Transports, Energy Continue To Suffer As Events Canceled, OPEC Can't Reach Agreement

A wild week ended with another head-spinning session Friday as stocks stormed back in the last half hour from deep losses to end above key technical support. The late charge helped stocks finish the week slightly higher despite massive levels of volatility.

Whether Friday’s late recovery will end up mattering next Monday is far from clear, and it might be worth remembering that last Friday’s end-of-the-day comeback didn’t spill over into this week. Still, ending the week with gains, however slight (0.6%), might taste like victory to some investors who got accustomed to regular 3% daily declines over the last 10 sessions. 

Short-covering ahead of the weekend appeared to show up around 30 minutes away from the closing bell. The comeback followed failed attempts earlier at a rally that flamed out in a big way. At times, the major indices were down well over 3% before finishing off less than 2%. That’s still not something to necessarily cheer about, but it leaves a better feeling than many investors probably had an hour earlier.

Chart Watch Turns Positive

From a technical standpoint, it might be significant that the S&P 500 Index (SPX) managed to close above the Feb. 28 low close for the year of 2954, and above another technical support level at 2940. It’s possibly a constructive trend that the market went down to test last week’s lows, apparently didn’t find much enthusiasm about selling further, and then got some traction into the close. It’s pretty common to see a double-test of the lows when the market is gripped by volatility the way it is now, though typically in the past the second key test has come a month or two after the first.

Today’s SPX closing level of 2972 is down 12.2% from the all-time high close posted on Feb. 18. If you compare today’s close to the close a week ago, however, things are actually up a smidgen. We’re seeing the market make higher highs and higher lows, a positive technical occurrence.

The three horsemen of risk were up significantly on Friday, with the Cboe Volatility Index (VIX) rising above 50 intraday for the first time in more than two years. There’s no sign of a let-up in this amazing bond rally, and gold is inching toward $1,700 an ounce. Stocks, meanwhile, couldn’t hold onto a brief comeback attempt.

Despite heavy selling two weeks in a row, it’s been a very orderly downturn. You might not like what’s happening to the stock market, but unlike in some past selloffs, we haven’t seen the machines breaking down or people hitting the panic button. That’s possibly because there’s such an efficient information flow now as markets trade around the clock.

We’re repricing every single asset, and the systems are holding up despite levels of volume never seen. The bond market is almost completely in the driver’s seat right now as the U.S. 10-year Treasury yield went into the final hour of trading Friday trying to hold onto the 70-basis point mark. It started the week above 1%. By the end of the day, the 10-year had clawed back to 0.78%.

This isn’t a typical bond rally—it’s been a long time since we’ve seen bonds move like this. A lot of economists continue to think that until bonds wave the white flag, stocks just won’t be able to make a sustained rally. They might pop back now and then, but rallies could continue to get met by sellers.

Brief Lift For Airlines, But Transports Still Braking

Despite the late comeback, many sectors remain in correction territory down 10% or more from highs. It’s been worse for some parts of the market than others. The Dow Jones Transportation Average ($DJT) is off more than 20%, putting it into bear territory.

Some of the airline and cruise stocks got a temporary boost Friday morning when reports in the media suggested the government might take a proactive response to help industries hurt by the virus, but then they sold off again. A meeting between the administration and cruise line executives this afternoon is being watched closely by investors and people in the industry to see if any measures get announced. 

Investors might also want to keep an eye on the news all weekend and remember to watch closely when futures trading begins Sunday evening around dinner time in the U.S. Typically, the SPX futures have been getting off to pretty disappointing starts the last few weekends, reflecting the unwillingness many investors have to head into the weekend with long positions. The average Sunday night start has been down 66 points.

It’s often said that misery loves company. Well, from a sector standpoint Friday, that seemed to be the case. Even so-called “defensive” areas like Utilities, Staples, and Real Estate—which have done a pretty good job holding their own over the last two weeks—didn’t get much of a bid until the last half hour of the day when it looks like a little short-covering came in.

Some of last year’s “darling” sub-sectors and stocks, including most of the semiconductor companies, continue to get taken to the woodshed. The PHLX Semiconductor Sector Index (SOX) is down about 11% year-to-date. Consider staying tuned on March 25 when Micron Technology, Inc. MU becomes the first major semiconductor company to report earnings. It could be very interesting to hear what executives have to say about their supply chain. Nike Inc NKE reports earlier that week and can hopefully give insight into the consumer.

