3-8-16 – Where is the market going?

March 8, 2016
By Vlad Karpel

Stocks opened lower following weakness in overseas markets and are on track to snap a five-day winning streak. The S&P 500 is down 16.50 points to 1985.28 heading into midday Tuesday.

Meanwhile, Treasury bonds are seeing notable strength after data showed China exports declining 25.4% year-over-year. The report rekindled concerns about global demand and sparked a rally in government debt across Asia and Europe. Helping bonds further was a successful action of 30-year Japanese bonds. The yield on the ten-year Japanese bond briefly touched a NEGATIVE .10% in the wake of the action Tuesday.

In the US, the yield on the benchmark ten-year Treasury, which moves opposite to price, has dropped to 1.82% from one-month highs of 1.92% Late-Monday.

Meanwhile, crude oil is off $1.03 to $36.87 after reaching 2016 highs yesterday. Gold gained $3.5 to $1267.50.

On Wall Street, eight of ten market sectors are lower, being led by paced in Energy (XLE), Basic Materials (XLB), and Financials (XLF). Consumer Staples (XLP) and Utilities (XLU) are seeing relative strength.

CBOE Volatility Index (.VIX) is up .84 to 18.19 and ticking higher for a second day after falling to 2016 lows last week. Overall options volumes are picking up from a very slow pace seen Monday, but remain below the norm. 3.7 million calls and 3.6 million puts traded across the exchanges through the first two hours. Projected volume for the day is 15.7 million and 5% below the one-month daily average.

Indeed, given this week’s light economic and earnings calendars, there is not a lot of news to drive increased order flow.

Crude oil remains a primary catalyst for short-term moves in the equities market. Yesterday, for example, prices surged nearly 6% and the move triggered a 2.5% jump in the Energy (XLE) sector, which was up 10% in just one week prior to today. The continued strength in oil spurred a week of heavy “bargain hunting” and short-covering in the sector, until today.

In addition, the European Central Bank’s next meeting looms Thursday. The ECB is widely expected to cut its deposit rate by 10 basis points to a negative -.4% and expand its asset purchase program.

Wait-and-see is likely to be the order of the day tomorrow ahead of the ECB Thursday. Furthermore, with no significant domestic economic data slated for the next few days, crude oil and weekly inventory numbers Wednesday are the most obvious short-term catalysts prior to the ECB announcement.

On the technical front, the S&P 500 failed to make a decisive break of 2000 Friday after being turned away at 2009.13. Yesterday’s intraday high of 2006.12 is also a resistance area. Beyond that, the 200-day moving average around 2020 comes into play.

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Recall that the 2000 level is significant for more than one reason. Specifically, from 11/3/2015 to 2/11/2016, the S&P 500 lost 281 points. Through Monday, it had recovered 173 points, or 61.6% of that 281-point decline. According to Fibonacci numbers, a move that recovers more than 61.8% negates the previous trend. Therefore, a decisive break of Monday’s closing print would be a bullish development and set up a test of the 200-day MA.

That, in turn, might need to wait until there is better news on the earnings and economic front. While crude oil remains an important short-term driver for the energy sector, the accommodative action from the ECB is already baked in the cake. Then focus turns to the March 16th Federal Reserve meeting, where monetary policy officials are likely to signal a much less accommodative stance.


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