Markets Bounce Slightly, Volatility Eases, But Caution Remains

U.S. markets are looking cheerier following yesterday’s rout, but caution appears to be the name of the game this morning.

Equity futures are up in pre-market trading, but not nearly enough to counter yesterday's vicious selloff. The Cboe Volatility Index (VIX), which spiked yesterday, is down over 4 percent this morning, but still elevated.

Markets were lower out of the gate Monday, as tariff fears and ongoing tech woes appeared to set off a broad-based selloff to start Q2 2018. When the dust had settled, all 11 sectors of the S&P 500 (SPX) finished lower for the day—10 of which have moved into  correction territory relative to recent highs.

Those worries haven’t gone away, leaving the market higher but cautious this morning. This soft bounce shouldn’t be too surprising given yesterday’s sharp selloff. Markets seem to be in re-evaluation mode, and choppy trading could continue until we get guidance from company leadership on upcoming earnings calls. Plus, the monthly jobs report, to be released Friday, might offer clues as to future Fed policy, so it's not unreasonable to expect thin trading at times.

Today, consider tuning in as Spotify Technology shares begin trading on the New York Stock Exchange. Trading could be particularly interesting because of the streaming service’s unconventional choice of doing a direct listing. Spotify has chosen to skip the typical initial public offering (IPO) process and list its shares directly on the exchange. While the debut will likely have little impact on the market as a whole, it might be a volatile opening due to the uncertainty surrounding the listing. No target price has been set in advance of the listing, and as the company has never turned a profit, it may be hard to value. Investors might consider popping some popcorn and watching the action, rather than jumping in on the open. 

At 2 p.m. ET, we’ll see auto and truck sales numbers from the major manufacturers. After a somewhat disappointing February, you may want to watch for whether buyers headed back to the showrooms in March. Keep in mind that bad weather across much of the East Coast in February might have contributed to the gloomy sales figures last month.

Speaking of gloomy, remember when yesterday’s markets tanked on pressure from tech and retaliatory tariffs from China? Amazon.com, Inc. AMZN led the charge lower, finishing down about 5.2 percent after the President’s continued criticism of the company via Twitter. Shares of Intel Corporation INTC added to the tech woes, falling over 6 percent, as Apple Inc AAPL said it might move away from Intel chips in favor of an in-house chip for its Mac computers. Shares of Facebook Inc. FB, still reeling from a recent data security issue, also lost ground, as did Tesla Inc TSLA, on concerns a recent recall, plus production setbacks on its Model 3, could further impair its financial condition.

Despite the selling, there may actually be some good news.

One thing that’s notable is that the selling was orderly. It wasn’t a panic. On days of true panic selling, investors might see the VIX  spike 20 percent-25 percent and gold up around 5 percent and bonds up significantly. While it’s true that the VIX spiked 18 percent on Monday, gold only gained 1.3 percent and the 10-year Treasury yield finished the day flattish at 2.74 percent. Investors seem to be recalibrating their expectations as volatility perhaps becomes the new normal for a while. (See more on that below)

Amid all the uncertainty swirling about, stocks that are paying dividends are perhaps becoming a layover point until earnings season. As always, market participants want certainty. When they don’t get it, they often turn to stocks that pay dividends. So it’s notable that telecoms and utilities, both historically high dividend payers, were among the least badly damaged S&P 500 sectors yesterday. It should also be noted, though, that both sectors are down year to date and some may think they don’t have much left to lose.

Another reason to perhaps take heart despite yesterday’s selling: It was done on lighter than normal volume as some international markets were closed while U.S. traders were selling. Fewer participants in the market can exacerbate swings either way.

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FIGURE 1: SPX THROUGH THE 200-DAY MOVING AVERAGE. After bouncing off its 200-day moving average (blue line) a couple of times in recent sessions,, the S&P 500 Index (SPX) crossed through it in earnest Monday and closed below it. Some trend watchers may be asking what's next. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

We Need to Talk About Volatility

You know that sinking feeling you get with conversations that start with “We need to talk.” No need for that here. Yes, volatility is up. But the longer your time frame, the less intraday volatility is likely affect your thinking and positioning. So consider paying attention, but don’t be overwhelmed. For some, the "buy the bounce" narrative may have gone by the wayside at the moment, and nobody wants to try to catch the proverbial falling knife. But over time, buy-and-hold investors are likely to see the bumps smooth out.

The Graying of Tech?

There’s a lot of noise in tech stocks at the moment, as highlighted above – Trump’s tweets on Amazon, Apple’s  announcement on Intel chips, Facebook’s data issue, and so forth. So perhaps now is a good time to look toward the horizon and potentially calmer waters. The sector is becoming more mature. For the moment, and perhaps well into the future, many tech companies are still priced for growth, but as time goes by it may become time to start asking whether we might see the price-to-earnings ratios of some of these names start gravitating toward those of value stocks. That could mean lower P/E ratios and more dividends. Because of current market volatility Apple’s dividend seems to be attracting some investors who want a different kind of return than other tech stocks that prioritize reinvestment over payouts. Interesting that a tech company is acting a bit like a safe haven.

Focusing on Industrials

As worries mount over a potential trade war between the United States and China, it may be worth keeping an especially close eye on the industrials sector. After all, much of the trade hoopla is surrounding Trump’s tariffs on steel and aluminum from China and other countries. Of course, all this will take time to filter into what actually goes on in factories. Tomorrow's factory orders report could be of interest since manufacturing is often considered a bellwether of the wider economy. Figures showing factory orders for manufactured goods in February come out at 10 a.m. ET, with the consensus estimate from Wall Street analysts of a 1.8 percent rise, according to Briefing.com. The site’s own estimate is for a 1.5 percent gain. Either would be a swing into positive territory, as orders decreased 1.4 percent in January.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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Posted In: NewsCommoditiesMarketsJJ KinahanTD AmeritradeThe Ticker Tape
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