Market Insider

Tuesday Look Ahead: Stocks Still Under Pressure


The shakeout is not over.

Stocks had their worst day since early July Monday, and the low volume sell off likely sets the tone for the week. Traders said the selling was orderly—there was no sign of panic—and they expect to see more pressure on stocks this week.

The U.S. market followed world equities markets lower Monday, as the "risk trade" reversed. The dollar strengthened and commodities prices fell. Buyers moved into the safe haven of U.S. Treasurys though bond market volume was also light.

Asian markets reacted to Friday's weak U.S. consumer sentiment data, and the Chinese market, already down sharply last week, dipped 5.8 percent Monday. Japan was also a catalyst after it reported positive GDP, up 0.9 percent in April through June, but less than what economists had forecast. Japan's Nikkei was down 3.1 percent. The selling continued into Europe, where French and German markets were down more than 2 percent.

For Tuesday, traders expect Wall Street to take its directional cue from overseas markets. There are producer prices inflation data and housing starts at 8:30 a.m. Several retailers report earnings, representing a diverse cross section of the retail landscape. Ahead of the bell, there's home improvement giant Home Depot ; department store chain Saks , discounter Target and TJX , the owner of off-price chains Marshall's and TJ Maxx. Computer maker Hewlett Packard reports after the bell.

The Dow finished Monday off 186, or 2 percent at 9135. The combined 262 points lost since Friday gave the Dow its worst two-day performance since June 16. The S&P 500 erased 24, or 2.4 percent to 979. Stocks have now given up all of their August gains and are trading at levels last seen July 29.

Jason Trennert of Strategas said he believes the pull back is just that, and the bigger market trend remains up. "We've been telling our clients..that it's more dangerous to be short than long, and I think that's true," he said.

"It's important to keep an eye on China because it has been a very good leading indicator for inflationary and deflationary pressure over the last couple of years...It's obviously a much more volatile market," said Trennert. "I don't know if you can really see what's going on now as a trend, but I think it bears watching."

The worst performing sector Monday was the financials, off 4.3 percent, followed by commodities-driven materials, off 3.7 percent. Defensive sectors like health care, consumer staples and utilities were the best performers.

Health care stocks got a boost from gains by insurers Aetna and United Health , among others, after Health and Human Services Secretary Kathleen Sebelius said a plan for non profit cooperatives may be a solution to create more competition on insurance. That idea was viewed as less threatening to managed care companies than a government-run health insurance plan.

Fear Rising

As stocks swooned, the CBOE's VIX, or volatility index, popped. The VIX was up nearly 15 percent at 27.89.

Daniel Deming, who trades the VIX at Stutland Equities, said the move in the VIX was the result of several factors. First, the stock market opened down sharply, a natural trigger for a spike in volatility.

"Over the last couple of weeks, we saw premiums in back month futures trading significantly higher than the cash," said Deming. He said the market had been pricing the VIX at 29 for October and 28.30 for September, historically bad months for stocks. The 30 level on the VIX is significant to investors since it implies the expectation of a 2 percent daily move in the S&P 500.

"We're seeing a break below 1000 (on the cash S&P 500) which psychologically is going to create some uncertainty," he said.

"I think people got a little complacent. Historically, the average for the VIX is up around 20.. so right now, I think we're seeing a little bit of uncertainty The big turning point will be if we can't hold some of these moving averages on the downside," said Deming. "..945-946 is the 50-day moving average which would be a 5 percent or so move form the high..That's what I'm looking for."

Traders point to 950 as a key area for the S&P, which could serve as a floor for the market, at least temporarily. They also say the volume is light because there is a real lack of players on Wall Street, due to summer vacations. "The volumes are terrible. There's really nobody here," said Steve Grasso of Stuart Frankel.

The dollar rose against a basket of currencies Monday, and was up 0.75 percent against the euro. The euro was at $1.4083.

The Treasury market saw the yield on the 10-year rise to 3.491 percent and the two-year rose to 1.024 percent.

"This is an all equities story, and it probably will be the story this week. I don't really think there's any data that's going to shake us up," said Rick Klingman, who heads the Treasury desk at BNP.

Unlike last week, there are no Treasury auctions for markets to traverse. "We don't have any supply, and equities are a little scary. Flows are light. Trading is light," he said.

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