2-4-16 – Where is the market going?

Stocks stumbled at the open and trading has turned mixed through midday Thursday. The S&P 500 is up less than a point to 1913.50 and 13 points from session lows.

Treasury bonds are holding firm after several weeks of gains and following weak Productivity and Factory Orders data. The yield on the benchmark ten-year, which fell to 12-month lows of less than 1.8% intraday yesterday before jumping back towards 1.9%, has eased to 1.86%.

Volatility in the commodities markets continues as well. Crude oil hit a low of $31.68 this morning before spiking to $33.60 and is now up 33c to $31.95.

Gold, silver, and copper see ongoing strength, as the US dollar extends big losses from Wednesday in the wake of today’s lackluster economic data. Gold has added another $12.50 to $1154.

Basic Materials (XLB) are leading the way on Wall Street. The sector is up 2.4% amid continued strength in the metals. Industrials (XLI), Financials (XLF), and Telecomm (IYZ) are areas of relative strength as well. Consumer Staples (XLP) and Consumer Discretionary (XLY) are seeing notable weakness.

CBOE Volatility Index (.VIX) is up .53 to 22.18, but well off yesterday’s morning high of 27.70. Trading in the options market is relatively active for a second day. 4.6M calls and 3.4M puts traded through the first two hours. Projected volume for the day is 19.3M and 5% greater than the one-month daily average.

VIX March 30 and 40 calls are the most actives, as the 114,000 Mar 30 – 40 call spreads on the volatility index were sold Thursday morning. The massive trade appears to be a closing sale. The same spread saw heavy buying interest Tuesday and Wednesday.

The interest in upside call spreads on the volatility index this week is a reflection of the underlying anxiety that persists after the S&P 500’s 5% drop during the first month of the year. According to the “January Barometer” the market’s performance in the first month of the year is an indicator of the performance for the entire year. Since 1950, the barometer has a nearly 90% accuracy rate, according to the Stock Trader’s Almanac. The S&P has shed another 1.4% so far in February.

Indeed, the equities market faces a number of hurdles in 2016 that are likely to keep volatility elevated in the near-term. The list has been duly noted here in recent weeks and includes lackluster fourth quarter earnings results, uncertainty over Federal Reserve policy, China slowing, volatility in the energy markets, and let’s not forget the uncertain Presidential Elections.

On the technical front, yesterday’s midweek reversal was somewhat encouraging and the S&P 500 successfully tested support at the 1900 level earlier today. Below that, yesterday’s low print (1872) comes into play, as it coincides with an important support low from August and September as well. A drop below and hold on to your hat! Overhead resistance awaits at 1925 and today’s high of 1927. 1940 is the next logical target beyond that.

Jobs data tomorrow is likely to be a next catalyst. Keep an eye on bond yields and crude oil, as they are the tails wagging the dog lately.