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On a Cautionary Note: Gloomy Start as Weak Claims Data, Lack of Stimulus Weigh

After a volatile overnight trading session, caution seems to be the sentiment today. There’s lots to watch—jobless claims, new home sales, Fed testimony, coronavirus concerns, and earnings—all of which could influence the markets.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Federal Reserve: Meeting today
5 min read
Photo by Getty Images

Key Takeaways

  • Costco earnings, more Powell testimony to Congress up ahead today

  • Pressure on Tech stocks continued in pre-market trading after big drop yesterday
  • Jobless claims still stubbornly high, up slightly from previous week

(Thursday Market Open) A wild and stormy night followed yesterday’s steep losses and morning starts with continued pressure. There’s a more cautionary mood in the market this morning as investors await a new batch of earnings, data and Fed testimony.

Lack of new stimulus is something that has investors concerned, and it may continue to weigh on the market. Fresh coronavirus fears that dominated headlines earlier this week also continue. Tensions between the U.S. and China over Tik Tok could be a third pressure point.

Today’s calendar includes Fed Chairman Jerome Powell in front of Congress for the third day in a row, earnings from Costco (COST), and new home sales for August. 

It started with a weekly initial jobless claims report that failed to impress. New weekly claims of 870,000 were actually up from a revised 866,000 the previous week and well above expectations of near 850,000. The fresh data arguably show that unemployment remains a massive problem and also hint that economic progress isn’t exactly storming back. Stocks extended their losses in pre-market trading after the claims data. 

All of this could keep influencing trading today, but the main focus might again be on rising volatility and the increasing pressure on Tech stocks that came out of the woodwork again Wednesday. 

One possible source of selling in Tech yesterday came from the Justice Department planning to submit a proposal to Congress to curb longstanding legal protections for internet companies and force them to shoulder more responsibility for managing content on their sites, The Wall Street Journal reported. 

Tech Selling Feeds on Itself

It was interesting to see how Tech stumbled on the congressional news yesterday and then how the selling just picked up, building on itself to some extent. If there’s anything good to say about Tech’s breakdown this month, it’s that some of the excess valuation has gone away. As of mid-week, the sector’s price-to-earnings (P/E) multiple for the next 12 months stood just under 27, down from close to 30 at the start of the month, according to research firm CFRA.

Valuation for the broader market is also closer to historic levels now than back at the start of the month when the S&P 500 Index (SPX) had a P/E of 24.4. That’s been sliced and diced down to 22.9, still well above historic levels.

The Nasdaq (COMP) managed to avoid setting new lows for the current down-move yesterday after falling below 10,600 intraday on Monday. That’s probably a good area to watch as today’s session moves forward. 

With the SPX, the level to watch is just beneath where the index sat at Wednesday’s close. A dip below 3230 would put the SPX into an official 10% correction. It’s traded below that level intraday recently but hasn’t closed there. A close below the 10% correction line might send the signal that things have gone far enough, or could trigger more selling. 

If you’re wondering about technical support, the SPX 100-day moving average sits at 3195 (see chart below). But the 200-day moving average, now at 3100, may be a more realistic support level to watch. 

The mega-cap losses could be causing investors to feel less confident in the market given the lack of leadership at the top, research firm Briefing.com noted. It’s also interesting to see that bonds and gold didn’t find much buying interest this morning despite the softness in stocks. That could suggest investors are raising their cash positions in what analysts sometimes call a “flight to safety” type of move. 

That wouldn’t be a huge surprise at this point, with volatility pushing higher and the election looming less than six weeks away. Consider watching the dollar index, which jumped above 94 on Wednesday, to see if it keeps gaining. That might be a sign of more trouble for stocks because it often points to investors getting nervous. 

Bumps and Bruises Persist

Anyone hoping things might smooth out a little in coming days might be in for disappointment. Wednesday’s quick shift from bright sun at the open to dark clouds an hour later was only the latest evidence that this market can shift on a dime. For some of the unsteadiness, feel free to blame the virus, which has made things so unpredictable almost all year. 

