EDITOR’S NOTE: Sam Collins will return on Monday.
Stocks mustered a small gain on Thursday, preventing the brewing selloff from turning into a full-blown meltdown. And, the S&P 500 did so with some help from right where you’d expect to see it — the 20-day moving average line.
On the flipside, though largely unnoticed, the Russell 2000 small-cap index booked second sizeable loss in a row. Whether or not yesterday was a victory is largely a matter of perspective.
Either way, rebound or not, the bulls have good reason to start getting nervous.
The few big moves we saw from individual stocks were just as vexing. Signet Jewelers Ltd. (NYSE:SIG) jumped nearly 9% following an earnings beat, though it missed sales expectations. Paint and coatings player PPG Industries, Inc. (NYSE:PPG) slumped 3.7% after rival AkzoNobel rejected an acquisition offer. Marathon Oil Corporation (NYSE:MRO) bounced 8.1%, offsetting a similarly sized setback on Wednesday stemming from crude oil’s meltdown. And, Staples, Inc. (NASDAQ:SPLS) stumbled to the tune of 5.3% after the company managed to meet last quarter’s earnings estimates, but simultaneously announced it was closing 70 stores.
Sector performances weren’t any more decisive. The big winner was consumer goods with a 0.71% gain, while materials stocks booked a loss of 0.81%. Most sectors closed notably close to breakevens.
That indecision was evident within the broad indices. The S&P 500’s close of 2,364.87 on Thursday was 0.08% better than Wednesday’s close. The Nasdaq Composite as well as the Dow Jones Industrial Average also closed up, though even less impressively than the S&P 500’s modest gain. Volume was a little lighter across the board…
… except for the Russell 2000. Its 0.43% loss and subsequent close at 1360.12 was on higher volume, largely matching Wednesday’s unusually outsized loss and unusually high volume. Unlike its large-cap counterparts, small caps aren’t finding support.
The market’s breadth and depth matched didn’t match the broad market’s tepid optimism. For the NYSE, decliners outpaced advancers by more than 2 to 1, and the Nasdaq advancers/decliners ratio was almost just as bearish. The Nasdaq’s bearish volume and bullish volume were almost perfectly matched, but 58% of the NYSE’s volume was bearish versus 39% of it being bullish.
Nevertheless, it’s tough to bet against the market’s lingering momentum. As the chart of the S&P 500 below clearly illustrates, the 20-day moving average line was as far as the bulls were willing to let the bears push stocks. Reminiscent of the support the 20-day line provided in January, we now have to wonder if we’ll see a repeat performance. That is, the market will not move up or down here, but rather, simply drift sideways while everyone and everything else catches up.
There are a handful of red flags to keep tabs on here, however. One of them is the VIX. Though it’s still below a pivotal ceiling at 13.2, Thursday’s gain from the VIX is the first time we’ve seen it make a decisive upward move without the market losing ground. This suggests traders are at least concerned about a pullback, and positioning accordingly.
All the same, the tipping point is 13.2; the S&P 500 would ideally be below the 50-day moving average line and/or the former ceiling at 2301 by the time that happens in order to convincingly suggest the pullback was underway.
The other red flag: The Russell 2000 looks perfectly content to pull back here.
It’s a concern simply because the small caps would be seen as the “risk on” trades to dump first when confidence in a marketwide rally starts to crumble. It’s not beyond salvaging yet, but it’s uncomfortably close. A break below January’s low of 1341 is the point of no return.
Conversely, the Russell 2000 would need to break back above 1,384 to convincingly say it was back in bullish mode.
Conclusion: This remains a ‘wait and see’ environment. Patience isn’t a virtue many traders have enough of, however. Find a way to get it. That said, do know that, while subtly so, the recent action from-small cap stocks is more alarming than Thursday’s support for the S&P 500 is encouraging. Stocks are simply being asked to support too big of a gain (13.4%) from the early November low, and it’s showing. The VIX is perhaps the biggest and best clue here.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
Today’s Trading Landscape (Heading 3)
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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