Market Direction: BEARISH alert
issued 8/10/2017
The economyWall Street took it to the chin this week as a war of words between the U.S. and North Korea prompted investors to take some profits on the heels of the stock market's most recent run to new record highs. Small caps paced the retreat, sending the Russell 2000 lower by 2.7%. The benchmark S&P 500 dropped 1.4% while the Dow (-1.1%) did a little better and the Nasdaq (-1.5%) did a little worse.
After closing Monday at record highs, the S&P 500 and the Dow showed no signs of slowing down on Tuesday morning, further extending their all-time intraday highs. But then sentiment began to shift. The major averages retraced the bulk of their gains as the heavily-weighted financial sector, which led the early rally on Tuesday, began to weaken. Then a second wave of selling took Wall Street into the red.
The second round of selling followed a statement from President Trump, in which he warned that North Korea will be "met with fire and fury like the world has never seen" if it continues to threaten action against the United States. Mr. Trump's comment came just a few hours after the Washington Post reported that North Korea now has the capability to load its missiles with miniaturized nuclear warheads.
Selling extended into Wednesday's session after Pyongyang responded to President Trump's Tuesday comment by saying that it's examining a plan to send missiles towards the U.S. territory of Guam. However, it's important to note that selling on Tuesday and Wednesday was very modest, leaving the S&P 500 with a two-day loss of just 0.3%.
That changed on Thursday though as investors began selling with conviction, sending the S&P 500 lower by 1.5%. While the jawboning between the U.S. and North Korea certainly threw the bulls off balance, Thursday's slide, which marked the S&P 500's worst one-day loss since May, pointed to a market that was probably overdue for a pullback following yet another run to new record highs.
In other words, the U.S.-North Korea spat certainty didn't help investor sentiment, but, more than anything, it provided a convenient excuse for investors to take some money off the table.
Boosted by another lukewarm inflationary reading and an ever-persistent "buy the dip" mentality, the bulls won out on Friday, pushing the stock market slightly higher. The Consumer Price Index ticked up just 0.1% in July, missing the Briefing.com consensus of +0.2%. The Fed prefers the PCE Price Index, but it's clear that the latest CPI reading didn't help the case for a third rate hike in 2017.
The fed funds futures market now points to the June FOMC meeting as the most likely time for the next rate-hike announcement with an implied probability of 57.5%. Last week, the market expected the next rate hike to occur in December with an implied probability of 50.4%.
It's also worth pointing out that the CBOE Volatility Index (VIX) spiked 5.5 points, or 54.7%, this week after drifting near an all-time low from mid-July to early August. The VIX shows what kind of a move, in percentage terms, the market is pricing in for a one-month period from the spot reading. The index is derived from near-dated options on the S&P 500.
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By the numbers the weekly closing index numbers compared to the initial BEARISH recommendation closing numbers:
Stock Market Closing Numbers
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compared to Recommendation Numbers
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8/10/2017
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8/11/2017
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Difference
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21,844.01
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21,858.32
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14.31
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6,216.87
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6,256.56
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39.68
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2,438.21
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2,441.32
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3.11
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