Disappointing PMIs and Flattening Yield Curves Sink Stocks
The 10-year Treasury yield (TNX) broke through uptrending support and completed a symmetrical triangle bearish continuation pattern on March 7. In the following two weeks, the TNX continued drifting lower – with a big drop on Wednesday in the aftermath of the Federal Open Market Committee (FOMC) monetary policy statement and another large drop in early trading on Friday.
However, Friday's early-morning drop didn't last long, with the TNX rebounding from a low of 2.42% to a close of 2.46%. Friday's price action created a bullish one-day candlestick pattern called a dragonfly doji. Typically, a dragonfly doji indicates the bottom of a downtrend as the bears are unable to hold on to the low values.
Adding strength to the case that today's move may have marked the indicator's near-term low is the fact that it reached the price target established by the symmetrical triangle bearish continuation pattern. Every completed price pattern establishes a price target based on the height of the consolidation range that makes up the bulk of the pattern. Here's how it works.
Whenever you see a price pattern, you find the widest part of the consolidation range, measure that distance and then add that distance to the breakout point of the consolidation range. In the case of the TNX, the widest part of the consolidation range occurred on Jan. 3, 2019, and was approximately 24 basis points wide, from a low of 2.55 to a high of approximately 2.79 (2.79 – 2.55 = 0.24). If you subtract this amount from the uptrending support level at 2.65 on March 7 when the TNX broke lower, you get a target of 2.41 (2.65 – 0.24 = 2.41).
Of course, this isn't an exact science. Nobody can guarantee where the target is going to be or that the indicator is going to reach that level, but seeing the TNX drop to 2.42 – just one basis point above the projected target – before rebounding higher to close in line with the resistance level the TNX originally established in October 2017 does provide some added evidence that the TNX may have found support.
The S&P 500 experienced its most turbulent bearish day since Jan. 3 today as it bounced back and forth before finally closing below 2,816.64, the level that had served as resistance since Oct. 17, 2018, and through which the index had recently broken above.
This move heading into the weekend is surely disappointing to the bulls on Wall Street who were hoping that Thursday's bullish move was going to clear the way for the S&P 500 to climb back up to its all-time high. Disappointing manufacturing numbers (more on this below) and a flattening yield curve that pounded financial stocks seem to have been the primary drivers of today’s pullback.
SVB Financial Group (SIVB) and Brighthouse Financial, Inc. (BHF) – despite the company's aggressive marketing campaign during March Madness – were the worst performing stocks in the S&P 500 today as they dropped 7.06% and 6.84%, respectively, but they weren't alone. Major bank stocks like Bank of America Corporation (BAC), Wells Fargo & Company (WFC) and JPMorgan Chase & Co. (JPM) – which fell 4.15%, 3.11% and 3.02%, respectively – got battered across the board as falling longer-term yields pushed net interest margin revenue projections lower for the financial institutions.
As I mentioned above, the 10-year Treasury Yield (TNX) did manage to bounce up off of its session lows, but it wasn't enough to bring the bulls back to the table.
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Risk Indicators – VIX
The CBOE Volatility Index (VIX) has been trending steadily lower during 2019, but it made a big jump higher today after Markit released an unexpectedly low number for both the European Flash Manufacturing Purchasing Managers' Index (PMI) and the United States' Flash Manufacturing PMI.
The Manufacturing PMI is a diffusion index, which means it is based on a scale of 0 to 100, with 50 being the balanced midpoint. Any number above 50 on the scale indicates expansion, and the farther above 50 the index goes, the stronger the expansion. Conversely, any number below 50 indicates contraction, and the farther below 50 the index goes, the stronger the contraction.
Analysts were expecting the European Manufacturing PMI to be below 50 – with a consensus estimate of 49.5 – but they weren’t ready for the actual result of 47.6. They also weren't ready for the U.S. number to come in at 52.5, which was below the consensus estimate of 53.5. The U.S. number wasn't as bad as the European number and managed to stay above 50, but it is the lowest level the U.S. Manufacturing PMI has dropped to since August 2017.
Seeing global manufacturing drop unexpectedly stressed traders out today, and the VIX reflected this surge of stress by jumping to 17.5 in early trading. This isn't the highest level the VIX has reached this year by a long shot. It isn't even the highest level the index has reached this month. That occurred on March 8, when the VIX climbed to a high of 18.3.
However, it does confirm that traders are paying close attention to the manufacturing sector as an indicator of global economic growth, and we should too. A few more sour reports like these could very well derail the bullish run we've been enjoying this year.
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Bottom Line: Yo-Yo Week
It has been a week of ups and downs. The S&P 500 broke above a long-term resistance level on Monday only to drop right back down below it today. However, yo-yo weeks aren't always so bad when you zoom out and look at the bigger picture. The S&P 500 may have closed the week lower than it started, but it is still higher than it was a few weeks ago.
We'll have to see what next week brings us, but even if the S&P 500 drops a little farther, it is still well within its current uptrending consolidation range.
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