Day Traders Diary

10/11/16

 The stock market ended Tuesday's session on a sharply lower note as equities endured a broad-based selloff, paced by technical selling and residual concerns related to a strengthening dollar, rising long-term rates, and valuations entering the third-quarter earnings reporting season. The Russell 2000 dropped 1.9% while the Nasdaq Composite finished lower by 1.5% and the S&P 500 ended down 1.2%.

The major averages stumbled out of the gate as buyers remained sidelined by some disappointing news on the earnings front.

Alcoa (AA 27.91, -3.60) came under pressure as a weaker-than-expected revenue outlook for its Arconic segments overshadowed an in-line earnings result for its third quarter. Illumina (ILMN 138.99, -45.86) was also in focus after issuing a warning after Monday's close that third quarter and fourth quarter revenue will be below analysts' consensus estimates.

In turn, the U.S. dollar showed some noticeable strength today, which came largely at the expense of the euro and the British pound, which declined 0.8% and 2.3%, respectively, against the greenback. The unnerving action there served as another deterrent for buyers. 

At the same time, the dollar's strength created some angst about earnings prospects for U.S. multinational companies and the economic prospects for emerging markets.  The iShares MSCI Emerging Markets ETF (EEM 37.22, -0.88) declined 2.3%, dragged lower by its exposure to Samsung Electronics (SSNLF), which is the second largest holding in the ETF, and worries that a stronger dollar, among other things, will make it more expensive for companies in emerging markets to repay dollar-denominated debt.

Samsung Electronics shocked its investors Tuesday with an announcement that it will be discontinuing production and sales of its Galaxy Note 7, which has been plagued by overheating issues and battery fires that have created safety concerns and a PR mess for the company.

Long-term interest rates were also on the rise as the U.S. Treasury market opened for trading again after the Columbus Day holiday. The long end of the curve underperformed at the start as the yield on the benchmark 10-yr note jumped to 1.78% (+6 bps). The 10-yr yield would pull back slightly, settling the day higher by four basis points (1.76%).

The Tuesday retreat continued up to the final hour as the S&P 500 (-1.2%) struggled to find its bearings. The benchmark index violated technical support at 2150 and 2144 before testing and breaching its 100-day simple moving average (2138.51). Prospective buyers were thought to be a bit skittish after the S&P 500 (-1.2%) tested, but failed to hold above its 50-day simple moving average (2166.18) on Monday.

A downturn in crude oil futures also dampened risk appetite. The energy component finished its day modestly lower after the head of Rosneft, Russia's largest oil producer, walked back expectations for the country to freeze or cut oil production. The International Energy Agency further added to selling interest when it reported that the global oil supply increased by 0.6 million barrels per day in September. WTI crude finished the day lower by 1.2% ($50.71/bbl, -$0.61).

All 11 S&P 500 sectors finished in the red with health care (-2.5%), materials (-1.3%), utilities (-1.2%), technology (-1.2%), and consumer discretionary (-1.1%) leading the retreat.

Biotechnology underperformed and the iShares Nasdaq Biotechnology ETF (IBB 277.00, -11.07) fell 3.8%. The sub-group moved lower in response to the revenue warning from Illumina (ILMN 138.99, -45.86).

In the broader health care sector (-2.5%), medical equipment names underperformed after St. Jude Medical (STJ 78.41, -2.87) issued a medical device advisory for its ICD and CRT-D devices. Abbott Labs (ABT 41.16, -2.34), which is in the process of acquiring St. Jude Medical, finished lower by 5.4%. 

The high-beta chipmakers displayed relative weakness after the aforementioned Samsung (SSNLF) announcement. Samsung supplier Integrated Device (IDTI 21.05,-1.00) finished at the bottom of the PHLX Semiconductor Index (-2.1%), falling 4.6%.

In the influential technology sector (-1.2%), top-weighted Apple (APPL 116.30, +0.25) outperformed as Samsung's troubles are seen as an opening for Apple to pick up market share in the smartphone market. Salesforce.com (CRM 72.42, -2.68) for its part declined 3.6% after reports indicated the company may still bid on Twitter (TWTR 18.00, +0.44).

Today's volume was below the recent average of 939 million shares as only 834 million shares traded today at the NYSE.

Investors did not receive any economic data of note today.

Tomorrow's economic data will include the 7:00 a.m. ET release of the weekly MBA Mortgage Index. Separately, the Department of Energy will release its latest inventory report at 10:30 a.m. ET while the Federal Reserve will release the minutes from its September 20-21 FOMC meeting at 2:00 p.m. ET.

Russell 2000: +8.1% YTD

Nasdaq Composite: +4.8% YTD

S&P 500: +4.5% YTD

Dow Jones: +4.0% YTD