 1.7% and Japan’s Nikkei giving back 0.9%. Hong Kong’s Hang Seng slipped 0.1% while Australia’s S&P/ASX 200 and China’s Shanghai were up 0.5%.
U.S. non-farm payrolls increased 200,000 in January, topping the consensus forecast for 180,000 job additions. The unemployment rate held steady at 4.1%, as expected, while average hourly earnings rose 2.9% from the same month of last year.
Household employment surged 409,000 versus 104,000 previously, with the labor force up 518,000 from 64,000. The workweek fell to 34.3 from 34.5 and the labor force participation rate was unchanged at 62.7%.
Private payrolls increased 196,000 with the goods producing sector adding 57,000. Construction jobs were up 36,000 and Manufacturing employment rose 15,000.
Service sector jobs rose 139,000 while Government employment was up 4,000 jobs.
The University of Michigan index of Consumer Sentiment fell 0.2 points to 95.7 in the final January update, topping forecasts for a print of 95.
Factory orders increased 1.7% in December, marking a fifth-straight monthly gain, and ahead of expectations of 1.5%. Advance durable goods rebounded to 2.8% while Transportation orders jumped 7.1%.
Excluding transportation, orders were up 0.7% versus 1.1% previously. Nondefense capital goods orders excluding aircraft fell 0.6% versus the 0.1% gain last month.
Shipments increased 0.6% compared to the 1.4% November gain. Nondefense capital goods shipments excluding aircraft rose 0.4% versus the 0.3% previous month gain. Inventories rose 0.5% while the inventory-shipment ratio was unchanged at 1.35.
Baker-Hughes Baker Hughes reported that the U.S. rig count was down 1 rig from last week to 946, with oil rigs up 6 to 765, gas rigs down 7 to 181, and miscellaneous rigs unchanged.
The U.S. Rig Count is up 217 rigs from last year’s count of 729, with oil rigs up 182, gas rigs up 36, and miscellaneous rigs down 1 to 0. The U.S. Offshore Rig Count was down 1 rig to 16 and down 6 rigs year-over-year.
Market Sentiment – San Francisco Federal Reserve Bank President John Williams said the Fed should continue hiking rates to cool off the economy but made it crystal clear he is not advocating more than the three rate hikes the Fed has forecast for this year.
Dallas Fed hawk Kaplan said inflation pressure will be seen by the U.S. economy this year, which should keep the Fed removing accommodation gradually but deliberately.
The iShares 20+ Year Treasury Bond ETF (TLT) continued its technical breakdown following the gap lower and backtest to $119.24. Late May support at $120.50-$120 was breached and now represents short-term resistance.
There is risk to $118-$117.50 on continued weakness and a close below $119.25-$119.
RSI is at 1-year lows with risk to 20 and November 2016 support. Resistance is at 35-40 with continued closes above the latter signaling a possible short-term bottom.
Market Analysis – The Spider Small-Cap 600 ETF (SLY) fell for the 4th time in 5 sessions with Friday’s closing low reaching $134.06.
Fresh support is at $134-$133.75 with the close below the 50-day moving average being a slightly bearish development. There is additional risk to $132.50-$132 on a close below $133.75.
Lowered resistance is at $134.25-$134.50.
RSI is back in a downtrend after failing mid-December support at 50 and now represents short-term resistance. There is risk to 30 and August lows on a move below November support at 40 and continued weakness.
The iShares PHLX Semiconductor ETF (SOXX) traded down to $178.53 with mid-January support at $178.50-$178 now in play.
A move below the latter sets up additional weakness to $176.50 and the 50-day moving average. Lowered resistance is at $179.50-$180.
RSI appears to be on track to test December support at 40-35 on continued weakness. Resistance is at 50 with continued closes back above this level signaling a possible short-term bottom.
The percentage of Nasdaq 100 stocks trading above the 50-day moving average closed Friday at 62.5%. We warned last week a close below 80% and early January support would be a bearish development with this level being breached the prior session.
There is additional risk to December support in the 60-55 area on continued weakness. Lowered resistance is at 65%-67.5%.
The percentage of S&P 500 stocks trading above the 200-day moving is closed just below the 75% level with early December support at 72.5% holding.
Continued closes below this level would be a bearish signal for additional weakness towards 70% and the late November breakout above this level. Resistance is at 77.5% on continued closes back above the 75% level.
Existing/New Position Update
SVXY tanked with Dow dropping 600 points. I’m expecting price to regain some upside over the next few sessions, since volatility sharply over-reacts during major price swings.
NFLX is stronger than I expected and price actually rose – even though stocks had the single worst day in over 1 year. If I see strength persist – we may have to cut position early.
TSLA earnings are a few days away and the price of the stock has held remarkably well during Friday’s session. I want to see how the position trades early next week and if earnings revisions are sharp – we may offset risk slightly.
Overall – I’m surprised how well the overall portfolio held during today’s session, especially NFLX.
I’m not too concerned with volatility since we still have plenty of time till expiration and the odds of seeing some upside is probable assuming market regains some degree of strength.