2-2-16 – Where is the market going?

February 2, 2016
By Vlad Karpel

Stocks slumped at the open and are working off session lows, but remain mired in the red through midday Tuesday. The S&P 500 is down 25 points to 1914.38 and 5 points from its worst levels.

Treasury bonds are seeing notable strength on a light day for data and as the equities market faces renewed selling pressure. The yield on the benchmark ten-year Treasury has plummeted below 1.9% and to levels not seen since April 2015.

Crude oil remains volatile. Prices fell towards $29 per barrel Tuesday and are down $1.20 to $30.40. Gold is flat at $1128 after a two-week gain of more than $50 an ounce.

On Wall Street, Energy (XLE) is again the big mover and is off 2.2%. Financials (XLF), Telecomm (IYZ), and Industrials (XLI) are areas of relative weakness as well. Ten of ten market sectors are under water.

CBOE Volatility Index (.VIX) is up 1.16 to 21.14 amid relatively light volumes in the options market. Roughly 2.9M calls and 3.2M puts traded across the exchanges. Projected volume for the day is 15.1M and well below the one-month average of 18M contracts.

SPDR 500 Trust (SPY) Feb 190 puts, iShares Small Cap (IWM) Feb 100 puts, and SPY Feb 182 puts are the most active options through midday.

Indeed, despite Friday’s big rally in the S&P 500, and an impressive intraday turnaround Monday, the underlying tone is once again defensive. The big move in Treasuries is evidence that risk aversion is on the rise and the increased put activity (relative to calls) is also a sign that portfolio managers are taking out insurance for fear of another market slide.

The volatility in crude oil is weighing on the energy sector, but the overall earnings results are not offering much fodder for the bulls either. According to Zack’s, with nearly half of the market value of the S&P 500 having reported, total fourth quarter earnings are expected to be down 5.8% from last year on 4.4% lower revenues.

Still half way to go.

Not helping: the only news on the economic front was the latest monthly auto and truck sales numbers. Ford (F) and GM shares are bought down 3.3% in the wake of the results.

Lastly, political chatter is making the rounds, with Cruz beating Trump and Rubio, while Clinton narrowly defeats Sanders, in the Iowa caucus.

All this does nothing but cloud an already murky market outlook for the remainder of 2016. As risk aversion persists, the prospect of heightened volatility continues. For its part, VIX remains above 20 and has closed above that level in nearly every trading day so far in 2016, compared to only 42 trading days (17% of the time) in 2015.

The two-day drop in the S&P 500 has retraced 45.6% of the big move from Thursday-Friday last week. There is support around today’s lows and the 1910 level. 1900 and 1875 are the next logical areas of support. On the upside, today’s high of 1935 corresponds with yesterday’s open and, like the high print of 1940 on Friday, likely to be short-term overhead resistance.

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