Tuesday, December 30, 2014

Home in the Range: Dow Drops 130 Points, Nasdaq Off 1.4%; Waiting for a Break?

Another day, another market spent looking for direction, even as  stocks drop thanks to big declines in American International Group (AIG), Merck (MRK),  Discover Communications (DISCA), Target (TGT) and Twitter (TWTR).

REUTERS

The S&P 500 dropped 0.9% to 1,867.72 today, while the Dow Jones Industrial Average fell 129.53 points, or 0.8%, to 16,401.02, its largest drop since April 25. The Nasdaq Composite declined 1.4% to 4,080.76, while the small-cap Russell 2000 finished off 1.6% at 1,108.01.

What caused the selling? It’s easy to blame disappointing earnings as well as other news surrounding some of the market’s most high-profile stocks. American International Group, for instance, dropped 4.1% to $50.54 after releasing disappointing earnings, while Merck fell 2.6% to $57.26 after selling its consumer business, making it the biggest loser in the Dow Jones Industrial Average.

Then there’s Discovery Communications, which declined 3.9% to $74.71, after reporting higher-than-forecast earnings, but missing on revenue.

Don’t forget Target, which continues to get hammered–it closed down 3.7% at $57.64– thanks to a downgrade from MKM Partners following the resignation of its CEO yesterday.

And of course there’s Twitter, which plunged 18% to $31.85 after a lockout period ended. Poor Twitter. It looks like it needs its mother but found only a Snort.

But despite today’s loss, the S&P 500 still remains stuck in a range between 1,860 and 1887, waiting for something–anything–to push it one way or another. Rhino Trading Partner’s Michael Block calls market sentiment “neutral to confused.” He writes:

Under normal circumstances, I would be concerned that we keep failing to break that April 4 high at 1892.50.  But we also keep failing… to fail.  The stage is set for a move out of the box, and lo and behold, we have a big potential catalyst coming tomorrow with Janet Yellen's testimony to the Joint Economic Committee at 10AM ET.  If Yellen can convince the world that she doesn't think stocks are in a bubble and can avoid saying something flip about tightening six months after tapering is done, it could be enough for a breakout to the upside given how dubious the Street is that such a move could happen.

Mizuho’s Carmine Grigoli and Ujjal Basu Roy marvel at U.S. profits:

We are encouraged by recent developments on the earnings front. First quarter earnings beat expectations in the face of difficult conditions, forward guidance issued by companies has turned more positive, economic growth is improving following weather-related weakness and profit growth is poised to accelerate for the rest of the year. It appears to us that profit trends are strong enough to propel the stock market to higher ground over the next three to six months.

Deutsche Bank’s Yin Luo and team are still wary of momentum stocks:

The March and April sell-off in Momentum has been detrimental to many quant and fundamental managers. Like many similar episodes in the past, we find the driver of this underperformance is attributable its amassed volatility exposure. During these sell-offs, we find that Momentum typically undergoes a sharp rotation correcting itself rapidly. However, we find that going into May, the 12-1 month Momentum factor continues to be over-exposed to high volatility stocks and against lower volatility…

Therefore, we recommend that investors keep a watchful eye on their Momentum exposure and in particular to the implied high volatility play inherent in the factor across both the large and small universe.

With Twitter down 18%, that might be good advice.

(Note that Deutsche Bank’s report is at odds with what I wrote yesterday, when I noted that high-volatility had outperformed momentum. Chalk it up to size?)

This post was updated for the close.

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