Month: February 2018

Equities experienced a highly volatile trading week. The Russell 2000 fell 4.49 percent, best of the major indexes.

Rising interest rates pushed equities lower last week, which in turn pushed the VIX, to its highest level in more than a year. February 2^nd was the biggest day for the VIX futures contract with nearly 80,000 contracts traded. On Monday, that number nearly quadrupled as shorts were squeezed. The VIX peaked at 50 on Monday, up from 11 in January, destroying traders heavily short volatility. The VelocityShares Daily Inverse VIX (XIV) lost 95 percent of its value on Monday and will be liquidated later this month.

Sectors were highly correlated this week. Among the larger sectors, technology was the best performer. SPDR Technology (XLK) fell 4.44 percent. SPDR Financials (XLF) fell 5.72 percent. Consumer discretionary, healthcare and industrials were in between. Smaller sectors were more diverse in their performance. SPDR Utilities (XLU) declined 2.65 percent, while SPDR Energy (XLE) slid 8.10 percent.

Some subsectors outperformed versus expectations this week. Biotechnology is normally more volatile, but SPDR S&P Biotech (XBI) slid 5.30 percent, in-line with the broader market. iShares PHLX Semiconductor (SOXX) outperformed the market with a dip of 4.77 percent.

Economic data was light this week. The ISM Services PMI rose to 59.9, up from 56 in December, signaling robust expansion. Initial claims for unemployment once again approached a 45-year low at 221,000, beating expectations of 232,000.

Chinese inflation slowed in January, supporting evidence of a slowdown as China’s government clamps down on credit growth.

The 10-year Treasury yield stabilized this week. It traded at a high of 2.88 percent but failed to breach the 2.9 percent level. It closed the week down slightly from last week’s close at 2.83 percent. The 30-year yield also stabilized, but still had some ground to make up. It rose slightly to 3.14 percent.

This week, Bristol-Myers Squibb (BMY) beat on earnings and revenue. General Motors (GM) and Disney (DIS) beat on both as well. Disney fell with the market, but GM shares were up 1.12 percent on the week. Gilead Sciences (GILD) delivered strong results but offered weaker guidance for 2018. Shares still outperformed the S&P 500 on the week, losing only 2.95 percent.

S&P 500 fourth-quarter earnings growth hit 14 percent at the end of this week. All sectors report rising earnings. All sectors except energy and utilities are beating earnings growth estimates. Earnings estimates for first quarter 2018 are rising. At the end of December, analysts forecast 11.5 percent growth. As of this week, the consensus estimate is 16.9 percent.

The U.S. Dollar Index has experienced a six-day winning streak. The euro fell 2 percent versus the U.S. dollar this week.

The S&P 500 Index outperformed most international funds this week. SPDR S&P 500 (SPY) declined 4.98 percent, iShares MSCI EAFE (EFA) 5.46 percent, and iShares MSCI Emerging Markets (EEM) 5.34 percent.

This week’s selling bout pulled major indexes down 4 percent. The overdue rout can largely be attributed to shifting volatility in an improving economic climate.

Although punctuated by periods of higher volatility, overall volatility has fallen steadily during the past decade. Many investors paid for protection against a market decline by buying puts on their stocks. Some speculators bet on higher volatility by buying futures and ETFs tracking volatility indexes.

Traders continued building short-volatility positions into the recent bout of selling, when the shorts were finally squeezed. On Friday, a record high of 78,000 VIX contracts were bought. On Monday, that number almost quadrupled. An inverse VIX ETF (XIV) collapsed and will be liquidated later this month.

After hours on Monday, traders and investors realized the spike in the VIX was caused by a short-squeeze in derivative products. Markets rallied back on Tuesday.

Financials led performance ahead of the dip due to rising interest rates. Consumer discretionary led the market higher as its largest component, Amazon (AMZN), advanced in the week.

Consumer staples, utilities, telecom and materials have all performed similarly over the past week.

Biotechnology held up well during the weakness considering its high volatility. Investors anticipate more mergers and acquisitions in the sector, lifting funds with small- and mid-cap companies such as SPDR S&P Biotech (XBI).

Energy has underperformed in the past week after an ominous, poorly timed conference call from Exxon (XOM). While oil market fundamentals have improved considerably, investors are still worried about a dip back to the $40s. After reporting strong earnings on Friday, Exxon management announced plans for increased investment, sending shares 12 percent lower. XOM is 22 percent of SPDR Energy (XLE). Chevron (CVX), 16.6 percent of XLE, also fell.

Rising interest rates triggered selling last week, setting up the short volatility traders for a squeeze. The 30-year Treasury yield jumped from 2.9 percent at the end of January to 3.1 percent.

Thompson Bond (THOPX) and other floating-rate funds held steady, despite the dip in treasuries.

The largest conglomerate in China, HNA Group, has failed to repay loans on numerous properties and companies around the world. It became the largest holder of Deutsch Bank (DB) at 9.9 percent. Shares of Deutsche Bank have fallen nearly 20 percent in the past 10 days as investors worry HNA may begin selling assets.

Developed-market equities underperformed as the U.S. dollar rallied.

SPY is approaching a relative high versus EFA. If the dollar begins a sustained rally, even the strong relative performance by emerging market funds could end. A rising dollar would be bullish for U.S. bonds and broadly bearish for commodities.

Equities sold off broadly on Monday, but most shares bounced significantly from intraday lows before the closing bell.  The Dow Jones Industrial Average closed 4.60 percent lower on the day, the S&P 500 fell 4.10 percent, and the Nasdaq 3.78 percent.

Short-term technical indicators showed the S&P 500 Index was overbought for all of January, but the selling over the past few days has pushed this towards an oversold condition. This indicates the selling might be close to finished. The VIX index spiked to 37.32 on Monday, its highest reading since August 2015. A short-squeeze in the VIX may have driven much of Monday’s afternoon selling.

Bonds decoupled from stocks and moved higher on Monday. Bond selling sparked the initial equity selling last week. This move in bonds should shore up markets in the days ahead.

Jerome Powell was sworn in as Federal Reserve chairman on Monday. The ISM services PMI ticked up to 59.9 percent in January, up from 56 percent in December. The Job Openings and Labor Turnover Survey (JOLTS) and consumer credit reports for December will be out later this week.

Bristol-Myers (BMY) rallied on Monday after strong earnings before heading lower with the broader market. Disney (DIS), Gilead Sciences (GILD), BP plc (BP), General Motors (GM), Allergan (AGN), Sanofi (SNY), Rio Tinto (RIO), GlaxoSmithKline (GSK), Tesla (TSLA), Philip Morris International (PM), Nvidia (NVDA) and CVS Health (CVS) are also scheduled to report earnings this week.