Month: August 2015

Equities plunged at the open today after global financial markets fell overnight.  The good news is the market has rallied through the early afternoon, recouping a significant part of the losses. The Nasdaq saw the largest initial losses, with Netflix (NFLX) down a whopping 17.7 percent at the open. Less than an hour later, Netflix was down less than 4 percent, a large move, but not a shocking one for such a volatile stock. A few hours thereafter, the stock was up 2.72 percent.  Without a doubt, volatility is back and investors must remain patient.

The drop and recovery in early trading makes it appear as if much of the selling impulse has been exhausted. Losses from last week and today resembles both the drop in October 2014 and the correction in 2011. Over the weekend, some chartists pointed out the resemblance to the 1987 stock market crash, which also was marked by a one-day selling climax. If the selling has exhausted, the lows from Monday morning should hold over the days ahead.

The genesis for the current selling remains China. Over the weekend, the government decided to forgo a cut in reserve requirements, a move widely anticipated by investors. It did announce the state-run pension fund will be allowed to put up to 30 percent of assets into the stock market, though it wasn’t enough to calm investors. The mainland indexes fell about 8 percent on the day, but they do not directly impact global markets due to capital controls and their absence from major global indexes.

Commodities and other emerging markets haven’t been as lucky. Oil prices continued their steady decline on Monday and have not yet shown a hint of a potential bottom. Markets such as Brazil and Malaysia are not facing acute pain in their equity markets, but steady pressure on emerging market currencies is pushing related ETFs much lower on Monday, continuing a string of losses that began when China allowed the yuan to depreciate in early August.

The U.S. dollar fell in early trading on Monday as well, as investors bet against the Federal Reserve hiking interest rates in September. The euro spiked to new multi-month highs versus the U.S. dollar and the yen reversed all of its losses in 2015. These moves are significant and could be a sign that the dollar rally versus these two developed markets has come to an end. The dollar continues to rally versus emerging market currencies though; it’s possible the change in the euro and yen is a short-term move based on expectations of Fed policy.

Economic data and earnings are light this week and should not have an impact on the larger concerns surrounding the market. However, with stocks appearing to head towards a bounce, any positive data may be latched onto as way of explaining the recovery in stocks. New home sales, durable goods orders and personal income for July will be reported. The second estimate of second quarter GDP will be announced on Thursday. Economists expect growth will be revised upwards from 2.3 percent to 3.3 percent.  As for earnings, retailers are still in the heavy reporting season. Best Buy (BBY), Aeropostale (ARO), GameStop (GME) and Dollar General (DG) headline a week when smaller retailers report.

Equities took a pounding this week as the slowing Chinese economy rattled commodity markets. Weakness in credit markets, a result of falling commodity prices, are also raising questions of solvency for some resource producers. The price of West Texas Intermediate Crude oil briefly traded below $40, a new low in 2015, while industrial commodities such as copper also weakened. For the week, the S&P 500 Index fell 5.8 percent and the Nasdaq lost 6.8 percent, wiping out all of its gains for the year.

China provided two negative data points this week.The stock market returned to its 2015 lows, erasing the boost from the government’s multiple bailout efforts. Additionally, the flash PMI for August fell to 47.1, the lowest level since the beginning of 2009. Any number below 50 signals contraction in the manufacturing sector. This rattled everything from commodities to emerging market currencies as many investors now expect further depreciation of the yuan.

As for the bond markets, corporates have been under pressure since May. These bonds haven’t been taking significant losses but there has been a steady downtrend as investors are worried that low oil prices will impact the energy sector. Some firms have borrowed to fund their operations and low oil prices could push some smaller firms into bankruptcy, as has already happened in coal this year.

Federal Reserve minutes caused investors to worry about delayed rate hikes due to a weaker economy. Fed officials discussed China, the strong dollar and weak commodities as possibly leading to slower economic growth. China is only mentioned 6 times, twice as a potential risk. In contrast, the word “reinvestment” appeared 13 times and was the second topic of discussion at the meeting. This is very important because the Federal Reserve has said it will stop reinvestments “sometime after” it begins raising interest rates. A rate hike could be delayed if economic growth weakens, but the Fed didn’t appear concerned three weeks ago. Fed officials instead spent a considerable amount of time discussing what they will do after rate hikes. Given the temperamental environment, events impacting the Fed’s direction may unfold, though a September rate hike is still a strong possibility.

There was significant panic on Friday and the market dropped as investors hedged against further losses by buying options at the close of the trading day. This is clearly an emotional reaction and signals selling may have climaxed. Several important sectors such as the market leading biotechnology sector, healthcare and consumer discretionary dipped to their 200-day moving averages, a key support line that has held for several years.

Currently, the market is oversold, suffering one of its worst weeks during this bull market. The dip this week resembles the drop seen last October, when stocks fell by a similar amount over the course of a few days. That decline was followed by a sharp rally and resumption of the bull market. Investors tend to overreact and the events of this week will likely lead to a rebound over the coming days. We would encourage investors to not overreact; instead, this may be an excellent buying opportunity as we enter the fourth quarter.