Daily State Of The Markets: Headline Headache!

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 |  Includes: DIA, IWM, QQQ, SPY
by: David Moenning

Most investors know that today's stock market can move quickly when headlines hit the wires. And most investors are aware that the reason for the oftentimes sudden and swift movements are the headline-reading algorithms that are pre-programmed to respond to certain words within those headlines as well as the accompanying stories.

On Thursday, the algos that can "read" headlines (well, scan for words at the speed of light, anyway) had a field day.

Rarely have investors been treated to the string of headache-inducing headlines that was seen on Thursday. Sure, there were certainly days during the European debt crisis when the news came hot and heavy. But during this, as well as the other various crises that have occurred since 2008, the headlines usually referred to the theme of the day.

On Thursday however, there was a plethora of topics that the bears could have chosen to act on. It truly was a sight to see.

It Started With the Politicians

After a strong session for the blue chip indices on Wednesday, where the Dow finished at a fresh all-time high, traders awoke to see European bourses down 1 percent or more and the S&P futures down double digits. The culprit was the newly announced sanctions by the U.S. and EU against Russia. Here's the story...

The new sanctions against Russia were put in place after leaders in the West agreed that Moscow has failed to sufficiently diffuse the situation in eastern Ukraine. The White House announced that the new measures will hit large banks, energy firms and defense companies. This included banks Gazprombank and Vnesheconombank and energy companies Rosneft (OTC:RNFTF) and OA Novatek (OTC:NOVKY).

The EU also imposed new sanctions, but they were not quite as strict as those from the U.S. The EU said they would ask the EU-owned European Investment Bank to suspend new investment in Russia. They will also seek suspension of new lending by the European Bank for Reconstruction and Development.

Russian President Putin responded by saying the latest sanctions announced would strain relations with the U.S. and would hurt both Russian and US businesses. Russian Prime Minister Medvedev said that the measures would achieve nothing and would encourage anti-US sentiment in Russia. He suggested that it will drive Russia to boost defense and security spending. And the Russian media cited a Kremlin statement that said it reserves the right to take retaliatory measures. Super.

Then Jets Started To Fall From the Sky

While a 12-point move in the S&P futures was certainly an eye-opener at 5:15 am, it was by no means a game-changing move. However, given the relative lack of volatility that this market has seen lately, the move definitely caused traders to sit up and take notice.

But after the anticipated move down at the open on Wall Street, the dip-buyers returned in earnest. By 10:00, the S&P 500 was back to even and the Dow was hitting another all-time high on an intraday basis.

But then the reports of jets falling out of the sky began.

First there were reports that a military fighter jet had been shot down in Ukraine. Reports were sketchy and given that this was likely a military operation, there was little press coverage. Or perhaps the next headline was simply too overpowering for anyone to care.

At about 11:00 am eastern, word was that a Malaysian airliner had crashed in eastern Ukraine. Within minutes the Twittersphere was on fire with reports that the passenger get carrying nearly 300 passengers and crew had been shot down by a surface-to-air missile.

The problem for the markets wasn't the fact that a human tragedy had occurred. No, this was about the potential for WWIII to commence.

I tweeted that the key to the rest of the session was whether or not the airliner had been shot down by either the Ukraine or Russian military - or if this was the work of "terrorists". In other words, if shooting down a civilian airliner was an "accident" or the work of individuals, stocks would be okay.

Key to today's session: If a "terrorist" shot down the plane, stocks are ok. If "military" on either side did - it's a problem. - StateOfTheMarkets (@StateDave) July 17, 2014

The reports, as well as the accusations out of Ukraine came fast and furious. But eventually it became clear that this had NOT been the work of either country's military. And as stocks began to rally once again, CNBC's floor reporter remarked that the market's reaction had been muted so far.

A Fed-Head Chimes In

Next up, St. Louis Fed President James Bullard made headlines by saying that the U.S. economy was reaching the Fed's goals faster than anyone had expected.

Adding fuel to headline-reading algo's fire, Bullard reiterates that Fed may need to raise rates sooner than anticipated. - StateOfTheMarkets (@StateDave) July 17, 2014

Although everyone was focused on the tragic airline crash, the headline from Bullard made traders realize that the Fed might be trying to collectively send a message to the markets. Given that the idea of raising rates sooner than most analysts anticipate has been repeated by various Fed officials lately, it was becoming clear to traders that the Fed is likely talking about a rate hike before June of next year.

And yes, the algos noticed.

Next, Israel Decides to "Take it Up a Notch"

Just about the time you thought things couldn't get any worse, the headlines blared that Israel had begun a ground offensive into Gaza.

While this conflict has been in place for some time now, Israel deciding to take the game to the next level added fuel to the geopolitical fire on Thursday.

There's an Issue at the White House, Seriously?

In what could only be describe as an "Oh, for heaven's sake" moment, late in the trading session, the headlines announced that the White House was on lockdown.

The problem was an "unattended package on the north fence." And while the situation was quickly diffused, this appeared to be the straw that broke the camel's back in terms of the U.S. stock market "holding up" in the face of all the negative headlines.

Suddenly, it was "sell first, and ask questions later." The trend-following algos jumped on board and the S&P dove another 14 points.

While the bulls were to be applauded for their efforts to hold the line for much of the day, the unending string of headache-inducing headlines were simply too much to overcome. And in the last hour, the market "whooshed" lower.

Oh, and 44 Hedge Funds Are Involved in New Insider Trading Probe

After the close, the hits kept on coming. Google (NASDAQ:GOOG) (NASDAQ:GOOGL) missed on EPS (although revenues and other metrics were strong enough to cause the stock to rise). IBM (NYSE:IBM) disappointed. And the SEC announced that 44 hedge funds were under investigation for insider-trading.

According to Bloomberg, which cited an SEC filing, a regulatory investigation of insider trading concerning the U.S. House Ways and Means Committee involves 44 hedge funds, including 25 funds located in New York. Awesome.

So there you have it...If there was any question about why stocks suddenly and without warning went into a tailspin yesterday, now you know why.

The question of the day, of course, is if this was simply another in a long string of one-or-two-day wonders or the start of the meaningful correction that just about everyone on the planet has been calling for. Today's action should tell us a lot. So if you are planning on being at the beach or on the golf course, it might be a good idea to check in every once in a while.

Turning to This Morning...

The focus this morning remains on what exactly happened to MH17. U.S. intelligence believes that while it was indeed a surface-to-air missile that downed the airliner, killing all 298 people on board, the question remains, who fired the missile? Russia is blaming the Ukraine government. Ukraine blames pro-Russian separatists. In addition, the other geopolitical issues continue to be focal point of the markets this morning. Despite the negative session in Europe, where traders are also concerned about the state of the economy, U.S. stock futures are pointing to a modest rebound at the open.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:

- Japan: -1.00%

- Hong Kong: -0.28%

- Shanghai: +0.17%

- London: -0.39%

- Germany: -0.63%

- France: -0.12%

- Italy: -0.12%

- Spain: -0.77%

Crude Oil Futures: -$0.03 to $103.16

Gold: -$7.10 at $1309.30

Dollar: lower against the yen and euro, higher vs. pound.

10-Year Bond Yield: Currently trading at 2.475%

Stock Futures Ahead of Open in U.S. (relative to fair value):

- S&P 500: +4.23

- Dow Jones Industrial Average: +39

- NASDAQ Composite: +16.94

Thought For The Day... Find the good. It's all around you. Find it, showcase it & you'll start believing in it. -Jesse Owens

Positions in stocks mentioned: none