Day Traders Diary

3/21/17

Investors attempted to make the most out of some positive overnight developments on Tuesday morning, but a modest gain at the opening bell was the straw that broke the back of a stock market that may have extended itself a little too far. The major averages finished their worst day of 2017 solidly lower with the Nasdaq (-1.8%) leading the retreat. The S&P 500 settled lower by 1.2%, marking the first time since October that the index closed with a loss of more than 1.0%. That streak is the longest since 1995.

The financial sector (-2.9%), the poster child of the stock market's post-election rally, tumbled deep into negative territory on Tuesday, signaling the possible end of the new administration's honeymoon phase. The reversal of fortune had its roots in the inverse relationship between the yield curve and the banks. The former is flattening in a contradiction of the pro-growth narrative that has driven the stock market to record highs in the post-election period; meanwhile, the banks are getting flattened as investors re-think the high earnings expectations related to a widening yield spread that have driven many bank stocks sharply higher since the election.

As they have since the presidential election on November 8, most sectors followed the financial group's lead to finish the day solidly lower. The cyclical sectors absorbed the worst of the selling pressure with the consumer discretionary, industrials, materials, and technology sectors closing lower between 1.2% and 1.7%.

Countercyclical groups outperformed amid the day's risk-off sentiment with the rate-sensitive utilities sector (+1.4%) closing atop the day's leaderboard. The sector profited from the increased buying interest in the Treasury market, which left yields lower across the board; the benchmark 10-yr yield finished Tuesday's session three basis points lower at 2.43%.

Like its defensive peers, the health care sector (-0.8%) also outperformed the broader market, but it showed relative weakness within the countercyclical space as the debate on health care reform picked up steam in Washington. The GOP's proposed health care legislation will go the floor of the House on Thursday, but reports indicate that the Republicans will not have enough votes to move the bill to the Senate.

Investors will keep their fingers crossed, hoping that a resolution can be worked out in the nation's capital so that lawmakers can move on to tax reform--another promise that has propped up the stock market.

Tuesday's lone economic report was fourth quarter Current Account Balance:

The current account deficit for the four quarter totaled $112.4 billion while the Briefing.com consensus expected the deficit to hit $128.2 billion. The third quarter deficit was revised to $116.0 billion from $113.0 billion.

On Wednesday, investors will receive the weekly MBA Mortgage Applications Index at 7:00 ET, January FHFA Housing Price Index at 9:00 ET, and February Existing Home Sales (Briefing.com consensus 5.54 million) at 10:00 ET.

Nasdaq Composite +9.6% YTD

S&P 500 +6.0% YTD

Dow Jones Industrial Average +5.8% YTD

Russell 2000 +2.0% YTD