Day Traders Diary

5/17/17

The major U.S. indices have experienced a wave of selling pressure today following a New York Times report that President Trump asked then-FBI Director James Comey to end the FBI investigation into former National Security Advisor Michael Flynn. The S&P 500 and the Dow trade lower by 1.1% and 1.2%, respectively, while the Nasdaq shows relative weakness with a loss of 1.6%. Small caps, though, have taken the biggest hit as seen in the Russell 2000, which is down 2.2%.

In the report, the NY Times cites a memo that James Comey wrote following a February 14 meeting with President Trump in the Oval Office. The White House has denied that President Trump asked Mr. Comey to end the investigation, but lawmakers and legal experts are saying this may qualify for obstruction of justice, which is considered an impeachable offense.

The concern at hand is that an investigation into the matter could derail tax reform efforts, which have already been slow to get on track. Accordingly, the major indices have weakened, weighed down by a reconsideration of valuations that have gotten stretched on the back of a tax reform bid.

That bid was fostered by a belief that tax reform will drive stronger economic and earnings growth. That could still happen if tax reform happens, but timing is everything and there is currently a reasonable basis to think the timing of tax reform legislation is going to get pushed back. That assumption is wringing out a small portion of some of the speculative excess that has been built up in the market since the election.

No sector advanced more in the immediate wake of the presidential election than the financial sector, and no sector has declined more today than the financial sector amid the thought that said pro-growth promises may not come to fruition. The financial space is down 2.6% with influential names like Bank of America (BAC 22.78, -1.21), Citigroup (C 60.23, -2.27), and Goldman Sachs (GS 215.66, -9.94) being hit the hardest. The three companies show losses between 3.6% and 5.0%.

Like financials, the top-weighted technology sector (-1.8%) is also exhibiting relative weakness. Companies with the biggest 2017 gains show some of the biggest losses today with Apple (AAPL 151.85, -3.64) and Facebook (FB 146.97, -2.80) lower by 2.4% and 1.9%, respectively. Chipmakers are also underperforming, evidenced by the PHLX Semiconductor Index's 2.7% tumble.

On the flip side, three of the eleven sectors -- real estate (+0.9%), utilities (+0.4%), and consumer staples (+0.1%) -- trade in the green as part of a defensive-oriented trade. The energy group (-0.2%) also outperforms the broader market, underpinned by crude oil's ($49.18/bbl, +1.1%) positive performance.

The energy component jumped from its flat line to a solid gain following the weekly crude inventory report from the Energy Information Administration (EIA), which showed that U.S. crude stocks declined by 1.8 million barrels for the week ended May 12. While that's less of a decline than the consensus expected (-2.3 million barrels), it has been seen as a positive today in light of last night's disappointing API reading, which showed a build of 0.9 million barrels.

Today's risk-off tone has manifested itself outside of the equity market as well. Treasuries trade higher across the board, with the back end of the yield curve leading the way.  The 10-yr yield (2.24%) is nine basis points lower while the 2-yr yield (1.25%) is lower by six basis points. The flattening of the yield curve has also worked against the financial sector. 

In addition, the CBOE Volatility Index (VIX 13.59, +2.94, +28.1%) has spiked to a fresh three-week high after hovering at a historically-low level just last week, and the U.S. Dollar Index (97.59, -0.51, -0.5%) has slipped to its lowest level since before the U.S. presidential election. 

On the data front, the weekly MBA Mortgage Applications Index decreased 4.1% to follow last week's 2.4% increase. Investors will not receive any other economic data on Wednesday.