Philly Fed Index was nothing short of spectacular

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It’s hard to pinpoint a single reason behind today’s brief panic on Wall Street, as even though we got concerning reports regarding the coronavirus outbreak overnight, stocks actually ticked higher in the first hour of trading.   While stocks, and especially the market-leading Nasdaq seems ripe for a profit-taking event, today’s selloff might have been technical in nature, with no clear trigger preceding the move, but the coming days could provide further clues regarding the origin of the sudden burst of sell orders. This is despite strong numbers from the Philly Fed Index.

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The major indices turned sharply lower in early trading following yesterday’s record-breaking session, but despite their largest intraday drop in almost a month, the benchmarks finished only slightly lower.  The Dow Jones Industrial Average (INDEXDJX:.DJI) was down 128, or 0.4%, to 29,220, the Nasdaq (INDEXNASDAQ:.IXIC) lost 66, or 0.7%, to 9,751, while the S&P 500 (indexsp:.inx) fell by 13, or 0.4%, to 3,373. Advancing issues outnumbered decliners by a less than 5-to-4 ratio on the NYSE, where volume was well above average.

Almost all of the key risk-on sectors finished the session in the red, despite the strong bounce in the afternoon and tech stocks and healthcare-related issues were clearly weakest. Utilities outperformed again, in line with the increased global demand for safe-haven assets. Treasury yields fell across the curve, and the 30-year yield hit its lowest level since early October, as rate long-term growth worries continue to mount. Gold hit another seven-year high today, even in comparison to the mighty dollar, and the shiny metal is now near or at its all-time high against the likes of the Japanese yen and the euro.

Spectacular performance of the Philly Fed Index

Today’s Philly Fed Index was nothing short of spectacular, with the key manufacturing measure coming in at 36.7, posting its second largest monthly increase ever. Given the fact that the index was just above zero in December, the situation in the globally weak sector seems to be rapidly improving in the U.S. Almost all of this week’s key domestic economic releases have been bullish, with today’s upbeat CB Leading Index and even the lower-than-expected amount of crude oil inventories pointing to healthy trends in the U.S.

While the increase in the number of confirmed coronavirus cases slowed down in China, a new crisis could be underway in South Korea, with the reports from Iran and Japan also fueling fears of a global epidemic. South Korea is a crucial part of the global tech supply chain, similarly to Japan, which could explain today’s weakness  in the tech sector, while the chaotic political situation in Iran raises concerns the country’s ability to contain a possible outbreak. That said, the pandemic hasn’t confirmed the worst-case scenarios, so far,

The U.S. and overseas manufacturing and services PMIs will be in focus tomorrow, and the European readings could be the most important again. That said, in light of today’s near-record reading in the Philly Fed Index, it will also be interesting to see how the U.S. Markit PMI changed this month. Existing home sales will also be out just after the bell, while the FOMC members Clarida and Brainard will give speeches during the session, and investors will be looking for clues regarding the Fed’s stance on the epidemic.

Technical Corner

Today’s steep morning drop could be foreshadowing a deeper pullback in the wake of last autumn’s key technical breakout and the subsequent historic rally, but the key trend indicators are still pointing higher on Wall Street. The major indices remain well above their rising 200-day moving averages of 8,358 for the Nasdaq, 3,039 for the S&P 500, and 27,199 for the Dow, and the benchmarks are also still above their steeply rising 50-day moving averages of 3,270 for the S&P 500, 9,209 for the Nasdaq, and 28,781 for the Dow.

The Nasdaq suffered the biggest hit this morning, which is usually a bad sign for bulls, but small-caps held up very well, and that great news from a broader perspective. A lot of analysts have been pointing out the ‘narrowing’ of the rally, meaning that only a handful of stocks have been behind the gains in the major indices, so far, this year. The Russell 2000 performed better than all of the large-cap benchmarks today, and since the index is still above both its 50- and 200-day moving averages, it could finally revisit its all-time high form 2018 in the coming weeks. Stay tuned!

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