A chock-full slate of economic data could keep the S&P 500 (SPX) and the CBOE Volatility Index (VIX) on the wild ride that has dominated trading over the last several sessions.
Although the earnings reporting calendar is light this week, the market could be looking to the next deluge of quarterly reports just around the corner. Alcoa (AA) unofficially jump-starts the season on October 8 and many stock traders are increasingly aware of currency fluctuations and their potential impact on earnings.
The U.S. dollar has been strengthening throughout the quarter and that trend could potentially dent profits of big multinationals that do a lot of business in Europe and Asia. Some of these companies might step forward and say the strong dollar ate up some of their profits since their last reports three months ago.
Multiple Drivers
On the topic of currencies, the European Central Bank meeting comes into focus Thursday. The euro slid to fresh 52-week lows against the buck last Friday; the euro-zone currency dropped to 1.267 against the dollar compared to 1.369 at the beginning of the quarter.
And of course, it may be time for Wall Street to tidy up portfolios before the final quarter of 2014 begins Wednesday. So-called “window dressing,” in which fund managers load up with solid performers and dump a few dogs, could factor into the equation.
With several catalysts colliding, there may be little surprise in the whipsaw market action that has come on the heels of the S&P 500’s 1.2% advance in Q2. Take last week’s action, for instance.
After what looked like the end of the world last Thursday following disappointing housing news and concerns about the Apple (AAPL) operating system, the SPX was still able to hold the 1980 line and has spent a grand total of one day since August 19 outside the 1980-2012 range. Thursday’s drop marked the first 30-point-plus move since July 31 and the fifth biggest one-day market move so far in 2014. All told, the SPX shed 1.4% last week. Now, the weakest of the major averages last week was the Russell 2000 (RUT), continuing to show softness, and off 2.4% for the week. Many traders will continue to watch the small caps for any potential signs of weakness for the broader market.
Risk on the Rise?
The CBOE Volatility Index (VIX), known as the market’s “fear gauge” because it reflects trader purchases of short-term protection, jumped nearly 3 points Thursday and hit its highest levels since early August (figure 1). VIX eased 0.80 points to 14.84 Friday, but was up 22.4% on the week, crossing above its 50-day moving average. It still is a far cry (31.5%) from the level seen at the start of the quarter (11.57), but the sharp rise in the VIX since June seems noteworthy since the S&P 500 is up only a slim 1.2% during that time.
Figure 1: The CBOE Volatility Index (VIX) flirted with 17, back at early-August levels, in a... [+]
The volatility index typically moves lower when the S&P 500 trades quietly. In this case, however, the volatility index seems to be suggesting that volatility expectations and risk perceptions are on the rise and that, in turn, sets up an interesting backdrop as we head into a busy news week and the beginning of the all-important fourth quarter.
Investors might expect some level of heightened volatility throughout the week given the flush economic calendar, concluding with monthly jobs data on Friday. The pace of hiring and wage growth has been a major point of contention at the Federal Reserve. Doves, including chair Janet Yellen, believe the jobs market is growing slow enough to warrant keeping ultra-low interest rates in place, while hawks argue that once wage inflation takes hold, it will be difficult to combat given such a low starting point for interest-rate policy. Before the hiring headlines hit, monthly sales results from the automakers come into focus Thursday. It’s a key report because it shows whether stronger hiring has translated into big-ticket spending. See the full economic calendar in the table in figure 2 below.
Good trading,
JJ
TD Ameritrade, Inc., member FINRA/SIPC. Commentary provided for educational purposes only. Past performance of a security, strategy, or index is no guarantee of future results or investment success.
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