Equity index futures are signaling a lower start for the major indices and that has everyone scrambling to explain why that is since it runs counter to how the stock market has been trading of late.
Currently, the S&P futures are down nine points and are trading 0.4% below fair value. The Nasdaq 100 futures are down 30 points and the Dow Jones Industrial Average futures are down 78 points.
We might as well start with the easiest connection for the current disposition of the futures market. The Nasdaq Composite is up 4.6% this month; the Dow Jones Industrial Average is up 3.8%; the S&P 500 is up 3.6%; and the Russell 2000 is up 3.0%, with just about all of those moves unfolding after the Fourth of July holiday.
In other words, the major indices have made a big move in a short amount of time, leaving them at risk of some profit-taking activity, which is what one will see at the opening bell.
Other connect-the-dot explanations include:
- Trade concerns (which serves as the most convenient excuse of all these days whenever the market is looking weak)
- Downside price action in the likes of American Express (AXP), Union Pacific (UNP), Travelers (TRV), Alcoa (AA), Domino's Pizza (DPZ), eBay (EBAY), BB&T Corp. (BBT), and Taiwan Semi (TSM) following their earnings reports
- Weakness in commodity prices, namely oil ($68.30, -$0.46, -0.7%), gold ($1215.10, -$12.80, -1.0%), and copper ($2.68, -$0.08, -2.9%), with a strengthening in the dollar weighing on prices
- A disappointing trade balance report out of Japan, which featured weaker than expected import and export growth for June; and
- The expected drag on the consumer staples sector after UBS downgraded Procter & Gamble (PG) to Neutral from Buy and initiated Clorox (CLX) with a Sell rating
There might be other explanations, yet one needs to be cognizant that it isn't necessarily raining negativity this morning.
IBM (IBM) is up 2.2% after pleasing with its second quarter report and outlook; Comcast (CMCSA) is up 1.9% after saying it won't pursue the acquisition of Twenty-First Century Fox (FOXA) assets any further, meaning they are Disney's (DIS) for the taking; and the initial claims and Philadelphia Fed Index reports were both stronger than expected.
Initial claims for the week ending July 14 dropped by 8,000 to 207,000 (Briefing.com consensus 220,000), which is thee lowest level since December 6, 1969. Continuing claims for the week ending July 7 increased by only 8,000 to 1.751 million.
The key takeaway from this report is that it covers the period in which the survey for the employment situation report for July is conducted, so the low level of claims is bound to feed expectations for another month of strong nonfarm payrolls growth.
The Philadelphia Fed Index for July, meanwhile, moved up to 25.7 (Briefing.com consensus 22.0) from 19.9 in June, led by a sizable jump in the New Orders and Prices Paid Indexes.
The key takeaway from the report, though, may be that the diffusion index for future general activity decreased for the fourth straight month, falling from 34.8 to 29.0.
These reports didn't change the tone much in the futures market, which is negative for several reasons and one easily-extrapolated reason.