February 6, 2018, 6:30 am EDT
Stock markets around the world have remained extremely volatile overnight in the wake of yesterday’s record breaking US selloff. The Dow’s breach of 25,000 to the downside opened the floodgates to a new round of selling likely triggering a ton of stop loss orders and sending traders stampeding for the exits. The Dow lost over 1,000 points in a record one-day drop and this selloff continued into Asia Pacific trading where the Hang Seng also lost 4%.
This morning, European indices and US index futures are trying to bounce back and another round of hammer and doji candles are forming. Like yesterday, however, early signs of improvement could get swamped by selling once US markets open. In the wake of yesterday’s big selloff, we could see another round of margin calls and forced selling today that could keep the pressure on stocks. Although RSI indicators for some indices have dropped into the oversold zone, just as we saw markets stay overbought for months, they can stay oversold for a while too and it may take a few days to finish shaking out the weak hands.
While markets were clearly overbought and overdue for a major correction like the one we are seeing, the trading of the last week also indicates that market action in 2018 is likely to be very different from 2017. Last year volatility was low with markets trending upward with few pauses or corrections. This year, the end of the easy money party and high valuations brought about by rising interest rates could limit the upside for stocks. On the other hand, a strong economy and positive environment for earnings could help to create a floor. As these two forces fight it out, we could see markets move in a wide sideways trend with more volatility and less complacency for much of this year.
Cryptocurrencies continue their crash this morning with Bitcoin trading down 9.6% toward 6,200 while Ethereum is down 13.9% and has broken under 600. Cryptocurrency traders are learning that the momentum trade and fast money moves cut both ways. The flight out of risk markets is adding to the pressure from the ongoing regulatory crackdown. On the other hand, gold continues to benefit from a flight to safety. In traditional currency action, the Euro is outperforming today on the back of a positive factory orders report out of Germany.
In economic news today, trade data is due for Canada and the United States at 8:30 am followed by the Canadian Ivey PMI report at 10:00 am. Trade deficits of $2.2B and $52.0B respectively are expected. These numbers could attract attention from politicians between rounds of NAFTA talks. In particular, President Trump, who has been taking credit for the stock market gains of the last year, could talk trade to distract people from blaming the losses of recent days on him as well.
Earnings season continues today with results due from a number of companies including Walt Disney and General Motors in the US, plus WestJet, Finning and Indigo Books in Canada. Walt Disney’s report after markets close may attract particular attention from traders. The House of Mouse is expected to report EPS of $1.62 for Q4. In addition to the impact of big movie releases like Star Wars: The Last Jedi, traders may remain focused on results from Disney’s cable business. Guidance and outlook comments may attract even more interest, particularly anything related to the pending Fox asset purchase, its plan to launch a streaming service, upcoming movie releases like Black Panther, Avengers and Solo (which finally released a trailer yesterday). Any comments related to cable networks, streaming and cord cutting could also impact trading in Netflix which looks particularly vulnerable to any moves by Disney to being streaming distribution in house.
This article is intended as general market commentary, based on sources considered to be reliable but could contain unintended errors. Commentary, estimates and charts are provided for information, education and entertainment purposes. They are not as and should not be construed in any way as investment advice. The authors assume neither liability nor credit for returns from readers’ trading or investment activity. We do not accept any remuneration from companies mentioned in this report. The authors or related parties may enter or exit short term trading positions in markets mentioned in this report at any time without notice. Some of the charts used in this commentary are based on Forex and Contracts for Difference (CFD) markets; leveraged products which carry a higher degree of risk and may not be suitable for all investors. CFD trading is not available in the United States of America. Copyright 2018 The Fundamental Technician, all rights reserved.