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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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The Week In Review

1/24/14

Equities endured a rough end to the abbreviated week with the S&P 500 seeing its largest weekly loss since June 2012. The benchmark index fell 2.1%, extending its January decline to 3.1%.
The market spent the entire session in a steady slide amid continued concerns regarding China. Furthermore, participants kept a close eye on the foreign exchange market where emerging market currencies weakened while the Japanese yen saw its second consecutive day of gains. Dollar/yen fell below the 102.50 level after trading near 104.50 on Wednesday. The yen strength came about after Bank of Japan officials said the Japanese economy remains on track and there is no need for additional easing at this time. In turn, this posed a headwind to yen-based carry trades, which played a significant part in last year's market rally.
Like yesterday, the weakness began overnight; however, unlike yesterday, the aggressive selling did not start until the European session kicked off. Regional indices saw broad losses with peripheral markets leading the slide. Spain's IBEX plunged 3.6% while Italy's MIB fell 2.3%.
The overseas weakness set the tone for a lower start in U.S. equities with cyclical sectors leading the decline. Consumer discretionary (-1.9%) and technology (-2.1%) finished just ahead of the broader market thanks to the relative strength of Starbucks (SBUX 74.98, +1.59) and Microsoft (MSFT 36.80, +0.75) after both beat their bottom-line estimates.
Staying on the earnings theme, most of the reports received between yesterday's close and today's open were ahead of expectations but that mattered little to the broader market. However, Kansas City Southern's (KSU 99.49, -17.79) seven-cent miss mattered quite a bit as the stock plunged 15.2% while also weighing on the Dow Jones Transportation Average, which tumbled 4.1%. This marked the largest one-day loss for the bellwether complex since September 2011 as the broad liquidation resulted in 17 of 20 components posting losses in excess of 2.0%. Due to the sharp losses, the industrial sector (-3.1%) ended at the bottom of the leaderboard.
Elsewhere, financials (-2.3%) and materials (-2.7%) lagged while energy (-2.1%) ended in-line.
Meanwhile, defensive sectorssans health careoutperformed with losses between 0.9% and 1.1%. Procter & Gamble (PG 79.18, +0.94) contributed to the relative strength of the consumer staples sector after reporting a one-cent beat. For its part, the health care sector lost 2.3%.
Treasuries booked gains with the 10-yr yield ending lower by five basis points at 2.73%.
The aggressive selling fueled strong demand for volatility protection as indicated by a 30.0% surge in the CBOE Volatility Index (VIX 17.89, +4.12), which ended at its highest level since October 15.
For the second day in a row, the selloff was accompanied by above-average volume as 902 million shares changed hands at the NYSE.
Monday's data will be limited to the December New Home Sales report, which will be released at 10:00 ET.

Nasdaq Composite -1.2% YTD
Russell 2000 -1.7% YTD
S&P 500 -3.1% YTD
Dow Jones Industrial Average -4.2% YTD
Week in Review: From Highs to Lows in Less Than a Week

On Monday, bond and equity markets were closed for Martin Luther King Jr. Day.

Tuesday saw the major averages begin the abbreviated week on a mixed note as the Nasdaq added 0.7% while the Dow Jones Industrial Average shed 0.3%. For its part, the S&P 500 rose 0.3% as eight of ten sectors finished in the green. Stocks began the day with solid gains but the early strength faded quickly when the S&P 500 was unable to extend above the 1850 level during the opening minutes. That rejection emboldened sellers, who promptly drove the indices to their lows. Adding insult to injury was the fact that mostly better-than-expected earnings reported ahead of the opening bell failed to entice buyers.

The market endured an uninspiring Wednesday session, which unfolded in similar fashion to Tuesday's affair. Once again, the major averages ended mixed with the Dow Jones Industrial Average (-0.3%) coming out on the losing end while the Nasdaq (+0.4%) and S&P 500 (+0.1%) eked out modest gains. The price-weighted Dow spent the entire session in the red as 19 of its 30 components registered losses. Most notably, the second-largest index member, IBM (IBM 179.64, -3.09), plunged 3.3% after beating its Capital IQ earnings estimate by 13 cents on below-consensus revenue. Despite the bottom-line beat, the report was scrutinized due to the company accounting for a lower tax rate than in previous quarters.

On Thursday, the S&P 500 snapped its modest two-day win streak with its second-largest decline of the month. The index lost 0.9% as nine of ten sectors registered losses. Although stocks sold off throughout the day, the weakness actually started during the overnight futures session when three China-related developments began fueling the risk-off sentiment:

The HSBC flash PMI reading for January was below expectations at 49.6. The sub-50 reading is indicative of manufacturing activity contracting; and the January reading marked a six-month low for the series.
A Financial Times report indicated Chinese authorities are working to prevent a default of a $500 million high-yield investment trust, failure of which could trigger an unnerving fallout in China's shadow banking system.
An SEC administrative law judge issued a ruling that censures the accounting arms of the "Big Four" in China for six months due to their unwillingness to turn over requested documents involving US-listed Chinese companies under investigation for accounting fraud.
The three developments did enough damage to sentiment that a slate of mostly better-than-expected earnings could not halt the day-long slide. The discretionary sector (-0.7%) finished just ahead of the broader market after last year's top S&P 500 component, Netflix (NFLX 386.08, -2.64), surged 16.5% in reaction to its bottom-line beat and above-consensus guidance.