Market Perspective for August 24, 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.

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