Financial Review

Backfire to Correction

…Major stock indices suffer technical breakdown. Trade wars backfire. Easter tweets against DACA, NAFTA, and Amazon. Apple will dump Intel. ISM slips. Construction spending flat. Yield curve flatter. Crude slide. EPA CAFÉ battle.

Financial Review by Sinclair Noe for 04-02-2018

DOW – 458 = 23,644
SPX – 58 = 2581
NAS – 193 = 6870
RUT – 36 = 1492
10 Y  – .01 = 2.73%
OIL – 2.09 = 62.85
GOLD + 15.80 = 1341.80

This is looking very ugly. The S&P 500 was down 2.2% to start the second quarter. It was the worst opening day for the second quarter since 1929.  We were telling you that the S&P 500 was trading above its long-term support. About 10 days ago, we said it was likely the S&P would hover just above support heading into the end of the quarter – and that happened. We are now in the second quarter, and we saw the breakdown today. The 200-day moving average for the S&P 500 is 2589. The intraday low for the S&P was 2553, and we closed at 2581 – definitely below the 200-day moving average. This is the first time the S&P 500 has closed below the 200-day MA since June 2016 – or another way to view it, the S&P has been above this key trendline for 443 sessions. Now, the length and strength of the bull run would indicate there will be a bounce back, or at least an attempt to bounce back.  The S&P is now down for 11 of the past 15 sessions and is negative year-to-date.


At one point during the session, the Dow was down about 780 points, and is also negative year-to-date. The Dow managed to bounce off the 200-day moving average at 23,423 but did break it on an intraday basis. The Dow is now a bit more than 11% below the Jan. 26 record high. There are, of course, 30 blue chip stocks in the Dow industrial average. With the declines, all of the 30 Dow components are below their 50-day moving average, a level that is often viewed as a gauge of short-term momentum. The Nasdaq Composite is still trading above the 200-day moving average but the index has turned negative year-to-date. The Nasdaq fell into correction territory on Monday, defined as a 10% drop from a peak. Both the Dow and the S&P had been in correction territory since February. To break out of a correction, we would need to close above the January highs. Meanwhile, the Dow Transportation Average lost 2% today at 10,190, and is also in correction territory. If the Transports close below the Feb. 9 lows of 10,136, it would trigger a sell signal based upon Dow Theory, which basically states that the Transports and Industrials confirm significant secular moves.


Now, you may be wondering what is so important about the 200-day moving average and the Dow Theory numbers; they are, after all, just numbers on a graph. True, but even if you don’t use these indicators in your own trading, technical factors can have an outsize effect on markets because many computer-based trading programs are wired to kick in and buy or sell massive quantities of stocks when events such as the breach of a moving average happens.  And when a sell is signaled, the market can move a thousand points in a matter of a couple of minutes.


The Nasdaq 100 Index lost 2.9%. Nearly a fifth of the S&P 500’s tech sector closed in bear territory, led by Facebook’s decline of more than 20%. Apple is down more than 10%, so it is in correction territory. Tech stocks have an increasingly large effect on stock indexes because of their weighting: The sector accounts for $6.4 trillion, or about 28%, of the S&P 500’s $23.4 trillion in market cap spread across 11 sectors. The Sox Index, or Philadelphia Semiconductor Index is 12.8% off its 52-week high set in mid-March. Today, Intel was clobbered after Apple announced it is planning to use its own chips in Mac computers beginning as early as 2020. Apple provides Intel with about 5 percent of its annual revenue. By using its own chips, Apple would be able to more tightly integrate new hardware and software, potentially resulting in systems with better battery life — similar to iPads, which use Apple chips. While the transition to Apple chips in hardware is planned to begin as early as 2020, the changes to the software side will begin even before that. As part of the larger initiative to make Macs work more like iPhones, Apple is working on a new software platform, internally dubbed Marzipan, for release as early as this year that would allow users to run iPhone and iPad apps on Macs. Intel lost 3% today to close at 48.92.