Crude Hits New Three-Year Low

U.S. crude oil prices fell below a major long-term technical support area on the charts at around $42 a barrel Friday after OPEC couldn’t agree with Russia to lower production. Crude closed 10% lower at $41.28, the lowest finish since August 2016.

Energy stocks took another leg down, with some oil exploration companies falling double digits. Continental Resources, inc. CLR was off nearly 12% at one point, and Apache Corporation APA fell 9% intraday. The S&P Energy Select Sector Index (IXE) fell to 431 this week, a level not seen since 2009 (see chart below). 

Analysts say crude could stay under pressure for a while as it looks like Russia and OPEC might not be able to reach any agreement soon. Russia might be less able to handle lower prices for as long as countries like Saudi Arabia, which can make money on crude at lower prices. So, if Russia eventually buckles, maybe crude could mount a comeback. We’ll have to wait and see.

The Energy sector washout might be hurting investors, but lower gas prices—along with lower mortgage rates—could give consumers an unexpected gift. Thirty-year mortgage rates fell to their lowest level in history this week near 3.3%, Freddie Mac said. Gas prices are below $1.80 a gallon in parts of the southern U.S., which is the lowest since 2016. The problem with low gas prices is that they often reflect a slowing economy, so it’s not necessarily the best news in the world unless you’re planning a long driving trip. 

Jobs Report Redux

Though Friday’s February payrolls report didn’t apparently help the market much, it is nice to know we were in a really solid place before all this started. At the end of the day, it is a good report and bonds did come off significantly right after the data, which might hint that the market is still responding to normal signals. 

The healthcare sector still appears to be making fantastic strides in adding jobs. Government hiring was strong, but that particular area can make investors a little nervous because no one can ever be quite sure if that’s sustainable. The 53,000 jobs created in the hospitality industry almost certainly will not show up again in this month’s (March) report, considering how that sector is arguably among the most exposed to the virus impact. 

A loss in retail jobs wasn’t too surprising, but one area maybe to be nervous about is transportation. If you start seeing a lot of jobs lost there, we’ll know the transportation sector has been suffering pretty significantly.

While the data are backward looking, it is a bit comforting to think that we went into the virus situation with a pretty strong economic foundation. Things weren’t breaking down, and a lot of the data looked strong. Those numbers are going to likely get worse in coming weeks, but it’s from a high level.

FIGURE 1: DRILLED. Considering how seemingly orderly the current selloff has been, comparisons to the 2008-09 financial crisis are a bit premature. But then there's the Energy sector (IXE), which had already been weighed down by sinking crude prices. This week's meltdown seemed to exacerbate the sector's weakness, sending IXE to its lowest level since the heady days of 2009. 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.  

Staples Stocking: It’s no secret that some Staples companies, particularly those selling household items, have gotten a lift as people rush out to stock up on supplies in case the virus impact worsens. Costco Wholesale Corporation COST is one of the beneficiaries as people seem intent on buying every roll of toilet paper and bottle of hand sanitizer they can find (both items had shortages at some stores in the Chicago area this week). Other stocks that got a lift included Clorox Co CLX, Campbell Soup Company CPB, and, to some extent, Procter & Gamble Co PG.

It’s important to be careful here, however, because there’s a limit to how much stocking up people are likely to do. Chicken soup may be good for a cold, if the old tales are true, but people can only eat so much of it at a time. Also, any large purchases now might mean people have so many rolls of toilet paper and cans of soup around that they won’t necessarily need to go out and buy more right away if and when the virus fears ebb. So that means we might be seeing future sales pulled forward, helping these companies in the current quarter only to hurt them later in the year, like “robbing Peter to pay Paul,” as the saying goes.

Keeping Up with the Numbers Next Week: Next Friday’s March consumer sentiment number could be well worth watching. It’s likely to be one of the first sentiment reads to take in peoples’ reaction to this downturn in the stock market. There’s also inflation data for February next week, as consumer and producer prices for February are due. The question is whether there will be a ripple effect in data next week from the weakness in transports. 

More Rate Cuts on Way? Despite the Fed cutting rates earlier this week, the bond market seems to still be trying to push the Fed into more moves, whether at its meeting March 18 or even possibly ahead of that. The week finishes with futures pointing toward 100% chances of the Fed adjusting rates downward, with 49.5% chances of another 50-basis point cut and 50.5% chances of a 75-basis point cut. That second option would bring rates back down near lows last seen in late 2015.

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.