Market merry-go-round
03/26/18
Stocks start this week with their year-to-date lows within shouting distance after the S&P 500 (SPX) posted back-to-back down weeks for only the fifth time in the past year, closed the week with two big down days, and dropped to its lowest level in more than five weeks. Long-time market leaders have more recently become losers, as traders and investors pivoted toward more traditionally “defensive” market sectors.
S&P 500 (SPX) daily price chart, 11/21/17 – 3/23/18. FOMC announcement, China tariff announcement

Source: OptionsHouse

Last week wasn’t boring, that’s for sure. It isn’t often that even the most ho-hum Federal Reserve interest rate decision is knocked out of the financial headlines before the market has had a chance to analyze it to death, but that’s what happened when the White House announced on Thursday that it intended to slap $50 billion worth of tariffs on Chinese goods, rattling markets with renewed trade war fears.

Less than 24 hours earlier the Federal Reserve had raised the Fed funds rate 0.25% to 1.75%, as expected, and repeated their outlook for three rate hikes this year (and not ruling out the possibility of a fourth). The same-day response to the announcement was mixed: Stocks rallied immediately after it, but weakened to close near the session’s lows, with all indexes except the Russell 2000 (RUT) closing in the red.

Then came Thursday’s bombshell and a 775-point (3%) drop for the Dow Jones Industrial Average (DJIA). The market managed to keep its head above water in early trading on Friday, but it eventually gave way to the bearish sentiment and the SPX closed down more than 2% for the second day in a row.

The most obvious sign of market rotation was the tech-centric Nasdaq 100’s (NDX) last-place finish among major US indexes; the small-cap Russell 2000 (RUT) held up the best under pressure. All indexes except the NDX will be starting out this week down on the year. Here’s how last week shook out:

Index Comparison. US stock index comparison, week ending March 23

Source: OptionsHouse

Also for the second consecutive week, rotation was evident at the sector level. Although things were red across the board, the top-performing S&P 500 sectors were: Energy (-0.9%, buoyed by a surge in crude oil prices), Utilities (-2.5%, second straight week of relative strength), and Real Estate (-3.9%). But even more telling was the weakest of last week’s worst-performing sectors: Information Technology (-7.9%), followed by Financials (-7.2%) and Health Care (-6.8%).

Tech’s woes were well-represented by Facebook’s (FB) nearly 14% slide amid revelations that political consulting firm Cambridge Analytica got unauthorized access to millions of FB users’ data.

Anadarko Petroleum (APC) was one of the energy stocks that took advantage of crude’s rise, rallying 6.9% on the week. Crude oil busted out of its consolidation in dramatic fashion, with the June WTI crude oil futures (CLM8) jumping more than 7% from March 16 through March 23, and closing out the week near its highs around $66/barrel. (Gold futures also jumped on Thursday and Friday.)

Considering it’s a four-day week (equity markets are closed for Good Friday), this week’s economic calendar is pretty busy, with GDP grabbing the spotlight on Wednesday:

Monday: Chicago Fed National Activity Index

Tuesday: S&P Corelogic Case-Shiller HPI, Consumer Confidence

Wednesday: GDP, Corporate Profits, Retail Inventories (Advance), Wholesale Inventories (Advance), Pending Home Sales Index

Thursday: Personal Income and Outlays, Chicago PMI, Bloomberg Consumer Comfort Index, Consumer Sentiment

Friday: EQUITY MARKETS CLOSED (Good Friday)

This week’s expiring futures contracts include:

Tuesday: April natural gas (NGJ8), March copper (HGH8), March palladium (PAH8), March silver (SIH8)

Thursday: April gasoline (RBJ8), March 5-Year T-Note, March 30-Day Fed funds, March 2-Year T-Note, March feeder cattle (FCH8)

A light week of earnings is peppered with just a few big names:

Monday: Paychex (PAYX), Red Hat (RHT)

Tuesday: FactSet (FDS), IHS Markit (INFO), Lennar (LEN), McCormick (MKC), Dave & Busters (PLAY), lululemon athletica (LULU)

Wednesday: BlackBerry (BB), Walgreens Boot Alliance (WBA), Progress Software (PRGS),

PVH (PVH), WageWorks (WAGE)

Thursday: Constellation Brands (STZ), Restoration Hardware (RH)

You can find a complete list of earnings and other market events on the E*TRADE market calendar (logon required).

With the SPX having dropped below its March 2 swing low, there’s no technical barrier between its current level and a test of its February correction low around 2533. Tariffs and trade wars appear to be primary catalysts driving the market. Traders and investors could be waiting for clarification (or reversal) of recently announced policies before committing themselves too much to the long side of the market. 

 

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1 CNBC.com. Fed's Charles Evans goes out on a limb, argues against a March rate hike. 3/9/18.