In a two-week span, Trump ordered up an array of tariffs against numerous countries, blocked Chinese takeovers of US companies and sought new restrictions on future Chinese investment. China responded over the weekend, imposing tariffs on a range of US goods, following through on a promise to retaliate against the Trump administration’s tariffs on imports of Chinese steel and aluminum. Penalties range from 25% on American pork and eight other kinds of goods to 15% on fruit and 120 types of commodities. The Finance Ministry renewed China’s criticisms of the Trump administration’s 25% tariffs on steel and 10% tariffs on aluminum under Section 232 of the Trade Act as violating global trading rules. This action by China is retaliation for steel and aluminum tariffs, not for other tariffs announced by the US last week.


Other countries haven’t retaliated for the steel and aluminum tariffs, which took effect March 23, largely because Trump temporarily exempted many of them. Still, the EU is unhappy and warned it will respond with its own 25 percent tariffs on $3.5 billion of American goods. Like China, the EU says it will focus particularly on products from states that are part of Trump’s political base, including iconic U.S. brands of motorcycles, blue jeans and bourbon whiskey. In turn, Trump warned that he would impose a 25 percent penalty on European car imports if the EU carried out its threat.


There is a big concern that tariffs could backfire. Many more people are employed in industries, such as auto manufacturing, that buy steel to make products, than in steel-making itself. Some consumers may also have to pay higher prices. Trade tensions could boost inflation more than desired by Federal Reserve policy makers, who might feel the need to raise rates more aggressively than planned. On the other hand, the tariffs result in job losses and a slowing economy. Worst case scenario, the economy slows, jobs are lost, and inflation heats up dramatically, leaving the Fed in a nearly impossible position.


In a series of Easter-morning tweets, Trump said there would be no DACA deal, again threatened to pull out of Nafta and called on the Senate to use the “nuclear option” to change its voting rules. In his latest Twitter rant Monday morning, Trump again attacked Amazon, claiming they don’t pay taxes, rip off the post office, and steal Easter eggs from the baskets of little children.


The ISM said its manufacturing index slipped to 59.3% last month from a 14-year high of 60.8% in February. Still a strong number but it looks like there might be some bottlenecks in the supply chain.


Construction spending inched up 0.1% in February to a seasonally adjusted annual rate of $1.27 trillion, compared with an unchanged reading in January. The Commerce Department reports spending on public construction projects dropped 2.1% in the month, the biggest decline since October 2004. Private outlays rose 0.7% in February, with spending up 0.1% for residential projects and 1.5% for nonresidential projects.


We have talked many times about the flattening yield curve, and you know that a narrowing yield curve is usually associated with an economic slowdown, and an inversion typically predates a recession. At 47 basis points, the gap between two- and 10-year Treasury notes yields ended the first quarter at its narrowest since 2007. The 10-year yield fell seven basis points last week to 2.74 percent, declining through a key resistance level that held for weeks. The 30-year yield closed below 3 percent for the first time since January. Meanwhile, shorter maturities were little changed, leaving the yield curve from 2 to 30 years at the flattest since 2007. The bond market is likely to be on edge until Friday, when the U.S. Labor Department releases its monthly jobs report for March. The consensus estimate calls for about 185,000 new jobs last month, but the labor market was super-hot in January and February – gaining 313,000 new jobs last month.


Crude slid the most in almost two months. If, in fact, trade tensions are on the rise, it stands to reason that global economic growth will take a hit. And if economic growth decelerates, demand for oil will likely diminish. At least that was the rational given for biggest decline in crude prices in more than seven weeks. Perhaps a simpler reason for the decline was hedge funds covering wrong-way bets that supplies would diminish. Nationwide crude production has remained above 10 million barrels a day since early February.


The Trump administration rejected an Obama-era plan to make automobiles more fuel efficient, opening up a long process to weaken current standards and putting California and the federal government on a collision course over vehicle emissions. The standards called for roughly doubling by 2025 the average fuel efficiency of new vehicles sold in the United States to about 50 miles per gallon. Proponents said they could help spur innovation in clean technologies. California, long allowed by an EPA waiver to impose stricter standards than the federal government on vehicle emissions of some pollutants, is prepared to sue the EPA if it tries to weaken the standards. And, of course, the rest of the world is demanding cleaner, more efficient cars, so…. Backfire.


Health insurer Humana’s shares closed up 4.4 percent on news it was in talks with Walmart to expand their partnership or possibly be acquired by the retailer. Walmart stock fell 3.8 percent.

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