Monday, March 3, 2014

28 Feb AMC - S&P broke new high despite Ukraine conflicts

Market Summary

The stock market finished an upbeat week on a mixed note amid the return of concerns about the immediate future of Ukraine. The S&P 500 added 0.3% after holding a solid 0.6% gain through the bulk of the trading day. The Nasdaq Composite and Russell 2000 lagged, falling 0.3% and 0.4%, respectively.

The early advance occurred after the release of several data points that were cast in a bullish light. 

Specifically, the second estimate for Q4 GDP was weak, revised down to 2.4% from 3.2%. That was able to be spun as a basis for why the Fed isn't going to hurry the pace of its tapering or the timing of the first hike in the federal funds rate. The Chicago PMI and Consumer Sentiment reports were better than expected, providing some hope that recent economic weakness is primarily a weather phenomenon. And, finally, pending home sales were up a disappointing 0.1% in January, playing back into the notion that the Fed is going to be deliberate with its handling of monetary policy. 

The major averages reached their highs by midday, but the Nasdaq was much more tentative in its advance as large cap names traded little changed while biotechnology lagged. Appropriately, the afternoon selloff was paced by the index, which underperformed earlier in the day. Biotechnology was pressured considerably, sending the iShares Nasdaq Biotechnology ETF (IBB 264.42, -7.73) lower by 2.8%. 

The afternoon weakness came about after multiple reports indicated that Russian troops have increased their presence in Crimea, which is located in Southern Ukraine. In addition to yesterday's seizure of the parliament building, armed gunmen also took control of two airports as well as the local television station and a telecommunications company. The reports were followed by comments from Ukraine's acting President Oleksandr Turchynov, who said Russia invaded the country ‘as a guise of exercise' with intent to ‘provoke a conflict.' President Turchynov urged Russian President Vladimir Putin to ‘show reason' and pull back the forces. 

Despite the selloff, the S&P 500 was able to return into positive territory thanks to relative strength of heavily-weighted sectors like consumer discretionary (+0.5%), consumer staples (+0.7%), and financials (+0.5%). 

With uncertainty back in the picture, participants rushed in search of volatility protection, which sent the CBOE Volatility Index (VIX 13.99, -0.05) from a session low of 13.49% to 14.79%. This represented a 9.6% swing in the near-term volatility measure before it settled near the middle of its range. 

Elsewhere, Treasuries reclaimed a large portion of their morning losses. The benchmark 10-yr yield ended higher by two basis points at 2.66% after notching a session high at 2.70%. 

Participation was above average with 944 million shares changing hands at the NYSE. MSCI rebalancing, which took place at the close, likely added some volume to the final tally. 

Economic data included four reports: 
  • Fourth quarter GDP was revised down from 3.2% to 2.4% in the second estimate while the consensus expected GDP to be revised down to 2.6%. Just about all of the data that came in over the last couple weeks were worse than what the BEA expected when it released its advance estimate. There was really nothing new in the GDP report that was a surprise from the most current monthly releases. The important takeaway is that real final sales, which were revised down to 2.3% from 2.8%, now show absolutely no breakout from trends that go back to Q1 2012. The "surge" in economic growth that led to strong 2014 economic forecasts did not actually happen. 
  • The Chicago PMI for February increased to 59.8 from 59.6 while the consensus expected a decline to 56.0. Analysts have been quick to point to extreme winter weather conditions as the culprit for the recent poor economic data trends. Yet, the blustery weather in February had absolutely no effect on Chicago-area manufacturers. This is another data point suggesting the weather is being used as a scapegoat during a cyclical down period. 
  • The final University of Michigan Consumer Sentiment Index for February was revised up to 81.6 from 81.2 while the consensus expected an increase to 81.5. While the index moved in the opposite direction from the Conference Board's Consumer Confidence index, overall sentiment trends were relatively flat this month. Gains in equity prices offset slightly weaker employment conditions. Changes in gasoline prices and media reports likely had little effect on overall confidence values. The Current Conditions Index strengthened to 95.4 in the final reading from 94.0 in the preliminary. The Expectations Index was revised down to 72.7 from 73.0. 
  • Pending home sales for January rose 0.1%, which was worse than the 0.8% increase forecast by the consensus. Today's reading followed last month's revised decrease of 5.8% (from -8.7%). 
  • Nasdaq Composite +3.2% YTD
  • Russell 2000 +1.9% YTD
  • S&P 500 +0.6% YTD
  • Dow Jones Industrial Average -1.5% YTD

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Leaders & Laggards

Technical Updates

Next Week in view

Alvin's Commentaries

Market started with a strong bullish bias and S&P500 broke new high. However, the market quickly reversed at 1.30pm just to recover back at 3pm, which Dow & S&P500 ended positive leaving Nasdaq in the red. Volumes were at 932m. Given the new high and futures today in red, I am expecting this bullish to be short lived.

Market Call: Down
Date: 3 Mar 2014

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