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The S&P 500 declined as much as 0.8% on Thursday, as disappointing retail sales data for December played into the market's concerns about a U.S. economic slowdown. The benchmark index, however, staged a late morning rebound back to its flat line, where it wavered for most of the afternoon. It almost finished flat, but a wave of selling activity in the final 20 minutes of trading left the S&P 500 down 0.3% to end the session.

The Dow Jones Industrial Average (-0.4%), the Nasdaq Composite (+0.1%), and the Russell 2000 (+0.1%) experienced similar price action.

Aside from the retail sales data, which showed a 1.2% decline in retail sales for December ( consensus +0.2%) -- the largest monthly decline since Sept. 2009 -- the market navigated its way through a flurry of news headlines.

President Trump was considering a 60-day extension for the March 1 trade deadline, according to Bloomberg, although follow-up reports indicated that both the U.S. and China remained far apart on structural reform demands. In addition, White House press secretary Sarah Sanders said that President Trump is set on signing the spending bill and declaring a national emergency to build a border wall, which caused some minor gyrations in the market.

Some occurrences that helped lift the market from early lows included (1) a belief that the December retail sales numbers were aberrant and will give way to better retail sales data for January, (2) the outperformance of high-growth, mega-cap stocks, (3) Fed Governor Brainard (FOMC voter) saying she thinks the balance sheet normalization effort should come to an end later this year, and (4) the market's resilience to selling efforts squeezing short-sellers and drawing in sidelined participants fearful of missing out on further gains.

The S&P 500 sectors finished the session mixed.

The consumer staples sector (-1.2%) felt the brunt of the negative fallout in Dow component Coca-Cola (KO 45.59, -4.20, -8.4%) after it disappointed with its FY19 earnings guidance.  The financial sector (-1.2%) for its part underperformed as a flattening yield curve, and worries about net interest margin compression, weighed on the bank stocks.  American Intl. Group (AIG 40.19, -3.99, -9.0%), which fell well short of consensus earnings estimates for the December quarter, was a notable drag on the sector as well.

Conversely, the real estate (+0.5%), health care (+0.2%), communication services (+0.2%), energy (+0.2%), and information technology (+0.1%) sectors finished with gains.

Dow component Cisco Systems (CSCO 48.40, +0.90, +1.9%) provided the information technology sector with added support as it gained ground after beating earnings estimates, guiding Q3 revenue above consensus, raising its quarterly dividend by 6.0%, and approving a $15 billion increase to its stock repurchase program.

U.S. Treasuries saw increased buying interest following the release of the retail sales data, which drove yields lower across the curve. The 2-yr yield declined three basis points to 2.50%, and the 10-yr yield declined five basis points to 2.66%. The U.S. Dollar Index decreased 0.1% to 97.05. WTI crude increased 1.2% to $54.47/bbl.

Reviewing Thursday's economic data, which included Retail Sales for December, the Producer Price Index for January, the weekly Initial and Continuing Claims report, and Business Inventories for November:

  • Retail sales declined 1.2% ( consensus +0.2%) on the heels of a downwardly revised 0.1% increase (from +0.2%) in November. That is the largest monthly decline since September 2009. Excluding autos, retail sales fell 1.8% after a downwardly revised unchanged reading (from +0.2%) for November.
    • The key takeaway from this disappointing report is that the weakness wasn't isolated to gasoline station sales (-5.1%). It was pretty broad-based across discretionary spending categories like furniture and home furnishings (-1.3%), electronics and appliance stores (-0.1%), clothing and accessories (-0.7%), miscellaneous store retailers (-4.1%), nonstore retailers (-3.9%), and restaurants (-0.7%).
  • The Producer Price Index for final demand declined 0.1% in January ( consensus +0.1%), pulled down by a 0.8% decline in the index for final demand goods. Excluding food and energy, the index for final demand increased 0.3% ( consensus +0.2%). On a year-over basis, the index for final demand was up 2.0%, versus 2.5% in December, while the index for final demand, excluding food and energy, was up 2.6%, versus 2.7% in December.
    • The key takeaway from the report is that it could portend margin pressures for producers if they don't choose to pass along the higher costs to their customers.
  • Initial claims for the week ending February 9 increased by 4,000 to 239,000 ( consensus 225,000). Continuing claims for the week ending February 2 increased by 37,000 to 1.773 million.
    • The key takeaway from the report is that the four-week moving average of 231,750 for initial claims is the highest since January 27, 2018.
  • Total business inventories declined 0.1% in November ( consensus +0.2%) after increasing an unrevised 0.6% in October. Total business sales fell 0.3% after increasing a downwardly revised 0.1% (from 0.3%) in October.
    • The key takeaway from the report is that business sales rose at a slower pace than inventories. That distinction, if it persists, will diminish pricing power.

Looking ahead, investors will receive several economic reports on Friday: the preliminary University of Michigan Index of Consumer Sentiment for February, Export and Import Prices for January, the Empire State Manufacturing Survey for February, and Industrial Production and Capacity Utilization for January.

  • Russell 2000 +14.6% YTD
  • Nasdaq Composite +11.9% YTD
  • S&P 500 +9.5% YTD
  • Dow Jones Industrial Average +9.1% YTD
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