Market takes inversion excursion

08/19/19
  • Yield-curve inversion trips up market, but stocks rebound
  • Trade-war rhetoric de-escalates
  • This week: Fed minutes, Leading Indicators

A yield-curve inversion—the 10-year rate dropped below the two-year rate for the first time since 2007—did the unthinkable last week: It bumped the trade war off the financial front page.

It also sent the S&P 500 (SPX) to its biggest one-day drop of the year (-2.93%) on Wednesday as traders pondered the implications of the potential—but widely misunderstood—recession signal:

S&P 500 (SPX), 6/3/19–8/16/19. S&P 500 (SPX) price chart. Aug. 5 low still intact.

Source: Power E*TRADE


But something else also happened that day: While the SPX closed lower than it did on August 5, so did the Cboe Volatility Index (VIX), suggesting the market was experiencing less “fear” even though it had fallen to a lower close.

The SPX rebounded Thursday and Friday, as bond-market angst eased and traders appeared to digest some of the week’s other news, including Tuesday’s report that the US would delay implementing tariffs,1 and stronger-than-expected retail sales and manufacturing numbers.

Although it was the US market’s third-straight down week, losses were moderate, especially in tech—the Nasdaq 100 (NDX) dropped less than it did the previous week. Here’s where things stood as of Friday’s close:

US stock index performance table for week ending 8/16/19. S&P 500 (SPX), Nasdaq 100 (NDX), Russell 2000 (RUT), Dow Jones Industrial Average (DJIA).

Source: Power E*TRADE


Sector roundup: The strongest S&P 500 sectors last week were consumer staples (+1.7%), utilities (+0.6%), and real estate (+0.5%). The weakest sectors were energy (-3.7%), financials (-2%), and materials (-1.9%).

Power moves: On the upside, Deciphera Pharmaceuticals (DCPH) soared +80% to $35.90 on Tuesday, and Pivotal Software (PVTL) jumped +69% to $14 on Thursday. On the downside, Banco Macro (BMA) fell -53% to $36.20 on Monday, and Myriad Genetics (MYGN) dropped -43% to $25.50 on Wednesday.

Futures action: Traders looking to buy a dip in gold didn’t get much of a chance. December gold (GCZ9) dropped to its lowest level of the week the same day (Tuesday) it surged to a new contract high of $1,546.10/ounce; the market closed out trading on Friday around $1,523.50. After hitting a seven-day high of $57.40/barrel on Tuesday, October WTI crude oil (CLV9) retreated to close out the week around $54.90. September 10-year T-note futures hit a new contract high of 131.34 on Thursday.

Coming this week

FOMC minutes on Wednesday and Leading Indicators on Thursday anchor this week's economic calendar:

Monday: E-Commerce Retail Sales

Wednesday: Existing Home Sales, FOMC minutes

Thursday: European Central Bank (ECB) minutes, Leading Indicators

Friday: New Home Sales

Retail stocks highlight the earnings calendar:

●Monday: Altaba (AABA), Baidu (BIDU), Estee Lauder (EL), Weibo (WB), SINA (SINA), IQIYI (IQ).

●Tuesday: Toll Brothers Inc (TOL), Kohls Corp (KSS), TJX Companies Inc (TJX), Home Depot (HD), Urban Outfitters (URBN), Medtronic PLC (MDT).

●Wednesday: Keysight Technologies (KEYS), Target (TGT), Nordstrom (JWN), Lowe's (LOW), L Brands (LB), Baozun (BZUN), Analog Devices (ADI).

●Thursday: 58.com (WUBA), Dick's Sporting Goods (DKS), Gap (GPS), HP (HPQ), Intuit (INTU), VMware (VMW), Salesforce.Com (CRM), Ross Stores (ROST).

●Friday: Foot Locker (FL), Williams-Sonoma (WSM).

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.

Word on the Street

Interest rates [being] where they are, stocks begin to look much more attractive.

Mark Mobius of Mobius Capital Partners 2

VIX does the trick. As noted earlier, the Thursday–Friday rebound didn’t necessarily come out of left field.Volatility insider” noted the potential for a rally when the SPX falls below a previous swing low but the Cboe Volatility Index (VIX) indicates less fear than it had at the prior market low. Compare the SPX and VIX levels on August 5 and August 14:

S&P 500 (SPX) and Cboe Volatility Index (VIX): 7/29/19 – 8/16/19. SPX lower, but so was fear level.

Source: Power E*TRADE


August 14 marked a lower SPX close, but the lower VIX that day indicated a lower level of market anxiety. As of Friday, the SPX had responded with a 1.7% rebound that took some the sting out of Wednesday’s sell-off.

 

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1 CNN.com. Dow rises 400 points after US delays certain tariffs on tech. 8/13/19.

2 MarketWatch.com. Central banks ‘racing to the bottom’ means one thing, says Mark Mobius: that the stock market will do ‘very well’. 8/16/19.

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