Stop, drop, and roll. Equity markets spent the better part of yesterday’s session trying to claw their way out of early session deficits but any hopes of a solid close were dashed by a Presidential Tweet. Trump announced a plan to add an additional 10% tariff on $200 billion in Chinese exports affecting 40% of all US imports from the country. Markets were unable to recover and they closed solidly down on the session. The S&P 500 closed just on its 2900 support level off of its low of the session and if that level fails to hold 2819 will be the next retracement level (see chart 4 in my attached daily chartbook). The Dow Jones Industrial Average closed on its support level of 26000 and a failure at that level will find further support at the Fibonacci line at 25607. Both the Russell 2000 and the NASDAQ 100 closed off their highs but managed to close relatively unscathed compared to the S&P and Dow. This should not be surprising to my regular readers who should note that the R2K and NASDAQ, being more growth-oriented, are perceived to be less affected by trade-related issues. Additionally, the recent momentum in those indices helped shield them from the bulk of yesterday’s late session fear trade. We can confirm that it was in fact a “fear trade” by observing the behavior of the VIX index and bonds. The VIX, which is an index created for hedging equities, is designed to be negatively correlated to the S&P 500 and is based on the implied volatility of the S&P 500 futures options. Because it is based on volatility it is called the Volatility Index, or VIX. The VIX, as noted here in many prior notes, trades in a spiky fashion, usually responding to shorter term issues, so when it trends or trades for long periods of time in one region, the index becomes more relevant. Yesterday’s quick spike, while notable, only indicates that the session's downward move in the S&P500 was based on fear (see chart 5 in my attached daily chartbook). If the VIX continues to trade up or does not ease back down in today’s session it could be an indication that we can expect some selling ahead. This morning we start the session with the VIX index at around 13.5, slightly higher than yesterday. Bonds, did their part to confirm the selloff in stocks as longer maturity treasuries traded up after several sessions of selling, causing yield to ease off (see chart 20 in my attached daily chartbook). 10 year yields will start the session at 2.84% down by a basis point from yesterday’s close.
Today, we are due to receive Chicago Purchase Managers index and the University of Michigan Sentiment Index. The CPM is expected to come in at 63, slightly down from last months 65.5 and U Mich. Sentiment is expected to come in at 95.5. While these are minor numbers, they can cause volatility on a low volume day. Traders will also be watching currency markets with a developing story regarding the Argentine Peso, which has been in a free fall. Yesterday, the Argentinian Central Bank aggressively raised rates hoping to provide support and the action was largely unsuccessful. Remember that higher yielding sovereigns usually cause currencies to go up as foreign buyers need to convert to local currency to take advantage of the higher yields. Also in the currency world, the Chinese central bank made some more moves to support its recently weak Yuan WHILE YOU SLEPT. Taking a step back, we had a very healthy week for equities with all of the major indices continuing to be constructive despite yesterday’s trade off and it is not uncommon for markets to take a rest after a ride such as we have seen in the sessions prior. Today, being the last opportunity for traders to helicopter out to Hamptons (that is actually a thing) ahead of the Labor Day Holiday, has the makings of being a low volume day but with the market slightly on edge, we can expect some volatility. Next week we get the monthly employment situation from the Department of Labor and Durable Goods Orders amongst a host of others, which is quite a bit to digest in an abridged low volume trading week, so get your rest this weekend and prepare for another week of excitement ahead!