Street Vision: More Volatility and Q3 Earnings in Market Rebound

Stocks are poised to start the day sharply higher following 2 days of steep declines that sent Major Market Averages to levels not seen since late June, with most settling below their 200 day moving averages. This morning, well over half of yesterday’s decline could be erased on the opening as markets in Asia rebounded sharply overnight, and halfway through the day in Europe markets are holding onto strong gains.

Aside from stocks simply being very oversold in the immediate term, Investors have regained some optimism for an easing of trade tensions with China following reports that President Trump plans to meet with President Xi during the G20 summit, in late November at Buenos Aires. While this 1 on 1 meeting has been publicly in the works for close to a week and headlined by news services mid day Thursday, it has clearly gained traction overnight as a positive step in US – China trade negotiations.

Investors are also being greet this morning by the kickoff of Q3 earnings, most notably 3 high profile banks, JP Morgan, Citi, and Wells Fargo. JP Morgan is $1.00 higher in pre market trading in response to their release, with the other 2 banks on deck.

More bonds…..Less Stock??

Thursday featured wild price swings throughout the day, mostly in negative territory as investors grappled for market direction. The Treasury wrapped up its 3 part auction with the 30 year bonds being more well received than 3 and 10 year notes the prior day. This inspired a modest relief rally in bonds with the 10 year note settling at a yield of 3.16%, its lowest level in a week.

Oil added to its correction from Wednesday fueling further profit taking in energy stocks. The technology sector held up better than most other sectors, contra to Wednesday, with a few names in the Social Media and Semiconductor space finishing in the green.

Volumes were brisk as there were clear indications that some diversified funds were shifting assets from stock to bonds, in response to concern over the pace of earnings growth slowing after Q3 and the opportunity for returns in the fixed income market that haven’t been available for over 7 years. This Asset Allocation trade may have been a significant contributor to the extreme volatility in the last 2 hours of trading.

As market averages doubled their losses between 2:30 and 3:00 PM there was exceptionally heavy downside volume in broad market equity ETFs accompanied by a sharp spike in the upside volume of bond surrogate ETFs. After the market rallied a full +1% in the next half hour, the residual “tail” of this asset allocation again sent stock lower during the last 30 minutes of trading, as they settled just off their lows of the day.

Typically after 2 days of high volatility, we would expect a calmer trading session, especially on a Friday at the end of a whirlwind week. Today may be the exception as Major Market averages are signaling a sharply higher opening. With stock prices at their lowest levels in 4 to 6 months and bond yields offering higher returns than in many years, the landscape in primed for more volatility as we get into the first week of Q3 earnings.