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Traders' Espresso: A.M. Edition (02/09/18)


U.S. equity indices suffered another broad downturn yesday, while the VIX spiked, bond yields rose and the dollar treaded water.

Volatility spread to Asian markets again, with most indices down between 1% and 4%.

A 2nd U.S. government shutdown lasted only hours; but increased spending and potential deficits to add to the national debt.

Friday is light on U.S. economic data, with the Baker-Hughes rig count the only major event at 1:00PM ET.

The Dow Jones Industrial Average suffered the second four digit drop in it's existence (the first was on Monday) and officially entered correction territory, down over 10% from it's all-time high of 26,616.71 on January 26.  Although this is the 2nd largest point drop in the index, today's drop doesn't even make it to the top 20 worst Dow days in percentage terms.  The NASDAQ 100 was the worst performer, down 4.19%.  The NASDAQ Composite and the S&P 500 were down 3.9% and 3.75%, respectively.  The Russell 2000 was the best performer, relatively speaking, down 2.93%.

None of the 11 S&P sectors escaped the sell-off, causing the RSI of all but three to sink or sink deeper into oversold territory.  The NASDAQ and the NASDAQ 100 finally settled back down into their long-term price channels.  The Russel 2000 actually penetrated the lower boundry of it's long-term price channel, raising concerns that rotation down amongst all indices may not find a floor anytime soon.  Click here to see a discussion of the sector and index charts and what it may mean for future price action.

It's no surprise that volatility returned in a big way, with the VIX spiking over 20%.  Gold was up slightly on safe haven buying.  Asian indices were broadly down, and as of this writing European markets followed suit, though showing a milder downturn compared to their Asian counterparts.

What had prompted the sell-off was some good news; initial and continuing jobless claims both came in better than expected, and average hourly earnings posted a surprise increase of 2.9% annualized.  Despite continuing fears of inflation and more aggressive Fed policy, the U.S. Dollar Index rose only slightly following four days of impressive gains.

Following the jobless numbers, U.S. index futures fell, then shrugged off the news to turn around and show continued strength into the open.  The dollar index also shrugged off the data, after initially rising modestly.  The afternoon session for equities showed accelerating weakness in both cash markets and futures, starting it's aggressive sell-off with almost 30 minutes left in the trading day.  Surprisingly, the dollar index did not resume it's bullish move with the same fervor that indices traded down.  I have stated recently in this column my thought that strength in the dollar index will serve in the short-term as a leading indicator of weakness in equities, due to the way it has reacted to fears of inflation and a more aggressive Fed policy.  While the fact that the dollar index barely moved today (up 0.08%) does not lead me to abandon that view, it does cause me to wonder if there isn't something fundamentally deeper at work causing such volatility.

The U.S. government officially shut down briefly, as the Senate failed to meet for a vote before the midnight deadline.  A spending measure has since been passed in both houses, causing this to be one of the briefest shutdowns in history.  The measure kicks the can down the road once again until March, but adds $300 billion in spending.  The impact on spending and the government debt can do nothing but fuel concerns over fiscal policy, raising eyebrows at the Fed, who may very well tighten monetary policy to keep the economy from overheating and kicking up rampant inflation.

After showing modest gains overnight, U.S. index futures briefly turned negative in the early morning before starting to recover ahead of the open.  At this hour futures are mixed; with the Russell and NASDAQ futures up, the S&P futures up marginally, and the Dow futures mildly down.  VIX futures are down marginally, with the dollar index and futures on the 10 year treasury up around 0.12%.  Commodities and bond yields are down; palladium is the only exception, up 0.55%.

Although futures are stabilizing at this hour, I would expect another rough and tumble day in the cash markets.  I would not expect traders to go into the weekend long, so expect more selling in the afternoon--possibly accelerating in the last hour of trade--just as we've seen over the last two days.