Opening Bell: U.S. Futures Extend Rout; Equities Signal Top; USD Jumps

 | Oct 24, 2018 06:30

  • European shares hold onto gains, US futures follow Asian markets lower
  • US major indices register second lower trough, establishing new downtrend
  • Small cap stocks underperformance strengthens case for market top
    • h2 Key Events/h2

    European stocks opened higher and kept climbing this morning, while futures on the S&P 500, Dow and NASDAQ 100 extended yesterday’s slide, in line with earlier Asian losses. Safe haven assets were mixed, with the yen falling, allowing the dollar to climb, even as Treasury yields were falling.

    Gains in builders shares helped the Stoxx 600 hold onto positive territory, though the pan-European benchmark slightly pared an early 0.7 climb. Barclays (LON:BARC) edged higher on positive earnings, while Deutsche Bank (DE:DBKGn) stock was sold off after softer revenue guidance.

    During the earlier Asian session, a rebound for China’s Shanghai Composite (+0.33 percent) from a 0.55 percent decline and for Japan’s TOPIX (+ 0.08 percent) from a 0.73 percent fall—to the lowest level since mid-September 2017—spared the MSCI Asia Pacific Index from entering a bear market.

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    Most US stocks closed lower for the fifth day on Tuesday, even after dip buyers almost wiped out losses. Safe haven assets such as the yen, gold and US Treasurys followed an opposite trajectory, as investors back-pedaled into equities.

    The S&P 500 pared an intraday 2.34 percent dip to 0.55. The earlier plunge took prices below 2,700, to the lowest level since late-May, mostly dragged lower by Energy shares (-2.62 percent) following a 4 percent slide in crude oil. Industrials (-1.65 percent) was the second worst performer. The other sectors managed to limit losses to under 1 percent, with Materials (+0.99 percent) at the top of that group. Real Estate (+0.64 percent) outperformed, followed by Consumer Staples (+0.44 percent).

    The Dow Jones Industrial Average trimmed a 2.17 percent loss to 0.5 percent, closing below the 25,000 mark for the first time since July 12.

    The NASDAQ Composite closed 0.42 percent lower, after rebounding from a 2.79 percent slump and entering “correction territory.” The term “correction” in this context refers to when stocks fall at least 10 percent from a peak: while the designation can be seen as arbitrary, it nevertheless creates a panic that may cause a self-fulfilling prophecy of further selloffs. However, the truth of the term would need to be based on a closing level. After yesterday's close, the NASDAQ decline from its August 30 peak is only 8.55 percent.

    From an individual stock perspective, Verizon (NYSE:VZ) and McDonald's (NYSE:MCD) advanced on solid results, while Netflix (NASDAQ:NFLX) led gains in tech shares. Industrial stocks remained under pressure after disappointing results from Caterpillar (NYSE:CAT) and 3M (NYSE:MMM) added to worries that rising materials costs would erode profit margins.

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    The Russell 2000 underperformed, closing 0.9 percent lower and erasing all its year-to-date gains. Technically speaking, using the strictest interpretation, all major US indices joined the Russell 2000 in a downtrend.

    Why are investors cashing out of small cap stocks, if one of the main headwinds for equities at present is the same trade war that had previously favored these domestically focused companies over their larger cap multinational counterparts? Perhaps, small cap selloffs are justified by the fact that when markets top out, traders shed speculative stocks first. Overall, yesterday’s underperformance of small cap shares adds weight to the evidence of a market top.

    As mentioned earlier, all US majors have now registered the second lower trough in a series of descending peaks and troughs, establishing a new downtrend. There is an argument among technicians, however, about what constitutes a valid peak and trough.

    While some only consider closing prices, purists examine the entirety of the price action. Yesterday’s lows registered the second trough in a downtrend, but some would argue that the bulls’ ability to push prices back above the previous, October 11 trough, demonstrates strength, and that only a lower close would confirm a lower trough. While conservative traders may wait for that trend reversal confirmation, aggressive traders may act now, relying on the weight of the evidence. Except for the Dow, all major averages closed below their respective uptrend lines since the previous correction February 2016, as well as the 200 DMA.