Broken record

06/03/19
  • June follows the SPX’s first down May since 2012, worst since 2010
  • China, US dial up trade rhetoric, crude oil hits four-month low
  • This week: Jobs report, key manufacturing data

“Go away,” indeed.

Weary bulls are likely relieved to see the calendar flip to June after the S&P 500 (SPX) suffered its first negative May in seven years, its first four-week losing streak since 2014—and, for good measure, its worst week and month of the year.

At its low point on Friday, the SPX’s May loss exceeded -6.5%, pushing the index closer to the retracement level noted in “Looking for a bounce:”

S&P 500 (SPX), 2/8/19–5/31/19. S&P 500 (SPX) price chart. May we move on, please?

Source: Power E*TRADE


Fears of a trade-war-triggered economic downturn continued to weigh on markets. After an early rally reversed into a sizable loss on Tuesday, a not-so-cryptic statement out of China (“Don’t say we didn’t warn you”) likely erased any hope of a rebound on Wednesday. But for good measure, the People’s Republic reminded the US it has a stranglehold on the production of “rare earth” minerals—obscure metals essential to the production of many tech products, including smartphones, computers, and TVs.1

China followed through on Thursday by announcing it would halt purchases of US soybeans,2 but the stock market managed to eke out a gain in the wake of Wednesday’s SPX-VIX divergence.

It turned out to be a short-lived respite. In the wake of White House threats to slap tariffs on all Mexican imports,3 the market closed out Friday, the week, and the month deep in the red, but still in possession of solid gains for the year:

US stock index performance table for week ending 5/31/19. S&P 500 (SPX), Nasdaq 100 (NDX), Russell 2000 (RUT), Dow Jones Industrial Average (DJIA).

Source: Power E*TRADE


Sector breakdown: The strongest S&P 500 sectors last week were real estate (-0.8%), information technology (-1.8%), and materials (-2%). The worst performers were energy (-4.5%, pummeled by the crude oil sell-off), consumer staples (-3.5%), and financials (-3.1%).

Power moves: Lots of fireworks on Wednesday, with Cara Therapeutics (CARA) +20% to $21.57, Abercrombie & Fitch (ANF) -26% to $18.39, and Canada Goose (GOOS) -31% to $33.89.

Futures action: It was a wild week for crude traders—the worst week and month for oil this year. On Wednesday, July WTI crude oil (CLN9) fell below $57/barrel for the first time since March, but rallied to close the day near $59, near the top of its range. It promptly reversed to fall -4% on Thursday, then plummeted -6% on Friday to close at its lowest level (around $53.30) since January.

June gold (GCM9) surged on Thursday and Friday to close at a six-week high around $1,306/ounce.

In a “flight-to-quality” move, June 10-year T-notes (ZNM9) jumped to multiple contract highs last week as yields slumped, peaking at 126.48 on Friday.

Coming this week

It’s the top of the month, and that means the jobs report on Friday—preceded by plenty of manufacturing and service-sector data:                                                                          

Tuesday: PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending

Wednesday: ADP Employment Report, PMI Services Index, ISM Non-Manufacturing Index, EIA Petroleum Status Report, Beige Book

Thursday: International Trade, Productivity and Costs,

Friday: Employment report, Wholesale Trade

Earnings this week include:

●Monday: Box (BOX), Caleres (CAL), Coupa Software (COUP)

●Tuesday: Cracker Barrel (CBRL), Tiffany & Co (TIF), Guidewire Software (GWRE), Salesforce (CRM)                     

●Wednesday: American Eagle (AEO), Campbell Soup (CPB), G-III Apparel (GIII), Cloudera (CLDR), Five Below (FIVE), MongoDB (MDB), Smartsheet (SMAR), Stitch Fix (SFIX)

●Thursday: At Home Group (HOME), Ciena (CIEN), J.M. Smucker (SJM), Beyond Meat (BYND), DocuSign (DOCU), Guess (GES), Ollie's Bargain Outlet (OLLI), Vail Resorts (MTN), Zoom Video (ZM)

Friday: Earnings took the day off for the jobs report.

Go to the E*TRADE market calendar (logon required) for an up-to-date earnings schedule and a complete list of splits, dividends, IPOs, and economic reports. The Active Trader Commentary also lists earnings announcements, IPOs and economic report times each morning.

Looking ahead. May was a history-defying month in what has been a mostly history-defying year for the US stock market. But even after last month’s downturn, the SPX’s 9.78% year-to-date return is better than it’s been in all but 18 years since 1960, so perhaps bulls shouldn’t feel too distraught.

Also, lousy Mays—and four-week losing streaks—may have slightly bullish short-term implications. After the SPX’s 20 other down Mays since 1960, June has closed up 11 times and closed down nine times—not much to hang your hat on there. The two most recent big May losers are non-committal, too: The SPX gained 4% in June 2012 after losing -6.3% in May, but after tumbling -8.2% in May 2010 (the year of the “Flash Crash”), the SPX fell another -5.4% in June.

The SPX’s track record after four-week losing streaks is a little different. After its previous four-week losing streaks since 1960, the SPX has shown a tendency to rebound one week later, when the index closed up 43 out of 68 times—a 63% win rate, vs. the 56% rate for all other one-week periods over the past seven decades.

After four weeks, though, the SPX was higher 55% of the time—still marginally “bullish,” but when you consider that the SPX has a positive return in 61% of all other four-week periods since 1960,4 it’s apparent that a four-week losing streak has the potential to portend more selling, even accounting for the favorable odds of an initial one-week bounce.

As has been the case so many times this year. whether some of the market’s historical patterns reassert themselves will likely depend on the nature of future tariff headlines. The rollercoaster ride probably isn’t over—which is good news for adept short-term traders, if not for investors.

 

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1 CNN.com. Rare earths could be the next front in the US-China trade war. Here's what you should know. 5/30/19.

2 Bloomberg.com. China Puts U.S. Soy Buying on Hold as Tariff War Escalates. 5/30/19.

3 CNBC.com. The Dow is set to drop more than 200 points after Trump threatens new tariffs on Mexico, GM shares fall. 5/30/19.

4 Supporting document available upon request.

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