Equities are under pressure today with all of the major indexes retreating below their respective 20-day moving averages, the first key level of technical support. The S&P 500 index was down 2.1% resulting in its biggest weekly drop since early 2016. There are two main reasons for the selloff today:
Technology and energy stocks accounted for much of the broad slide as major companies, including Apple (AAPL) and Google (GOOGL), and energy giant Exxon (XOM) reported earnings that seemed to have disappointed investors. Google had a one-time non-recurrent tax adjustment that impacted its quarterly earnings, while AAPL reported a record quarter, but investors seems to have focused on Iphone sales which were below forecast.
Adding to the selling today was the jobs report this morning which came in stronger than expected, as wages grew at their fastest pace since 2009. This sent the 10-year Treasury Bond yield to 2.82%, its highest level in roughly four years. Investors have become increasingly worried about more rapid interest rate hikes by the Fed spurred by higher inflation.
The VIX volatility index (or fear index) is up again today by 30% as nervousness has increased with investors wondering if there will be enough interest on this pullback for the bulls to dive back in.
Historically, February has been a volatile month for equities. The fact that the S&P 500 index did not hold the 2800 level makes me believe the worst selling is not over, and we could see acceleration in selling next week towards the 2720-2700 level.
The Good News
Though there are still plenty of companies that will report earnings the next week or two, the most highly anticipated and visible stocks have already reported their numbers. Overall, most companies that reported so far had good earnings reports.
This pullback brings some much needed relief after the huge run that the equities have seen since President Trump was elected in late 2016. Major indexes are no longer in overbought territories but they are still up nicely for the year.
Putting things into perspective, a good jobs' report means that the U.S. economy is flourishing, which is bullish for equities in the long term.
I do not believe that we will see a market correction, and any selling towards the 2700 level for the S&P 500 index is likely to be short lived. The best course of action is to sit tight and weather the current market volatility. The markets should soon recover.
Sincerely,
Rida MORWA
"All that the South has ever desired was that the Union, as established by our forefathers, should be preserved, and that the government, as originally organized, should be administered in purity and truth." – Robert E. Lee
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