Before The Bell
The futures market started off weak, albeit with some encouraging signs, after a dour day of trading yesterday. After the three-day holiday weekend, the stock market sold off hard as traders reassessed the amount of riskier holdings in their portfolios. A few bank earnings reports, including that of Dow-30 component Goldman Sachs (GS), left investors feeling underwhelmed; the company’s stock fell sharply in response. The indices significantly declined throughout the day, showing little sign of recovery. By the end of the session, the S&P 500 was off 86 points, the Dow Jones Industrial Average had fallen 543 points, and the NASDAQ had declined 387 points. This also marked the lowest close for the NASDAQ since October, and it finished at a level not far from correction territory.
The futures market continued this move lower through the evening and steadily fell overnight. However, futures contracts started to rebound after becoming oversold around the start of trading in Europe and then moved to the upside. The upward trend continued as earnings reports from a few large financial institutions were issued this morning, including the latest results from Bank of America (BAC).
Meanwhile, housing starts for December were strong with 1.702 million housing starts on an annualized basis, while building permits rose to 1.873 billion. These numbers suggest that demand is robust in the housing market, and the positive economic data is adding to the likely rally at the start of the new trading day.
Yesterday, market breadth was very weak, with decliners outpacing advancers by a 5.5-to-1.0 ratio. Energy stocks were among best performers, but that was an outlier, as it was the only sector among the 11 major groups to finish the bearish day to the upside. Technology and financial equities companies were among the weakest.
In commodity news, oil prices rose considerably yesterday, as traders foresee supply constraints even as energy demand increases. This disparity will likely continue to grow in the days ahead, pushing up the price of fuel. Meanwhile, U.S. Treasury Bond yields were higher across the board, through medium-term bonds recorded the biggest gains. This suggests that traders were fleeing both stocks and bonds yesterday. The VIX Volatility Index rose considerably as demand for options protection increased, suggesting that traders are betting on higher levels of volatility in the coming days and are hedging their positions.
Looking ahead, several economic reports will be issued over the next few days. These include the initial weekly jobless claims and the Philadelphia Fed manufacturing index on Thursday, as well as the leading economic indicators on Friday. These should give some insight into how well the economy is doing. Likewise, there will be plenty of earnings reports, the vast majority of them from companies in the financial sector, though a few energy companies will also be on the docket. Overall, we think most traders will be looking to see how well individual companies perform after giving guidance in the days ahead.
– John E. Seibert III
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
