A rare sight
02/05/18

Kicking off the first full week of February, the US equity market finds itself in a somewhat unusual position: off from its highs, and experiencing a genuine pullback.

What was a run-of-the-mill dip last week turned into something more significant on Friday, when all major US indexes dropped 2% or more intraday; the Dow Jones Industrial Average (DJIA) fell nearly 700 points intraday and closed down more than 665 points.

A little context: The S&P 500’s (SPX) 18.44% rally from August 18 to January 26 was larger than 94% of all other 23-week gains since 1960, and the index’s largest since 2012. And despite the sell-off in the final days of last month, it was still the tenth-biggest January gain (+5.62%) for the SPX since 1960. In short, the market was bound to retrace some of its steps eventually.

As of Friday the SPX had fallen as much as 3.93% from its January 26 all-time high—the largest downturn since the market shed around 5% from August to November 2016—and closed with its biggest weekly loss since January 2016.

The major US indexes fell comparable amounts last week, with the tech-heavy Nasdaq faring best, by a hair. Here’s the scorecard:

Index Performance Table

Source: OptionsHouse


Last week’s busy earning calendar was dominated by four of the five FAANG stocks—Facebook (FB) on Wednesday, and Amazon (AMZN), Apple (AAPL), and Google (GOOG) on Thursday. Results were mixed: Facebook and Google missed on earnings, Apple missed on revenue and had a dip in iPhone sales, and Amazon beat earnings and revenue estimates. And while Facebook steadied after initially declining and Amazon hit an all-time high on Friday, Google fell sharply and Apple extended its recent slide, breaking out of the downside of its nearly three-month consolidation.

Interestingly, most of last week’s economic data was strong, capped by Friday’s solid jobs numbers. On Wednesday the Federal Reserve held interest rates steady, stated it expected inflation to increase this year, and kept on track for another rate hike in March (one of three expected this year).1

S&P 500 (SPX), 7/12/17 – 2/2/18

Data source: OptionsHouse


No sectors escaped the downturn unscathed. The top-performing S&P 500 sectors were Telecom Services (-1.3%), Utilities (-2.3%), and Real Estate (-2.5%).

The three worst-performing sectors were Energy (-6.4%), Materials (-5.6%), and Health Care (-5.1%). A moderate dip in crude oil prices for the week (-1.8%) likely would have weighed a bit on the Energy sector regardless of other developments, but poorly received quarterly numbers from Exxon (XOM) and Chevron (CVX) on Friday guaranteed the sector’s fate for the week.

This week’s economic calendar is light:

Monday: PMI Services Index, ISM Non-Manufacturing Index

Tuesday: International Trade, JOLTS

Wednesday: Consumer Credit

Thursday: Chain Store Sales 

Friday: Wholesale Trade

Earnings, however, will continue to flood in. Just a few samples:  

Monday: Bristol-Myers (BMY), Sysco (SYY), Skyworks (SWKS)

Tuesday: Allergan (AGN), General Motors (GM), S&P Global (SPGI), Gilead Sciences (GILD), Microchip (MCHP), NETGEAR (NTGR), Walt Disney (DIS)

Wednesday: Humana (HUM), IntercontinentalExchange (ICE), Prudential (PRU), Kellogg (K), Philip Morris International (PM), Proto Labs (PRLB)

Thursday: GrubHub (GRUB), Regeneron Pharma (REGN), Twitter (TWTR), Tyson Foods (TSN), Viacom (VIAB), Yum! Brands (YUM), Overstock.com (OSTK), VeriSign (VRSN), Zillow (ZG)

Friday: CBOE Global Markets (CBOE), Moody's (MCO)

For a complete list of earnings and other market events, go to the E*TRADE market calendar (login required).

An evolving market theme that will bear watching is the ongoing Treasury price downtrend—which has been cited in some circles for at least some of the market’s current jitters. It’s provided opportunities for T-note futures traders (see “Is a bear market already here?”), but some analysts also speculate a continued rise in yields, especially above a certain level (3% commonly cited) could further pressure the stock market.2

 

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1MarketWatch.com. Fed expects inflation 'to move up' in 2018, signaling March rate hike. 1/31/18.

2Bloomberg. Market Euphoria May Turn to Despair If 10-Year Yield Jumps to 3%. 1/29/18.