Stocks pull back amid an imminent formal impeachment inquiry

Commenting on today’s trading focusing on the formal impeachment inquiry against Trump, Gorilla Trades strategist Ken Berman said:

formal impeachment inquiry

mohamed_hassan / Pixabay

Stocks showed resilience for several weeks, and today’s dip is not a game-changer, political uncertainty usually hurts equities, so a rise in volatility could be ahead in the second half of the week. Today, movements of the Volatility Index (VIX) perfectly described the surprise that the impeachment rumors caused, and should the political uncertainty persist, stocks might remain under pressure.

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Q2 hedge fund letters, conference, scoops etc

Formal impeachment inquiry against Trump

The major indices all finished in the red as the rumors regarding an imminent formal impeachment inquiry against the President sparked a sell-off in stocks in the second half of the session. The Dow was down 142 or 0.5%, to 26,808, the Nasdaq lost 119, or 1.5%, to 7,994, while the S&P 500 fell by 25, or 0.8%, to 2,967. Decliners outnumbered advancing issues decliners by a more than 3-to-1 ratio on the NYSE, where volume slightly above average.

Only the defensive utilities sector gained ground today, boosted by the declining energy prices and safe-haven flows, and we saw broad weakness among the key risk-on sectors. Materials declined by the most, due to another bearish session in the energy sector, as the odds of a military conflict in the Middle East further decreased in light of President Trump’s speech at the United Nations’ (UN) summit. Financials were also hit hard, as Treasury yields fell to new multi-week lows across the curve for the second day in a row.

Ukraine and formal impeachment inquiry

Interestingly, consumer goods held up well amid today’s risk-off shift, even in the wake of the much worse-than-expected CB consumer confidence number. Treasury Secretary Mnuchin cooled trade-related tensions yesterday, and that helped the shares of some of the export-heavy companies both in the consumer and industrial sectors. That said, the stability of the labor market is what’s really behind the relative strength of the consumer sector, and Friday’s consumer-related releases could have a large impact on stocks.

According to the latest reports, Democrats will almost certainly start a formal impeachment inquiry in the coming days, regarding President Trump’s ‘Ukraine tapes’ in which he allegedly pressures another country against Joe Biden one of the possible Democratic nominees.  The President quickly reacted, announcing that he will release the “complete, fully declassified, and unredacted” transcript of the tapes, but it seems that he won’t stop the inquiry with that, so we could be in for a heated autumn in Washington. 

Fed meeting

We will have a relatively quiet day of economic releases tomorrow, but as two FOMC member will give speeches in the morning, Treasuries and stocks could experience wild swings even in pre-market trading. Besides the speeches, new home sales and the weekly crude oil inventory number will be out, and given the volatility of the past couple of weeks, the energy sector could be in for another wild ride. While the crucial commodity has been under pressure ever since last Monday’s historic surge, a bigger than expected inventory draw could trigger a strong bounce tomorrow.

Technicals

Short-term technicals deteriorated somewhat due to today’s dip, and since the tech sector suffered the biggest hit, the Nasdaq is in the worst shape form a short-term perspective. Despite the pullback, the benchmarks are all well above their rising 200-day moving averages of 7,690 for the Nasdaq, 2,828 for the S&P 500, and 25,771 for the Dow. The indices are all very close to their 50-day moving averages of 2,950 for the S&P 500, 8,052 for the Nasdaq, and 26,600 for the Dow, and the tech benchmark closed below its short-term indicator today.

Besides tech stocks, small-caps got hit the hardest today, and the Russell 2000 erased a large chunk of its recent gains, confirming the risk-off shift. Despite today’s drop, the index is still in a bullish technical position, but another negative session could hurt the short-term outlook for small-caps. The Russell closed just above its 50-day moving average, and while it’s still above its long-term indicator as well, it’s well below its all-time high, due to a year of relative weakness. As the Russell’s strength was a positive sign for the broader market over the past few weeks, its current weakness warrants caution for the coming week. Stay tuned!




About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver