Traders mull opportunity in pullback

The S&P 500 just had its worst week of the year. Traders are now weighing whether they should buy the pullback or look for a steeper decline.

Their next move is made all the more confounding by the unusual developments that left even pros scratching their heads. 

Sure, healthcare dominated the headlines last week as lawmakers in Washington and the White House sparred over repealing parts of the 2010 Affordable Care Act. But the biggest move actually came from the financial sector, which plunged almost 4 percent despite a lack of any hard news. As the dust cleared, experts pointed to technical patterns for the selloff and a potential correlation with currency moves.

Second, traders also may want to look beyond just the United States when putting money to work. The S&P 100 Global index is up more than 1 percent so far in March, while the domestic benchmark is facing its first negative month since October. Improving economic conditions, plus a potentially overvalued U.S. dollar, is underpinning the divergence.1

Nonetheless, technology remains a bright spot at home. Semiconductor maker Micron (NASDAQ: MU) surged to its loftiest price in almost two years after results crushed estimates.2 (Its 10 percent gain was the best in the S&P 500 for the week.) Other key names in the sector like Apple (NASDAQ: AAPL), Facebook (NASDAQ: FB) and Applied Materials (NASDAQ: AMAT) hit new 52-week highs, as well. Smaller fiber-optic stocks also received positive response after a big industry conference.3

PVH (NYSE: PVH), the parent of Calvin Klein, was the second best member of the S&P 500 last week with a 7 percent gain on the heels of strong earnings. Analysts credited the move to growth in global markets.4 The domestic apparel and retail story, however, remained bleak as the country prepares for a wave of store closures, and traditional merchants like L Brands (NYSE: LB), Macy’s (NYSE: M) and Target (NYSE: TGT) hit new 52-week lows.

S&P 500 6-month chart

Source: OptionsHouse by E*TRADE

Aerospace supplier TransDigm (NYSE: TDG) was the worst overall performer in the S&P 500 with a 12.5 percent drop after a California Congressman called for an investigation into the company’s business practices.5

In total the index fell 1.23 percent between the closes of Friday, March 17, and Friday, March 24 -- its biggest weekly drop since early November. It’s bled steadily lower since hitting a record high at the beginning of the month. Will traders start to view that as a bearish “blow-off top” reversal pattern? Especially with that pesky CBOE Volatility Index (the dreaded VIX) refusing to go under below 11…

This week’s agenda features consumer confidence tomorrow and revised fourth-quarter gross domestic product on Thursday. And now that we’re looking to Europe, traders may also want to check Germany’s Ifo sentiment index (due early today). British Prime Minister Theresa May is also expected to begin formal steps to exit the European Union on Wednesday.

In summary, the market’s had a great run but traders may be beginning to feel that lot of optimism is priced in.

1. Reuters: Is the dollar overvalued? That depends how you view it. 3/24/17; Marketwatch: Eurozone PMI jumps to highest in six years. 3/24/17; RTT News: Germany's Economic Advisers Lift Growth Projection. 3/20/17.

2. Chip-Gear Makers Rise On Upbeat Micron Outlook. 3/24/17

3. Barron's: Lumentum: Jefferies Ups 3-D Sensing View; Oclaro 'Not For Sale'. 3/23/17

4. Barron’s: PVH: Not Just Another Apparel Maker; Shares Surge 8.4% After F4Q earnings. 3/23/17

5. TransDigm shares drop 4% as US rep pushes for probe. 3/22/17