The stock market had a bad day on Monday. It happens. The surprising thing is how long it took to happen. Calls for a pullback have been heard with each 1.0% increase in the S&P 500 this month, and yet this stock market had been looking oblivious to all of them as it gained 2%... 3%... 4%... 5%... 6%... and 7%!
The S&P 500 was up as much as 7.5%, but the air up there on that near-vertical ascent has grown thin, and now market participants are retracing their steps presumably to catch their breath.
Yesterday's pullback was more of an acknowledgment that the January rally had gotten carried away and that the prudent approach ahead of some key risk events was to take some profits.
A noticeable jump in long-term rates helped spur the selling activity, as did the recognition that the CBOE Volatility Index was surging, pointing to a newfound urge to insure investment portfolios against downside risk in the near term.
That urge has persisted this morning. The CBOE Volatility Index is up 3.3% to 14.30, leaving it up 29% for the week, as the stock market is on course to start today's session on a decidedly lower note.
The S&P futures are down 19 points and are trading 0.7% below fair value. The Nasdaq 100 futures are down 51 points and the Dow Jones Industrial Average futures are down 247 points.
This negative disposition has taken root despite better than expected earnings results from the likes of McDonald's (MCD), Aetna (AET), Pfizer (PFE), Corning (GLW), and Danaher (DHR).
The good earnings news, though, isn't the totally pleasant surprise it was just a short time ago.
In other words, there is a burgeoning sense that it has been priced in already with this January rally, which is creating some angst that reports later in the week from the likes of Amazon.com (AMZN), Apple (AAPL), Facebook (FB), Boeing (BA), Alphabet (GOOG), and Microsoft (MSFT) could be greeted with a similar sell-the-news response and/or material setback in the event of a disappointment from any of these heavyweight companies.
This thinking is just one of the perspectives weighing on the futures market. Other perspectives include the following:
- The sense that the talked-about pullback is at hand
- The nascent belief that rising interest rates are going to create a competitive headwind for stocks
- The news that JPMorgan Chase (JPM), Amazon.com (AMZN), and Berkshire Hathaway (BRK.B) are partnering to create an independent company, which is "free from profit-making incentives and constraints," to help reduce healthcare costs for their U.S. employees
- This news is hitting other healthcare stocks hard as investors worry about potential profit margin compression resulting from the initiative
- Further selling in Apple (AAPL), which is down 1.3% after Deutsche Bank became the latest outfit to voice concerns about iPhone X demand
- Chatter that pension funds are behind some of the selling as they rebalance investment portfolios at the end of the month
One is apt to hear "uncertainty" surrounding tonight's State of the Union Address and tomorrow's FOMC decision as another factor feeding the selling interest. Perhaps, but both have been previewed petty extensively, so take that excuse with a grain of salt.
In effect, an overextended market is hitting a wall, and the price-action momentum is cutting the other way for the time being as the market is correcting (or gets corrected) for its January excess.