Weak Day Across The Board For Stocks

The past few days saw the Dow fall while the Russell 2000 rose. It has been an interesting situation leading up to Thursday because if all the major indexes were to rally, then the Russell 2000 would be massively overbought. If they all fell, the Dow would be oversold. Since they all fell, the Dow is now on an 8 day losing streak which is the longest since March 2017. The Dow was down 0.8%, the S&P 500 was down 0.63%, and the Russell 2000 was down 1.06%. As you can see from chart below, the trade worries have caused the S&P 500 to make a double top consistent with the March high.

You can say this has been a consolidation after a big run up, but the longer it stays below the March high, the stronger the resistance will be. The S&P 500 is no longer overbought as the CNN Fear & Greed index is 52 out of 100 which is neutral. I’m looking for that recent high to be broken in 1-2 weeks on the back of strong early Q2 earnings reports.

(Click on image to enlarge)

Bonds, Dollar, And Oil

The treasury market basically just reversed yesterday’s action as the 10 year yield fell 4.22 basis points and the 2 year yield fell 2.48 basis points. The market was clearly in ‘risk off’ mode as traders flocked to treasuries. The difference between the 2 yields flattened to 36 basis points. Surprisingly, even though the curve flattened, the financials didn’t underperform. The XLF, which is the financials ETF, was only down 0.29%.

The dollar sold off from its recent 11 month high. The index fell 27 cents to $94.85. You can see why the Russell 2000 slightly underperformed the S&P 500 and the Dow as the small caps like a strong dollar.

WTI oil fell 17 cents to $65.54 as the market waits for the OPEC meeting tomorrow. OPEC is going to raise production; the only question is by how much. I expect production will increase by a decent amount because Iran, which was against production increases, is now signaling it would be okay with a small increase. The current expectation is for an increase in production somewhere in the range of 500,000 barrels per day to 1 million barrels per day.

Effect Of The Trade War

In a previous article, I mentioned the Dow could go up 500 points if a trade deal is struck with China which involves the tariffs being eliminating. The chart below does a great job of showing the effects of each of the major catalysts for stocks. The U.S. data has recently switched from a negative to a positive which explains the rally in May and early June. If this chart was extended to reflect this week’s action, the trade tensions would be a bigger drag on equities.

This chart shows the trade jitters have cost the S&P 500 about 75 points. The tech regulation is the biggest drag, but it mostly brought down stocks in March and April; it looks over for now as Facebook stock has rebounded sharply in the past few weeks. The earnings data has been the biggest catalyst for stocks to move higher this year which isn’t surprising. There was a boost in January as estimates went up because of the tax cut and a boost in April. I’m expecting another boost in July. The buyback blackout period is a potential negative catalyst which isn’t listed here.

Washington D.C. and U.S. data were blamed for the decline in February. That’s an interesting interpretation because the VIX spike played a role as well. This is a fundamental interpretation which is why the VIX and the sentiment shift didn’t make this list. When something other than the fundamentals move stocks, it’s always going to be difficult to explain the move fundamentally. Finally, you can see the Fed caused volatility in March when it raised rates, but hasn’t cause trouble for stocks after the rate hike in June even though the June hike included hawkish guidance.

These results clearly are estimated because there’s no way to be sure of the exact reasons stocks move. When I explain movements in written form it can’t be as precise as this chart which is what makes it great to look at even if it could be wrong.

Downside Surprise In The Regional Fed Report

The regional Fed manufacturing indexes are very volatile, so I take the headline reports with a grain of salt. However, it’s still surprising to see the June Philly Fed index was 19.9 which is a sharp decline from 34.4. It was much lower than the consensus for 28. This report still shows healthy growth. Essentially, the report was extreme growth shifting to normal growth. The headlines show this is a 19 month low, but that overly dramatizes what is still a strong report. Specifically, new orders fell from 40.6 to 17.9 and the 6 month expectations index for business conditions fell from 38.7 to 34.8.

The chart below compares the 5 region average for new orders with the new orders from the ISM manufacturing report. The latest tick on this graph shows the average of the Empire Fed and the Philly Fed new orders since the others haven’t been released yet. It indicates a moderate slowdown in manufacturing, but considering the strength in May, I don’t see it as a big deal. Finally, the prices paid index was down 0.6 to 51.8 and the prices received index was down 3.2 points to 33.2. These are still overheating even though they fell slightly. I would have liked to see more of a decline to make me feel better about the overall weakness.

To be clear, this whole report shows deceleration from rapid growth to good growth. That’s terrible in rate of change terms, but since this is a volatile index because it has a small sample size, I’m not worried at all. I will be worried if all the other indexes show the same weakness and the Philly Fed report drops again next month.