01-14-2016 – Where is the market going?

Stocks saw choppy trading at the open, but have found some strength heading into midday Thursday. After falling to low of 1878.93 this morning, the S&P 500 is up 22.90 to 1913.18 and nearly 2% off its worst levels.

Energy (XLE) is leading the advance after crude oil recovered 70 cents to $31.18. Healthcare (XLV), Telecomm (IYZ), and Utilities (XLU) are also outperforming.

Gold is losing some of the recent “safety” bid and is down $5 to $1082. Similarly, Treasury bonds are modestly lower and the yield on the benchmark ten-year is 2.08%, after falling to two-month lows of 2.07% yesterday.

Trading in the options market is active heading into the January expiration. Since the January term includes many former LEAPs, there will be a lot of position adjustments today and tomorrow, as contracts that are expiring are either covered, exercised, or rolled out to later expiration terms.

Roughly 4.3 million calls and 4.7 million puts changed hands through the first two hours of trading Thursday. Projected volume for the day, of 24.6 million, would represent a high for 2016.

SPDR 500 Trust (SPY) Feb 183 puts, Sprint (S) Jan 5 puts, and QQQ Jan 104 puts are among the most actives.

CBOE Volatility Index (.VIX) Feb 23 and 30 calls are also busy. The market’s “fear gauge” is down .60 to 24.70 and not seeing the typical “crush” that one might expect if the S&P 500 is in the midst of a rebound. Indeed, today’s action hints at a “relief rally”, combined with short-covering, but the underlying tone is likely to remain cautious heading into a busy news day tomorrow, followed by a three-day weekend.

On the economic front, Friday holds Retail Sales, inflation (PPI), Manufacturing (NY Empire), Industrial Production, and Consumer Confidence (U of Michigan) data. Meanwhile, the earnings calendar includes financial names Wells Fargo (WFC), Citi (C), PNC, and US Bancorp (USB) tomorrow morning as well.

Then the floodgates open on fourth quarter results Tuesday after the break. Expectations are for overall S&P earnings to be down 7.8% from a year ago on 4.7% lower revenues, according to Zack’s. 13 of 16 industry groups are expected to see negative earnings growth.

Against this backdrop, weak economic data combined with poor earnings support the bearish case for equities, but the bar is being set very low after the latest market rout and so there are likely to be some upside surprises along the way. All of this too say, expect the choppy and whippy trading to continue as the earnings season unfolds and into the next 1/27 FOMC meeting on rates. With shares of many energy names at five and even ten-year lows, crude oil represents a significant short-term catalyst as well.

On the technical front, today’s low on the S&P 500 is within ten points of the September trough (1871.91) and, beyond that, the August capitulation lows are the next support at 1867. Unlike the August bottom, however, there has been no significant spike in VIX or signs of capitulation. Therefore, a V-shaped turnaround seems like a less likely scenario despite the recent carnage. Holding the 1900 level today would be a first successful test of support. A climb above 1905 sets up a potential test of the next resistance in the 1918-1920 area.