2-18-16 – Where is the market going?

Stocks opened modestly higher Thursday, but have lost ground after several days of big gains. The S&P 500 is down 7.55 points to 1919.25 today and up nearly 3% on the week.

Treasury bonds are seeing strength and the yield on the benchmark ten-year is back down to 1.78% after St. Louis Fed President Bullard said late-yesterday that it is unwise for the Federal Reserve to continue normalizing rates given recent events. The dovish commentary seemed to signal a stark change of tune for one of the Fed’s more hawkish members.

Meanwhile, crude oil is flat at $33 after several days of large gains. Gold gained $7.5 to $1219.

On Wall Street, eight of ten market sectors are lower, led by Energy (XLE), Consumer Staples (XLP), and Financials (XLF). Utilities (XLU) are seeing notable strength.

Meanwhile, CBOE Volatility Index (VIX) is off .31 to 22 and continuing it’s one-week slide. The market’s “fear gauge” has now lost more than 6 points since closing at 2016 highs north of 28 on 2/11.

Overall options volumes are a bit light Thursday morning, but likely to pick up into the February expiration tomorrow. Roughly 3.8M calls and 3.2M puts traded across the exchanges through the first two hours of trading Thursday. Projected volume for the day is 17.7M and slightly less than the one-month daily average.

March 33 calls on the iShares Emerging Markets Fund (EEM) are the most actives after one bold player bought a 215,000 contract block in morning action. SPDR 500 Trust (SPY) Feb 193.5 and 194.5 calls are the next most actives. PowerShares QQQ (QQQ) Mar 93 and 98 puts are actively traded as well.

On the technical front, today’s weakness doesn’t come as surprise after the S&P 500’s 6.5% surge since retesting its January 20 lows last Thursday. Today’s decline retraces just 7.7% of the monster 97-point move seen over the past few trading sessions.

Still, until proven otherwise, the three-day uptick is a counter move during a larger downtrend. Today’s high of 1927 represents short-term resistance, as does 1940 and 1950. On the downside, 1900 has been a source of support and, beyond that, the S&P 500 is likely to find a bid around the 1875 level.

Crude oil remains an important catalyst because Energy (XLE) has been the most volatile of market sectors lately.

In addition, while Fed Bullard’s commentary might be viewed as a positive on the rate front, low rates have been an important reason for the underperfomance of financial sector in 2016. The Federal Reserve’s reluctance to raise rates also has rather negative connotations for the economic outlook as well, which comes after the worst quarter for corporate earnings since 2009.

Finally, Friday is expiration for February monthly options. It’s a light day for economic data with only inflation (CPI) numbers due out. However, Consumer Confidence, Home Sales, and Durable Goods are the next key data points to watch in the middle of next week.