1-28-16 – Where is the market going?

Market action is choppy like Lake Michigan along the shores of the Windy City. The S&P 500 has traded in nearly 30-point range and, after an initial run to 1902.96, is down 2.24 points to 1880.70 heading into midday Thursday.

Treasury bonds continue to see surprisingly little volatility in the wake of Wednesday’s FOMC announcement and the yield on the benchmark ten-year remains near 2%.

Gold is also flat near $1116.

However, crude oil continues to garner much attention. Prices bubbled to a high of nearly $35 per barrel in early trade on news a Russian energy official suggested that non-OPEC and OPEC members could meet next month to discuss supply. However, crude is now up 70 cents to $33 and has given back a good chunk of the gains after Bloomberg reported that an OPEC official said no meeting has been planned.

Nevertheless, Energy (XLE) is the best performing sector on Wall Street after gaining 2.2%. Utilities (XLU) and Tech (XLK) are also higher. Healthcare (XLV) and Financials (XLF) are seeing notable weakness.

CBOE Volatility Index (.VIX) is down .15 to 22.96 and options volumes are running about the normal pace, with roughly 4.4 million calls and 3.6 million puts traded across the exchanges.

VIX March 27 calls, March 35 calls, March 20 puts, March 25 calls, and March 18 puts are the most active options of the day, driven by spread trading. While one player opened a massive (80000 contracts) Mar 27 – 35 call spread on the index, another opted for a hefty (57000) Mar 18 – 20 – 25 – 27 iron condor. Both spreads are expressing the view that market volatility is likely to remain elevated through mid-March.

Indeed, the equities markets faces many headwinds. Lackluster earnings and revenues growth is chief among them. Caterpillar (CAT), for instance, is trading a bit higher today, but the results from the maker of earth-moving equipment hardly offers much fodder for the bulls. It reported a 22.6% decline in revenues and, excluding restructuring costs, a 45% decline in earnings per share.

While overall S&P 500 fourth quarter earnings are expected to be down 6.5% from a year ago, Fed officials yesterday didn’t seem to signal any significant changes to their strategy for 2016. While a rate hike isn’t necessarily in the offing for the March meeting, several more incremental increases are expected before yearend.

Lastly, it is an election year and that too might murky the market outlook in the months ahead.

From a technical standpoint, yesterday’s afternoon sell-off was not an encouraging sign for the bulls. Although the S&P 500 staged an impressive rebound in the second half of trading last week, there has been no follow through and, after four days of seesaw action, the index is down 26 points for the week.

Short-term support and resistance are clearly defined at this week’s range highs (of 1905) and lows (1875). Next support to the downside is the 1860 level, then down to 1850. On the upside, a break of yesterday’s highs of 1917 would be the first encouraging sign, as that sets up a possibly move to 1925.