1. Moving the markets

The markets came under pressure this morning with the Dow dropping some 250 points right at the opening. 3M was the contributor to this downside move as earnings disappointed, but more importantly, the company slashed forward guidance for 2019 and reduced its workforce by 2,000. The punishment was immediate with the stock skidding some 13%, its worst day since 1987’s Black Monday.

While the Dow bounced back, thanks to dip-buying rescuers, the index fared the worst of the 3 major ones by losing -0.51%. The Nasdaq closed slightly in the green, and the S&P hugged its unchanged line throughout the day but gave back a fraction in the end.

While we’ve seen a decent advance in equities this week, there are mounting signs of economic weakness throughout the world, ranging from Europe to Australia where rate cut expectations have increased. The Bank of Canada and the Bank of Japan are both projected to assume a more dovish stance (lower rates) in preparation of combating a further slowing of economic activity.

Domestically, we saw initial jobless claims surge the most in 18 months, thereby wiping out the drop we saw over the past 5 weeks. Does that mean we are now seeing the “real” and not seasonally adjusted economy appear on the horizon?

Again, bond yields ticked down causing a more favorable close to the low volatility SPLV vs. its more aggressive cousin SPY. See yesterday’s post for details.

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1. Moving the markets

Last Monday, I wrote how the direction of bond yields affects the performance of low volatility ETFs, such as SPLV, compared to the underlying index. Here’s what I said:

Case in point is the S&P 500, represented by SPY, which managed to eke out a gain of +0.10% during today’s session. It’s conservative cousin, namely SPLV, gave back -0.39% due to the spike in bond yields. Once that scenario reverses, and the markets correct, you will see the exact opposite, as SPLV will hold up better than SPY.

 This is exactly what happened today, as the 10-year bond yield stumbled and dropped 5 basis points. SPY lost -0.23% while the SPLV gained +0.36%. You just need to be aware of that relationship to better evaluate which one would be an appropriate selection for your portfolio.

Throughout the day, the major indexes struggled for direction and closed slightly in the red. Traders tried to digest not only yesterday’s gains but also wrestled with the question “what’s next,” after the S&P 500 and Nasdaq made new all-time highs.

Not helping upward momentum were not so great earnings from heavyweights such as Boeing and Caterpillar, which suggested that the health of corporate America may be mixed at best. Earnings will remain in focus with more than 20% of the S&P’s constituents having presented their quarterly report card.

Nearly 80% of those have produced better than expected results, but estimates had been previously lowered due to recessionary worries, so “beating” them is of questionable value.

I like looking at the big picture via graphs that demonstrate the decoupling of indexes that should be in sync. This chart clearly shows that the S&P 500 is in lofty territory, while bond yields have dropped and are showing a different picture. A re-coupling will have to occur sooner or later, the direction of which is the big unknown.

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1. Moving the markets

When markets get stuck in a tight sideways trading range, as we’ve seen over the past couple of weeks, a breakout, either to the downside or upside, will transpire sooner or later. It may not always be clear what causes such a breakout, but it occurred today with the bulls taking charge and pushing the S&P 500 and Nasdaq into record territory.

While earnings were mixed, some companies stood out and gave a boost to the markets. Topping the list were United Technologies, Coca Cola, both of which paled in comparison to Twitter’s 15.7% gain rallying on better than expected user growth. Toymaker Hasbro took second place with its shares advancing a solid 15%.

An unexpected assist came from the economic front, as new home sales soared to 16-month highs in the face of plunging prices and slipping existing home sales. Still, this was the third straight month that new homes sales have risen.

Also helping today’s ramp was a short-squeeze, which provided the push to get the S&P into record territory. All in all, it was a good day for the bulls, as the advances were broad.

However, I have to wonder if there is enough gas in the tank left to keep this rally going given the amount of weakening economic data points, we have seen YTD. But, that may be a moot point because, as long as there is enough money pumped into the global economies, nothing else appears to matter, as this chart clearly shows.

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