Volatility Marks the Dog Days of Summer

U.S. equity markets were under assault on multiple fronts Wednesday, as multiple Major Market Averages were once again turned back from a final push toward new highs.

While the row with Turkey remains a front burner issue, the boil is down to a simmer as their Lira stabilized for a 2nd day and their equity ETF, TUR recovered another +4% after a 10% bounce on Tuesday.

Caution is still required here, and this is a long way from being fixed as Turkey needs a meaningful interest rate hike just for starters.

Though markets recovered more than half their losses in the final hour of the day the pressure on stocks came from much more than Turkey and Tariffs. Away from this, there were 3 significant sources of downside  pressure on stocks:

Technology, and specifically, anything Internet and Social Media related outperformed as a safe haven during the 2 day selloff Friday and Monday, but that was decidedly NOT the case on Wednesday. The culprit here was a Chinese behemoth…internet conglomerate…we’ll call it, Tencent Holding (OTCMKTS: TCEHY).

This is not some new age rapper that’s taking the Pacific rim by storm, but it’s actually a $500 Billion internet juggernaut with a higher market cap than Alibaba. They had an earnings miss for Q2 that sent the stock down -7%. Apparently it was their 1st earnings miss in 10 years, and the stock is now down 30% from their all time high of $61 in January 2018.

This put an abrupt halt to the teflon shield the FANG stocks have enjoyed during almost every other broad market swoon we’ve seen this year, with Apple Inc. (NASDAQ: AAPL), Alphabet Inc (NASDAQ: GOOG), Facebook Inc. (NASDAQ: FB), Netflix, Inc.(NASDAQ: NFLX), and even the beloved Amazon.com Inc. (NASDAQ: AMZN) sharply negative on the day.

As a possible respite, Cisco Systems, Inc. (NASDAQ: CSCO) did report earnings after the close, and was trading +2% in after hours trading.

The Retail Sector was a headline grabber away from Turkey and Tariffs as Big reports on both the macro economy and individual retail earnings gave investors mixed signals.

July retail sales easily beat with a headline print of +0.5% v consensus of +0.1%, and the ex-auto # of +0.6% was double the consensus of +0.3% Despite this positive macro report, individual retailers were hit with a wave of selling as Macys (NYSE: M) led the way -7%.

While Macy’s Q2 EPS of +$0.59 beat consensus of +$0.50, their top line revenue declined -1.1% YOY and the stock did catch a couple downgrades after conflicting guidance for the 2nd half of 2018.

Keep in mind that retailers have been one of the best performing sectors in 2018 after dreadful performance the previous 2 years. Macy’s had YTD gains of +70% going into Wednesday giving investors little hesitation to take some profits on any sign of fundamental or technical weakness.

In a typical “shrug it off as a 1 day event reaction,” retailers could perform with a totally different mind set today. Walmart Inc (NYSE: WMT), still the brick and mortar bellwether is trading +10% higher in early morning trading Thursday after reporting an earnings beat that includes an impressive top line revenue gain YOY of +4.4%.

The Energy Sector, and specifically refiners were also sold aggressively on Wednesday after the weekly crude oil inventory report showed an unexpected build of +6.8 million barrels. Energy markets had been expecting a decline of 2 million barrels, resulting in the oil stocks being one of the weaker sectors on the day with a handful of refining stocks being lower by -5% or more.

This has been a jam packed week for market impact news on all fronts: Macroeconomic, Geopolitical, and the tail end of earnings season. It’s only Thursday morning! We’ve got a full 2 days left in the week.

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