Global Uncertainty And The S&P 500

Includes: SPY
by: Danny Riley

During Friday’s trade the Dow Jones Industrial Average (DJI:^DJI) closed down 140 points or -0.85%. The S&P 500 (SNP:^GSPC) lost 15.21 points or -0.81% while the Nasdaq Composite (^IXIC) plunged another -1.71% despite upbeat earnings results from Microsoft (NASDAQ:MSFT).

After being up 6 days in a row the S&P succumbed to geopolitical concerns with stocks moving into negative territory for the week.

Week Ahead

It’s going to be a big week for the stock market. Topping the list of highlights is the Fed two-day meeting, Wednesday’s ADP and GDP numbers, the Challenger job-cut report and Janet Yellen’s Thursday speech in Washington to the Independent Community Bankers of America, along with Friday’s jobs report and a slew of earnings reports.

Ordinarily we would not make so much out of an economic and earnings calendar and geopolitics, but with the S&P only about 1.7% from its all-time high, many traders we talked to on the floor said they would be on guard for some big movement.

What Happens to the Market if America Goes to War?

The S&P started out the week on a positive note. By Thursday, as the West pressed Russia to stand down and implement the Geneva agreement to get the Russian separatists to pull back from Eastern Ukraine cities, the global markets started to weaken again as the war of words intensified.

Eastern Europe isn’t the only place the U.S. finds itself in a faceoff. President Obama continues to push for a settlement over the disputed islands in the East China Sea, known as Diaoyu by China and Senkaku by Japan, but has also warned the U.S. would be obligated to aid its Asian allies and partners if China attacked. All this and an agreement to expand U.S. military bases in the Philippines is happening against the backdrop of another threatened nuclear test by the North Koreans.

While the stock market is going up it’s going to be hard to continue with so much geopolitical strife going on. This Wednesday the Fed will have done its 4th taper. At a certain point the S&P won’t rally back after a sell-off and will keep dropping. The threat of reduced liquidity will become a problem at some point.

Are we there yet? Probably not; but unlike the last few years of selling off and making new highs, this year feels different. I don’t need to take anything away from any news stories I read or saw on TV, but it can’t keep going this way without a correction.

The Asian markets closed mostly lower and in Europe 7 of 12 markets are trading higher. The week’s economic calendar includes 24 separate economic releases, 16 T-bill or T-bond announcements or auctions, the two-day Fed meeting and the May jobs numbers. Today’s economic and earnings calendar includes pending home sales, the Dallas Fed Manufacturing Survey and earnings from CNA Financial (NYSE:CNA), Loews (NYSE:L), Corning (NYSE:GLW), National-Oilwell (NYSE:NOV), Herbalife (NYSE:HLF), and Jacobs Engineering Group (NYSE:JEC).

Our View

The overall liquidation of the tech sector and the increased threat of war weighed down on the S&P 500 all day long on Friday. With the exception of a few short-covering rallies the S&P [CME:SPM14] was trading at sell programs levels all day. The rallying and selling off so many times generally means a reversal, but the S&P always comes flying back up after a sell-off. After a 180% gain from its March 2009 low to its nearly 30% gain last year, the S&P may not be up sharply, but it’s not down sharply, either.

If you could only look at one thing it would have to be the sell-off in the Nasdaq/tech/biostock sector. It maybe hard to draw a parallel to the 1999-2000 tech bubble, but the selling should not be overlooked.

Our view is twofold: The first part is that the ESM14 closed OK on Friday. If the Russians don’t pull anything it’s possible the S&P rallies a little in the first part of the day. The second part is that Mondays have not been kind to the S&P this year. Should the S&P open higher and there is no change out of Russia, we lean to selling the rallies.

As always, please keep an eye on the 10-handle rule and please use stops when trading futures and options.

  • In Asia, 9 of 11 markets closed lower: Shanghai Comp. -1.62%, Hang Seng -0.41%, Nikkei -0.98%.
  • In Europe, 7 of 12 markets are trading higher: DAX +0.79%, FTSE +0.41%
  • Morning headline: “S&P Futures Seen Higher as Russian Invasion Nears”
  • S&P Fair Value: -5.95
  • Total volume: 1.5 mil ESM and 3.3K SPM traded
  • Economic calendar: Pending home sales and the Dallas Fed manufacturing survey. Earnings from CNA Financial, Loews, Corning, National-Oilwell, Herbalife, and Jacobs Engineering Group.
  • E-mini S&P 500 1860.75+0.75 - +0.04%
  • Crude 102.15+0.02 - +0.02%
  • Shanghai Composite 0.00N/A - N/A
  • Hang Seng 22132.529-91.00 - -0.41%
  • Nikkei 225 14288.23-141.029 - -0.98%
  • DAX 9431.37+29.82 - +0.32%
  • FTSE 100 6699.06+13.37 - +0.20%
  • Euro 1.3845

 Global Uncertainty and the S&P 500