4-5-16 – Where is the market going?

April 5, 2016
By Vlad Karpel

Stocks slumped at the open amid weakness in overseas markets and remain under water into midday Tuesday. The S&P 500 is down 17.52 points to 2048.61 and four points from session lows.

Treasury bonds are higher as equities falter and despite better-than-expected readings from the ISM Services for March and Factory Orders in February. The yield on the benchmark ten-year is pinned near one-month lows of 1.72%.

Crude oil is flat at $35.70 and gold gained $11.5 to $1231.

On Wall Street, all market sectors are in the red, being paced by losses in Utilities (XLU), Financials (XLF), and Healthcare (XLV).

Meanwhile, options volumes are running a bit below normal, with 2.8 million calls and 2.9 million puts traded across the exchanges. Projected volume of 14.3 million for the day is about 5% less than the one-month daily average.

SPDR 500 Trust (SPY) Apr 196 puts are the most actives so far with more than 36,500 contracts traded.

CBOE Volatility Index (.VIX) is up 1 point to 15.12 and has jumped 2 points, or 15.4%, since closing at 7-month lows Friday. The 2-day uptick is not entirely surprising given the steep drop since February 11th (see chart below), which has coincided with a 13.5% surge in the S&P 500.


Indeed, with the US economy projected to grow at just a .7% rate in the first quarter and the corporate profit-reporting season looming, a bit of pre-earnings “jitters” is not too surprising after the sharp two-month run-up for the S&P 500. Alcoa (AA) unofficially kicks of the first quarter reporting season on Monday.

According to Zack’s, first quarter earnings for S&P 500 companies are expected to be down 10% for the first quarter. Moreover, earnings growth is expected to remain negative for the second quarter (-4.5%) before turning positive again in the third quarter. Therefore, the actual first quarter results are not likely to garner as much attention as the commentary from companies about the outlook for the second half of the year.

In summary, today’s weakness in the equities market is not entirely surprising given the market’s big run-up and with the earnings reporting season looming. A murky political landscape, uncertainty on the rate front, and poor economic data emerging from Europe is likely adding to the anxiety Tuesday.

Still, the market decline has been orderly and, while VIX is up and there is a modest uptick in put activity, there are no signs of panic reflected in the options market.

The S&P 500 has support near current levels of 2050, which corresponds with mid-March range high resistance levels. Beyond that, 2044 and 2031 are the next levels to watch. On the upside, 2063 is the next area of resistance, followed by recent highs around 2074-2075.

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