Day Traders Diary

4/5/16

The stock market ended the Tuesday affair on a lower note as global growth concerns and new rules regarding tax inversion mergers dominated today's trade. Additionally, fluctuating oil price and the underperformance of the heavily-weighted financial (-1.4%) and health care (-1.2%) spaces provided for some continued weakness in the broader market. The S&P 500 (-1.0%) finished its day behind both the Nasdaq Composite (-1.0%) and the Dow Jones Industrial Average (-0.8%).

Equity indices opened their day sharply lower after global bourses struck a risk-off posture in response to a weak showing from Japan's Nikkei (-2.4%) and some below-consensus economic data out of Europe. Predominantly, disappointing German Factory Orders for February (-1.2%; expected +0.5%) and a weaker than expected reading of the March Markit Composite PMI (53.1; expected 53.7) for the eurozone dampened investor sentiment.

Furthermore, the U.S. Treasury Department surprised investors after yesterday's close, announcing new regulations regarding inversion mergers. The new provisions aim to make it more difficult for companies to complete corporate tax inversions through mergers by targeting serial inverters and the potential tax advantages of "earnings stripping." The news struck a chord with Allergan (AGN 236.55, -41.00), which is attempting to merge with Pfizer (PFE 31.36, +0.64) in an inversion-type deal.

A positive reading of the March ISM Index (54.5; Briefing.com consensus 54.0) helped offer a momentary reprieve from selling pressure, but the averages were unable to extend their rebound effort. A leg lower in crude oil and relative weakness from the financial (-1.4%) and health care (-1.2%) sectors brought the averages back towards their lows by the afternoon.

All ten sectors finished the day in the red with utilities (-1.9%), financials (-1.4%), and health care (-1.2%) rounding out the leader board.

In the heavyweight health care space (-1.2%), health care plan names and generic drug manufactures displayed relative weakness. The generic drug manufacturer sub-group traded lower in sympathy with Allergan after its merger with Pfizer was put in jeopardy. Meanwhile, health care plan companies underperformed after yesterday's release of the latest policy and payment updates for Medicare Health and Drug Plans.

The financial sector (-1.4%) demonstrated broad-based weakness as the group extended its 2016 decline to 6.7%. Wells Fargo (WFC 47.51, -0.99) and Bank of America (BAC 13.19, -0.32) outpaced the losses in the broader sector while Morgan Stanley (MS 24.38, -0.66) extended its weekly loss to 4.5%.

On the flipside, industrials (-0.6%), consumer staples (-0.7%), and materials (-0.7%) finished with the slimmest losses.

The commodity-sensitive energy sector (-0.8%) recovered from a 1.1% decline as the group tracked the trajectory of crude oil. On that note, WTI crude ended its day higher by 0.6% at $35.94/bbl ahead of tonight's stockpile data from the American Petroleum Institute. Separately, Baker Hughes (BHI 39.36, -2.11) saw increased pressure after reports indicated that the Department of Justice may file an antitrust suit in order to block the company's merger with Halliburton (HAL 34.40, +0.40).

The U.S. Dollar Index (94.63, +0.12) recovered from its worst level of the day as the greenback gained against the euro and trimmed its loss against the yen. The euro/dollar pair slipped 0.1% to 1.1383 while the dollar lost 0.9% against the yen (110.35).

The Treasury complex ended its day near its high with the yield on the 10-yr note dropping four basis points to 1.72%.

Today's participation was above the recent average as more than 1.04 billion shares changed hands on the NYSE floor.

Today's economic data included February Trade Balance, ISM Service Index for March, and February JOLTs:

The latest trade data showed the U.S. trade deficit widened to $47.1 billion in February (Briefing.com consensus -$46.2 bln) from $45.9 billion in January.

That was due to imports increasing by $3.0 billion from January and exports increasing by only $1.8 billion.

On the surface, it sounds good to say that both exports and imports increased, yet there wasn't necessarily the strongest of demand accompanying those figures.

The uptick in exports was driven primarily by a $1.1 billion increase in consumer goods, almost all of which stemmed from exports of gem diamonds ($0.6 bln), pharmaceutical preparations ($0.3 bln), and artwork ($0.2 bln).

Similarly, the uptick in imports was driven by a $3.6 billion increase in consumer goods, more than half of which was owed to pharmaceutical preparations ($1.3 bln) and toys, games, and sporting goods ($0.6 bln).

The real trade deficit widened to $63.3 billion from $61.8 billion. The first quarter average of $62.6 billion is above the fourth quarter average of $60.1 billion, which is a negative factor for GDP computations.

The ISM Non-Manufacturing Index edged up to 54.5 in March from 53.4 in February. The March reading was above the Briefing.com consensus estimate of 54.0 and is the highest reading this year; however, the index stood at 56.9 in the same period a year ago.

The Non-Manufacturing Index report follows on the heels of the ISM Manufacturing Index, which also surprised to the upside.

The faster pace of growth in March should temper some of the festering concerns about a potential spillover effect from the slowdown on the manufacturing side of the economy, which had been building with five straight sub-50 readings for the ISM Manufacturing Index and a slower pace of growth for the ISM Non-Manufacturing Index over the same period. The dividing line between expansion and contraction is 50.0.

The improvement in March for the Non-Manufacturing Index was aided by upticks in several component indexes, namely new orders (from 55.5 to 56.7), employment (from 49.7 to 50.3), prices (from 45.5 to 49.1), and new export orders (from 58.5 to 53.5).

The import index (from 55.5 to 53.0) was the only index to turn down from February. The indexes for inventories and the backlog of orders were both unchanged at 52.5 and 52.0, respectively.

March marked the 74th straight month of expansion for the non-manufacturing sector.

The February Job Openings and Labor Turnover Survey showed that job openings decreased to 5.445 million from a revised 5.604 million (revised from 5.541 million) in February.

Tomorrow's economic data will include the weekly MBA Mortgage Index and the release of the Federal Open Market Committee's latest Minutes, which will cross the wires at 7:00 ET and 14:00 ET, respectively.

Russell 2000 -3.4% YTD

Nasdaq Composite -3.3% YTD

S&P 500 +0.1% YTD

Dow Jones +1.0% YTD