Correction mode

The days of an eerily calm market seem to be over. 

Last week’s pullback turned into a bona fide correction this week, as the S&P 500 (SPX) fell a little more than 10% from January 26 to Thursday’s close of 2,581. The market then followed through with a lower low on Friday, but mounted a furious rally late in the day to knock out a higher daily close (SPX +1.49%) and end the week on an up note.

S&P 500 (SPX) and CBOE Volatility Index (VIX), 9/26/17 – 2/9/18

Source: OptionsHouse

Last week’s decline, which took the SPX to its lowest level since October, was its worst downturn in a 10-day stretch since August 2015, and its worst intra-week decline since 2011. As of Friday’s close, all major US indexes—except the Nasdaq 100 (NDX)—were in the red for the year. The small cap Russell 2000 index (RUT), which has lagged the market in recent months, lost the least ground last week. Here’s how the week shook out:
Index Comparison

Source: OptionsHouse

The CBOE Volatility Index (VIX) jumped 275% in three days when it peaked above 50 on Tuesday—its highest level since August 2015. The volatility surge was enough to blow out at least one exchange-traded product, the VelocityShares Daily Inverse Short-Term VIX ETN (XIV), which attempted to profit on low and declining volatility conditions with leveraged short-VIX positions. When the SPX dropped to a new low on Friday, though, the VIX made a lower high (relative to Tuesday), and closed down on the day—a potentially bullish sign.

The red ink was distributed pretty evenly. For the second consecutive week, all S&P 500 sectors closed with losses. The best performers were Utilities (-2.8%), Materials (-3.4%), and Real Estate (-4.1%). Bright spots came in the form of individual stock performances, mostly in response to positive earnings releases, such as Twitter’s (TWTR) explosive move on Thursday.

Also for the second straight week, Energy (-8.5%) was the worst-performing sector, thanks to an 8% drop in crude oil prices that took the March futures contract (CLH8) below $60/barrel for the first time this year. Financials (-5.8%) and Telecom Services (-5.7%) rounded out the weakest sectors.

Interestingly, although the US dollar and US Treasury prices (the latter, for one day) bumped higher during the equity correction, gold (GC)—often seen as a safe-haven in times of financial distress—has actually declined in tandem with stocks over the past two weeks.

April gold futures (GCJ8), 12/12/17 – 2/9/18

Source: OptionsHouse

Looking ahead, aside from Treasury auctions and announcements (mostly on Thursday), the events that jump out from this week’s modest economic calendar are inflation data on Wednesday and Thursday, along with a few housing, sales, and production reports.

Tuesday: NFIB Small Business Optimism Index

Wednesday: Consumer Price Index (CPI), Retail Sales, Business Inventories

Thursday: PPI-FD, Industrial Production, Housing Market Index

Friday: Housing Starts, Import and Export Prices, Consumer Sentiment

We’re not through with earnings, though, even if this week doesn’t have the same star power as last week’s FAANG parade. Go to the E*TRADE market calendar (logon required) for last-minute additions to the earnings lineup and other market events. Here are a few names to keep an eye on:  

Monday: Dun & Bradstreet (DNB), Genpact (G), Varonis Systems (VRNS)

Tuesday: (BIDU), DCP Midstream (DCP), Diamondback Energy (FANG), Neurocrine Bioscience (NBIX), Occidental Petro (OXY)

Wednesday: Agilent (A), Applied Materials (AMAT), Cisco Systems (CSCO), Hyatt Hotels (H),

Marriott (MAR), Neenah (NP), NetApp (NTAP)

Thursday: Fortis (FTS), Global Payments (GPN), Reliance Steel (RS), Arista Networks (ANET), CBS (CBS), Con Edison (ED), (OSTK)

Friday: Coca-Cola (KO), Deere (DE), ITT Industries (ITT), Kraft Heinz (KHC), Ryder System (R), Vulcan Materials (VMC)

If history is our guide, the stock market’s current volatility is unlikely to shake itself out in just a matter of days. No one wants to see the market enter a prolonged downtrend (and as of today, it hasn’t), but recent events are a good reminder that no trend—no matter how strong—is without corrections. Contrary to some reports, this is not 2008. And some volatility, at least, is a good thing for active traders.

But stay sharp. As they used to say in Drivers Ed, “expect the unexpected.”


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