●Stocks pulled back as Treasury yields remained above 3%
●VIX hit eight-month high, oil tumbled
●This week: Earnings season gets started, FOMC minutes
It took all of two days for a fairly routine pullback in US stocks to morph into the third-largest market downturn of the year.
When the S&P 500 (SPX) fell 3.3% on Wednesday last week and followed up with a 2.1% loss on Thursday, what had been a ho-hum 1.5% pullback from the October 3 close was suddenly a 6.7% retreat.
Rising interest rates—percolating Treasury yields and a tightening Fed—were widely ascribed much of the blame for the downturn (along with trade-war fears), but although the 10-year T-note yield ticked to a new seven-year high near 3.26% on Wednesday, that was only incrementally above the previous week’s high, and the rate dropped sharply on Thursday. So, blame it on October?
The market’s favorite “fear barometer,” the CBOE Volatility Index (VIX), shot to 28.84 on Thursday—it’s highest level since February 12—before easing on Friday as the S&P 500 (SPX) closed up around 1% on the day.
Nonetheless, it was the market’s third-consecutive down week, the third-biggest SPX weekly loss of the year, and the biggest since March. The Russell 2000 (RUT) briefly slipped into negative territory for the year. Tech bore the brunt of the selling on Wednesday, but also mounted the strongest rebound at the end of the week. Here’s where the US indexes stood when the dust settled on Friday:
Source: OptionsHouse (data)
Sector action: It was red across the board last week, and investors adopted a defensive posture. The top-performing S&P 500 sectors were utilities (-1.3%), consumer staples (-1.9%), and real estate (-2.9%). The worst-performing sectors were consumer industrials (-6.6%), materials (-6.4%), and financials (-5.6%).
Highlight reel: Netflix (NFLX) tumbled more than 8% on Wednesday, outpacing the market sell-off amid news AT&T was planning to launch a competitive streaming entertainment service in Q4 2019. The stock lost a little more ground Thursday before roaring back to the upside on Friday with a 5.75% rally.
Square (SQ), which had already pulled back around 15% from its October 1 high around $101, dropped 11% on Thursday after news of a C-suite shakeup.1
Biopharma stock Argenix (ARGX) carried the bullish flag on Thursday, rallying more than 14%.
Futures action: The oil gusher ender abruptly last week, as December WTI crude futures (CLX8) shed nearly 6% between Wednesday and Thursday, pulling back almost precisely to support at its May-July-September highs before stabilizing on Friday.
On Thursday December gold (GCZ8) logged its biggest up day of the year, jumping nearly 3% (above the upper boundary of its two-month trading range) to $1,228/ounce.
The week ahead
On the economic calendar, housing data and assorted business and production metrics sandwich the mid-week release of FOMC minutes:
●Monday: Retail Sales, Business Inventories
●Tuesday: Industrial Production, Housing Market Index, JOLTS
●Wednesday: Housing Starts, FOMC Minutes
●Thursday: Leading Indicators
●Friday: Existing Home Sales
Okay, earnings season is warming up. This week brings the first FAANG (Netflix), and a whole bunch of financial names:
●Monday: Bank of America (BAC), KMG Chemicals (KMG)
●Tuesday: BlackRock (BLK), Domino's Pizza (DPZ), Goldman Sachs (GS), Grainger (GWW), Johnson & Johnson (JNJ), Morgan Stanley (MS), Progressive (PGR), Prologis (PLD), IBM (IBM), Netflix (NFLX), United Continental (UAL)
●Wednesday: Abbott Labs (ABT), ASML (ASML), Northern Trust (NTRS), U.S. Bancorp (USB), Alcoa (AA), Crown (CCK), Crown Castle (CCI), Steel Dynamics (STLD), United Rentals (URI), Wintrust Fin (WTFC)
●Thursday: American Express (AXP), PayPal (PYPL), WD-40 (WDFC), BNY Mellon (BK), Dover (DOV), Medidata Solutions (MDSO), Philip Morris International (PM), PPG Industries (PPG), Taiwan Semiconductor (TSM)
●Friday: Honeywell (HON), KC Southern (KSU), Procter & Gamble (PG), Schlumberger (SLB), State Street (STT), SunTrust Banks (STI)
Expiring futures contracts include October Feeder Cattle (LEV8), Mexican peso (6MV8), and Russian ruble (6RV8) today, and October VIX (VXV8) on Wednesday.
Go to the E*TRADE market calendar (logon required) for an up-to-date schedule, along with a complete list of splits, dividends, IPOs, economic reports, and other market events.
Par for the October course: As last week has reminded everyone, October can be a rocky month for stocks—it is, in fact, the most volatile month of year, historically. But it’s a good time to remember that October has, when all is said and done, been a positive month the US market.
Yes, from 1928–2017, the DJIA’s October’s high-low range has, on average, been the largest of any month since 1928—around 14.5% larger than its nearest competitor, November. Since 1988, that edge has been even bigger, with the average October range around 16.5% more than the runner up (January).
But that volatility has a big upside. Consider this: While 10 of the 20 biggest one-day DJIA declines since 1928 have occurred in October, six of the biggest up days have also occurred in October, more than any other month of the year. Bottom line, some big rallies have taken place in October—sometimes in the same months that have suffered sharp sell-offs.
October 2014 is a classic example (chart above). The Dow fell more than 1,100 points in the first two weeks of October (a 7% loss), but then rallied more than 1,500 points (nearly 10%) in the final two weeks for a 2% gain on the month.
That might be a more accurate picture of October than the widespread perception of a crash followed by an extended burn.
1 CNBC. Square plunges 15% after losing its CFO. 10/11/18.