S&P 500 Joins Nasdaq And The Russell 2000 In Correction Mode

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Friday, October 26, 2018, 12:18 PM, EST

  • NASDAQ Composite-2.05%Dow-1.27%S&P 500-1.62%Russell 2000-1.50%
  • NASDAQ Advancers:406Decliners:1922
  • Today's Volume+2.07%
  • Crude-0.19%, Gold+0.46%

Market Movers

  • Third Quarter US GDP (advance) +3.5% vs. consensus +3.3%; Third Quarter Deflator +1.4% vs. consensus +2.2%. Q2 GDP was +4.2%. Q2 Deflator was revised to +3.3% from a revised +3.0%
  • October US Michigan Consumer Sentiment (final) 98.6 vs consensus 99.0. October Current Conditions final 113.1 vs October preliminary 114.4 and September final 115.2. October Expectations final 89.3 vs 89.1 and 90.5
  • The yield on the 10 year Treasuries fell to 3.06% while the two year note eased to 2.78%
  • The VIX climbed by +2.97 to 27.19

Charlie's Commentary

Yesterday the S&P snapped a six day long losing streak on a rebound from oversold conditions and solid earnings that lacked rhetoric about the effects of tariffs and rising costs. Momentum-oriented sectors were the best performers, with consumer discretionary, tech, and communications services the leaders. Utilities was the only sector to finish lower. At the end of yesterday the blended growth rate of S&P companies that have reported to date was 20.9% on track for the third best reading since 2011.

Investors and traders were feeling somewhat optimistic albeit still guarded fully aware that earnings after the close from some industry bellwethers, would probably dictate the tone of today. Well the tone was set pretty early when Amazon reported and lowered revenue and profit guidance followed by Google, who missed revenue expectations. That weighed heavily on the futures in the aftermarket last night and this morning. It also fueled the ongoing discussions lately that maybe we have reached peak growth in earnings and that future results will not be as robust.

The bleeding in the futures began to abate however when the third quarter GDP number crossed the tape. It showed that the economy expanded at a 3.5% pace in the third quarter compared to the 3.3% consensus estimate as both consumers and businesses boosted spending marking the strongest back to back quarters of growth since 2014. This strong number followed a strong 4.2% advance the prior three months. Consumer spending, which accounts for approximately 70% of the economy, experienced a robust 4% increase which was the best since 2014. Net exports subtracted 1.8 percentage points from growth while faster inventory growth added 2.1 percentage points to output.

These strong numbers reaffirm that a strong job market and lower taxed continue to propel demand among both consumers and businesses. Despite all the strengths about the economy represented in the GDP numbers, it is a backward looking while the stock market is clearly forward looking and appears concerned about future growth prospects. Continuing with the economic theme we also had The University of Michigan Sentiment for October. The reading was 98.6, slightly weaker than the 99 number that was estimated, but still near 14 year highs. There was a dimmer view of personal finances and in buying conditions for major items that brought the reading lower than estimated.

Ongoing concerns are plaguing the market today. Earnings disappointments, fear of rising interest rates, an ongoing conflict between Italy and the European Union over budget spending and criticism of oil power Saudi Arabia have investors wary. The sell pressure has now pushed the S&P 500 into correction territory joining both the Nasdaq Composite and the Russell 2000 and is fueling speculation that this bull market could be turning into a bear. With this in mind we took a look at a quick historical perspective.

A market correction is often defined as a 10% pullback from a recent peak. However a correction in itself does not constitute a bear market as the next step. With all these concerns mentioned previously, big drops are a natural dynamic of the marketplace. According to data from the Factset, there have been 22 corrections since 1974 and only four of them (1980, 1987, 2000, 2007) have resulted in bear markets.

Looking at our current bull market that began in 2009, there have been six corrections that have avoided turning into bears. Analysts are quick to point out that bear markets are often triggered by a recession which this current economy is showing no signs of.

Turning to the commodity space, oil is heading for its third week of losses after Saudi Arabia warned of oversupply and a slumping stock market raised concerns about fuel demand. Conversely Gold is on pace to rise for its fourth straight week as appetite for the shiny metal gains with the market slumps in Asia, Europe and the United States.

From a sector perspective, all 11 sectors in the S&P 500 are trading in the red today led by consumer discretionary, communications, REITS and Technology. The "least damaged" sectors are materials and utilities. That's all we have today. Let's keep our chin up. Remember it is a Friday which traditionally is a risk off day going into the weekend. Trivia answer to follow at the bottom of the note. Feel free to respond to this e-mail with any questions or comments you may have. Steve Brown has the controls next week. Have a great weekend everyone!

Sector Recap

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Brian's Technical Take: Are Markets still too Hawkish?

One of the reasons for the October meltdown in equities is due, at least in part, to the upward acceleration in interest rates seen in the 1H of this month. In the MID's most recent "September Review and Outlook" we highlighted a number of bearish divergences and concerns throughout the marketplace including the long term technical setup of the 30-year Treasury Yield which looked poised to "breakout" above multi-year resistance at 3.25%.

In general breakouts above long term resistance levels are often followed by accelerating price action and this time was no different. The breakout triggered during the following week and the long end of the curve accelerated higher. The short end moved up as well, aided in part by Chairman Powell's public remarks that the pace of rate hikes is set to continue at a gradual pace and potentially above the normalized level for a period of time. This was new, more hawkish "guidance" which didn't take long to filter through to equities.

Four weeks later and steep double digit declines in the broad indices, and much worse for many sectors and industries (energy, discretionary, financials, materials, industrials, tech, etc.), markets are now reducing their expectations on the pace of future rate hikes. According to Bloomberg the probability of a hike this December is 66%, down from +80% last month. More importantly however is the number of rate hikes in 2019. In that regard it is worth noting despite the strong fiscal stimulus from lower taxes, deficit spending and repatriation, economic data is coming off its highs. Headline CPI peaked seven months ago, while core CPI peaked five months ago.

Housing and auto sales are slumping due in part to the impact of rising rates and affordability. Corporate earnings remain strong but expectations on future earnings growth are slowing. And after Q2's 4.2% GDP, today we see the first measure of Q3 came in at 3.5%. While this was above expectations of 3.2%, Bloomberg was reporting the whisper number up at 4%. Either way the peak of the cycle is more likely in the rearview mirror than ahead.

The two year Treasury yield is one widely followed market measure pundits use for gauging the pace of future rate hikes. It made a ten year high JUST THIS WEEK at 2.91%, and today has pulled back to the 2.79%. But as the short yield was making its ten-year highs, a "bearish divergence" was emerging with momentum already making lower highs, as measured by both the daily and weekly RSI's.

Over the last week the weekly RSI has fallen below both the 80 level, a sell signal for some momentum investors, as well as the "overbought" 70 level for the first time in twelve months. As we write the yield is now breaking below the 2.79% support. Next support from there resides just below at the 50-day sma, now 2.77%, which has proven to be reliable support on pullbacks since June, followed then by the 100-day sma, now 2.68, which lines up with the July high (horizontal red line).

In the context of the +166bps rise from 1.25% in September 2017 to this month's high 2.91%, a relatively modest 38.2% Fibonacci Retracement would bring the yield down to 2.28%, nearly identical to the June 2018 low. That scenario would suggest markets are currently far too hawkish on the pace of future hikes.

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Nasdaq's Market Intelligence Desk (MID) Team includes:

Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.

Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.

Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.

Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq's Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).

Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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