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Leigh Baldwin & Co.

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Day Traders Diary

12/4/18

 
 

The S&P 500 tumbled 3.2% on Tuesday, catalyzed by waning optimism in trade negotiations between the U.S. and China and concern over future economic growth, which was signaled by the drop in U.S. Treasury yields. A technical breach of the S&P 500's 200-day moving average (2762.32) also contributed to some selling.

Meanwhile, the Dow Jones Industrial Average lost 3.0%, the Nasdaq Composite lost 3.8%, and the Russell 2000 lost 4.4%.

Monday's trade-relief rally was under pressure from the onset as market participants reoriented their mindset to concerns that the U.S. and China won't be able to settle differences over major trading issues in the next 90 days. President Trump seemed to stoke those concerns with a tweet that acknowledged the possibility of getting a deal done with China, but which also carried the reminder that he is a "Tariff Man," implying that he would revert to further tariff action if a deal doesn't get done.

Beyond that factor, today's sell-off was really sparked by economic growth concerns, which manifested themselves in a decisive curve-flattening trade in the Treasury market that also featured an inversion of the 2-yr note yield (2.80%) and 3-yr note yield (2.80%) over the 5-yr note yield (2.79%).  The 10-2 spread narrowed to 12 basis points, which is the narrowest spread since 2007.

The benchmark 10-yr yield dropped seven basis points to 2.92% while the 30-yr yield dropped 10 basis points to 3.17%.  Those moves were exacerbated by a "pain trade," as short sellers expecting higher rates were compelled to cover their bearish bets.

It was telling, too, that the drop in interest rates wasn't a catalyst for increased buying interest in the stock market. The reason being is that the drop in rates was grounded in concerns over future economic growth, which in turn drove concerns about future earnings growth.

Concerns over future economic growth were reflected in the poor performances from the cyclical sectors, as well as the domestically-oriented Russell 2000 (-4.4%). The financials (-4.4%), industrials (-4.3%), consumer discretionary (-3.9%), and information technology sectors (-3.8%) underperformed the broader market.

The rate-sensitive financial sector was undermined by the flattening yield curve, which raised concerns about a compression in net interest margins.

Regional banks were notable laggards as worries about lower mortgage loan demand stemmed from home builder Toll Brothers (TOL 33.00, -0.53, -1.6%) acknowledging that it saw a moderation in demand in its fiscal fourth quarter ended Oct. 31 and that it saw the market soften further in November. The SPDR S&P Regional Bank ETF (KRE 52.63, -3.05) fell 5.5%.

Other laggards included the cyclical transport and chip stocks, which respectively weighed on the industrial and tech sectors. Notable underperformers included industrials UPS (UPS 106.80, -8.47, -7.4%) and American Airlines (AAL 36.69, -2.96, -7.5%); and chipmakers Advanced Micro (AMD 21.12, -2.59, -10.9%) and NVIDIA (NVDA 157.11, -12.93, -7.6%). The Dow Jones Transportation Average lost 4.0%.  The Philadelphia Semiconductor Index lost 5.0%.

Apple (AAPL 176.69, -8.13) fell 4.4% after HSBC Securities downgraded the stock to Hold from Buy and another supplier issued a guidance warning. Chip supplier Cirrus Logic (CRUS 37.95, -0.72, -1.9%) lowered its revenue guidance due to recent weaknesses in the smartphone market. The other FANG stocks, Facebook (FB 137.93, -3.16, -2.2%), Netflix (NFLX 275.33, -14.97, -5.2%), Alphabet (GOOG 1050.82, -55.61, -5.0%), and Amazon (AMZN 1668.40, -103.96, -5.9%), also showed considerable losses.

On the other hand, the utilities sector (+0.2%) was the only group that finished in the green. The defensive-oriented real estate (-1.3%) and consumer staples (-1.6%) sectors were the only other groups to finish with losses under 2.0%. 

In other corporate news, AutoZone (AZO 888.07, +55.61, +6.8%) led the S&P 500 in gains after it beat earnings expectations, while Dollar General (DG 104.10, -7.60, -6.8%) fell after it missed earnings estimates and lowered its fiscal 2019 outlook.

Separately, the CBOE Volatility Index (VIX) spiked 25.3% to 20.60 amid the market downturn, and WTI crude rose 0.1% to $53.13/bbl. 

Investors did not receive any notable economic data on Tuesday.

Looking ahead, investors will receive the weekly MBA Mortgage Applications Index and the Fed's Beige Book for November on Wednesday. On Thursday, investors will receive the ADP Employment Change Report for November, Q3 Nonfarm Productivity and Unit Labor Costs, Trade Balance for October, weekly Initial and Continuing Claims, Factory Orders for October, and ISM Services for November. 

As a reminder the stock market will be closed on Wednesday in honor of the late George H.W. Bush, the 41st President of the United States.

  • Nasdaq Composite +3.7% YTD
  • Dow Jones Industrial Average +1.3% YTD
  • S&P 500 +1.0% YTD
  • Russell 2000 -3.6% YTD
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