Early Market Trading Action Could Be Telling As Markets Rebound From Monday's Selloff

People who were being lulled to sleep thinking the markets were boring got a wake-up call yesterday.

The U.S. futures and European stock markets were trading higher Tuesday following massive losses on Monday. Asia booked modest gains—even as mainland China markets remained closed for a public holiday. 

The question now is whether the gains in overnight trading can hold and whether the market can build on them. The first 30 minutes of today’s session could be key. There might be a lot of follow-through selling pressure, and we’ll see if the early strength simply reflects some short-covering or if it’s actually people beginning to buy the dip. The first 30 minutes should tell the tale. 

Though some analysts called Monday’s action a needed and inevitable correction, it seems that the agreed-upon catalyst for the selloff was Chinese real estate giant Evergrande. With about $300 billion in debt, the concern is that if Beijing lets the second-largest property developer in China default on $83 million in payments due on Thursday, the global holders of its debt could get hit, roiling the global economy. 

Early Tuesday, some of the economic worries seemed to ease. Crude was actually higher, though that could reflect concerns about U.S. production due to hurricane-related outages in the Gulf of Mexico. And the 10-year yield was slightly higher, but only by a couple of basis points. Volatility—as measured by the Cboe Volatility Index (VIX)—eased slightly. 

So what happens now?

If investors overstated the risk Evergrande posed to global markets, and China acts to contain macroeconomic fallout while the Fed doesn’t have any upcoming surprises this week, a sharp market rebound is entirely plausible. 

However, many investors are bracing for more volatility this fall, in part going back to some of those analysts who say U.S. markets were due for a pullback after a nearly relentless drive for records. 

Up Next: Fed Meeting

The Federal Reserve starts its two-day meeting today. Last month Fed Chairman Jerome Powell said the central bank plans to start easing its stimulative bond-buying sometime soon, perhaps this year. The European Central Bank (ECB) announced it would follow suit and lower the amount of its own stimulus. The prospect of central banks starting to pull back on financial encouragement even as global economic fears continue could be a factor in recent market weakness. Investors will probably tune in to Chairman Powell’s news conference scheduled for 2:30 p.m. ET on Wednesday. 

Tuesday’s focus will also include the House, which is expected to vote this week on the debt ceiling and a stopgap spending measure to keep the government operating past the end of the fiscal year that ends on Sept. 30. Though we’ve been down this road before, the wrangling seems to purvey a feeling of uncertainty over the markets. 

August housing starts and building permits are out at 8:30 a.m. ET today, followed by existing home sales due out tomorrow. New home sales data is scheduled to be released on Friday. 

On the international stage, the United Nations convenes in New York today against a backdrop of worries including planet warming, polarized superpower relations, and a tenacious pandemic. 

There’s also an earnings report to watch this afternoon as Adobe ADBE gets set to open its books. The company is benefiting from broader trends in technology spending, one analyst said recently, according to Barron’s. 

FedEx FDX is also this afternoon, and the company is an interesting one to watch because it’s often seen as a derivative of consumer health.

CHART OF THE DAY: VIX BREAKS ABOVE DOWNWARD TRENDLINE. After a series of lower highs, the VIX surprised us by breaking above that downward trendline (yellow line). Although it closed off the highs, it’s still significantly above Friday’s close. Will the VIX (known for its mean-reverting behavior) move back toward that downward trendline or will it move away from it before moving back lower? Data source: Cboe Global Markets. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Going “Old School”: Over the last few years when the market gets rattled, investors tend to flock to the same “defensive” investments. This helps explain why the dollar, bonds, volatility, the Utilities sector, and other traditional “horsemen of risk” edged higher Monday morning even as the major indices fell sharply. It’s not just defensive sectors and fixed income that tend to outperform at times like these, however. Some large-cap stocks also have a way of swimming against the tide, and it’s something we saw back in the first days of the Covid selloff as well as in the nearly 20% decline of late 2018. 

Stocks like PepsiCo PEP, Honeywell HON, Coca-Cola KO, Procter & Gamble PG, Clorox CLX, and other companies selling basic staples either fell just a bit or even rose slightly to stand out in the sea of red Monday. Why is that? At times like this, it’s often the “old school stocks” people are going to be going after because they tend to want some level of certainty in times of uncertainty. While no stock is a “certain” thing, companies like the large-cap outperformers mentioned above often have stable products and have a history of paying dividends consistently quarter after quarter. There’s a certain degree of predictability that sometimes serves them well when everything around them is losing ground.

Buy Now, Pay Later Is Having A Moment. Retailers including Macy’s M, Bed Bath & Beyond BBBY, and Amazon AMZN in the last year have all added installment options at checkout. 

For shoppers who don’t qualify for credit cards, it can mean the difference between making a purchase or not. The former leads to higher sales for retailers. Installment plans are not new. At least two generations of homeowners probably used installment plans to buy washing machines and refrigerators. Today’s plans are often used for smaller-ticket items, like shoes or clothing items. 

With the Delta variant still a factor for many people working in hourly-paying jobs, financial uncertainty continues. An estimated 53 million adults in the U.S. lack traditional credit scores, according to FICO score creator Fair Isaac Corp. Installment plans are often smaller than credit-card spending limits and approved on a per-transaction basis, so shoppers have less rein with which to shop or get into trouble for spending too far above their means. For retailers, it means more customers get extended at least some credit to make immediate purchases. So for shoppers and retailers, every little bit can help. 

Got Gas? Unless you’re holding a position in natural gas futures (/NG), you probably missed the near-parabolic bull run that’s brought the commodity to heights not seen since February 2014. Year to date, /NG prices have run up as high as 130%, though they’ve recently pulled back from that level, yet far outpacing RBOB gasoline futures (/RB), up 51%, and crude oil futures (/CL), up 45%.

Winter isn’t here yet, but there’s a storm that’s ravaging the energy landscape, and it’s centered in Europe. The gas market is tight. Low wind speeds have kept electricity production on the weak side. And carbon prices are at record levels. All these factors combined are contributing to /NG’s rise in the global gas market. In Europe, gas and power prices are rising tremendously by the day, and the cruelty of the condition is that the seasonal coldness of winter is still three months away.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image by Natalie Murphy from Pixabay