For the first time in a while, a big setback for Tech on Wednesday wasn’t followed with any sign of buying in the last hour of the day. That’s not such a good sign going into Thursday’s session, because it means there’s not much chance of “spillover” buying. People appear to be more resigned to possible further losses in Tech after the sector did a pretty good job of bouncing back following earlier downturns this month. 

As long as cases keep growing, there’s no reason to think this won’t keep being a choppy market. Coronavirus overshadows everything right now. There’s no end date for that, and no one knows when we’ll get a resolution to that. One medical expert quoted in the media compared virus outbreaks to the forest fires out West. New ones keep cropping up even while old ones get put out, and no one is sure where the next one will start.

CHART OF THE DAY: AFTER THE SLUMP. After yesterday’s selloff and volatile trading after the close, the S&P futures (/ES—candlestick), after breaking below its 50-day moving average (blue line) is now getting close to its 100-day moving average (purple line), which is at 3195. But the 200-day moving average (yellow line), which sits at 3100, may be a more realistic support level to watch. Looking back to May, the 200-day MA acted as a support level a couple of times. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results. 

Crude Loses Steam: Well, that was short-lived. Crude’s brief rally back above $40 a barrel last week initially got heralded as a sign of possible supply issues due partly to OPEC’s production limits and lowered production in the U.S.. Now prices are struggling to reach $40 again as virus shutdown fears take hold. 

Really, it was kind of unrealistic for people to be worrying about supply at this point, with economies still struggling around the world and U.S. “driving season” long over. It wouldn’t be surprising to see crude continue to pivot right around $40 for a while, though it now appears attempts to drive it much below $38 could be met with buying interest. Meanwhile, it might be hard for OPEC countries to keep limiting supplies, in part because their governments are struggling with debt, notes trade publication OilPrice.com. Also, Libya recently restarted oil production, and one analyst said the “easiest” demand gains are already behind us. 

Fed Points to Capitol Hill: The most recent Fed vote on rates wasn’t unanimous, but Fed speakers taking the mic this week all seem on the same page. The economy is making some strides, they say, but not quickly enough. It still could use additional traction from Congress in the form of fiscal help. “It’s not a sustainable recovery, it’s still fragile,” said Cleveland Fed President Loretta Mester, quoted in The Wall Street Journal. The recovery effort needs broader government actions, she added. Meanwhile, Chicago Fed President Charles Jackson said, “Fiscal support is just fundamental.” Fed Chair Jerome Powell reiterated that, too, in his appearances before Congress this week. 

The Fed, of course, is powerless to make fiscal policy. And last week’s death of Supreme Court Justice Ruth Bader Ginsburg put hopes of a stimulus plan on the backburner as D.C. remains “conflict central.”  Increasingly, it feels like the Fed has done all it can and wants to throw a lateral across the Mall to the Capitol. Last spring, that worked well to stabilize and then help bring back the market. This fall, as the old stimulus dries up and a new one seems unlikely, it’s unclear who’s going to pick up the ball and whether a fumble might push the market’s back up against its own end zone.

Working the Late Shift: If you’re not doing this already, consider keeping a close eye on the last hour of the trading day, because that potentially could tell you the beginning of the next day’s story. For instance, several sessions in a row last week, the Tech sector saw a late uptick in buying after spending most of the day in the red. It took a few days, but that buying interest did hint at what eventually became a bit of a recovery for the sector earlier this week before Wednesday’s washout.

On days when you observe a wave of late buying or selling, it’s usually a good idea to check overnight markets to see if the trend continued after the bell, because it could suggest resilience the following morning. If the late rebound comes on a Friday, remember to check Sunday night when futures trading gets started. It might be a good idea to keep that in mind this weekend, because at times like these between earnings seasons and when political theater is in full session, the market is more prone to trade off of any headline news that happens Saturday and Sunday.

Good Trading,
JJ
@TDAJJKinahan

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This week’s economic calendar. Source: Briefing.com
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Key Takeaways

  • Costco earnings, more Powell testimony to Congress up ahead today

  • Pressure on Tech stocks continued in pre-market trading after big drop yesterday
  • Jobless claims still stubbornly high, up slightly from previous week

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