Unsettling Market Risk Potential For Thursday And Friday

Today, Wednesday April 3, action in the three legs that support stocks near the highs for 2019 pointed toward significant risk for Thursday and Friday.

The Standard & Poor’s 500 index closed the day up 0.21% at 2873.

Leg 1 for the market: The financials, the biggest sector (or the second biggest depending on what’s been going on with technology stocks), closed higher today with the Financial Select Sector SPDR ETF (XLF) up 0.30%. That left the XLF just short of the $26.50 level (at $26.40) that has been the pivot point for the sector for the last half of 2018 and much of 2019. That was an uncertain performance given that the yield on the 10-year Treasury rose 5 basis points today to a yield of 2.52. That took the Treasury yield curve away from the kind of inversion (where short term yields are higher than long term yields. The yield on the 3-month bill closed at at 2.42% today.) Bank stocks typically gain when yields rise and the de-inversion of the yield curve (suggesting less danger of a recession) would  also typically be good for stocks. The fact that the financials didn’t gain more today is an indication, in my opinion, that investors and traders are worried that Friday’s jobs number will be weaker than expected, raising yields again in the Treasury market, maybe even to the extent of restoring the inversion in the Treasury yield curve and increasing fears of recession. And there’s also the worry that comes with the start of earnings season for the big banks on April 12. In other words, the financial sector, one of the biggest elements in the S&P 500, is hanging around an inflection point.

Leg 2 for the market: Technology stocks climbed a very good 0.81% at the close today but this sector too was “twitchy.”  The Technology Select Sector SPDR ETF (XLK) climbed to its high around midday in New York with a 1.22% gain before settling back on yet more bad news from Facebook (FBWealth Strength IndexAAPL is Extremely Up and trending Up) on a failure to protect user data stored on Amazon cloud servers. Facebook shares finished the day down 0.38%.

Leg 3 for the market: Energy stocks don’t have the same direct influence on the S&P 500 and the general market–since the sector doesn’t have the market cap weight of financials or technology shares–but they are, at this moment, an important indicator of sentiment on the global economy. So it is significant–in as downward trending kind of way–that the Energy Select Sector SPDR ETF (XLE) was off a market-leading 0.96% today. That meant that energy stocks were down harder than oil prices by themselves would have suggested . U.S. benchmark West Texas Intermediate finished up 0.03% on the day and international benchmark Brent crude edge 0.09% lower. Earnings for energy stocks leverage the price of oil–rising faster than oil prices on the upside and falling further than oil prices on the downside–so today’s action is a vote by investors and traders in the sector on weaker economic growth and lower demand for crude.

Finally, I’d draw your attention to the odd behavior of the “fear index,” the CBOE S&P 500 Volatility Index (VIX). The VIX actually climbed today by 2.84% to an underwhelming 13.74. It’s unusual for the VIX to climb on a day when the market has posted gains. The move suggests that in the near term–which is the volatility that the VIX index tracks–some traders and investors have enough worry about the direction of the market to put a few hedges in place against a retreat. Not a lot of hedges. Just a few. I’d call it another indicator, though, of the nervousness surrounding the Friday jobs numbers and the run up to earnings season that starts on April 12.