2-9-16 – Where is the market going?

Losses across overseas equities markets set the table for a morning drop on Wall Street and market averages are attempting to work off session lows into midday Tuesday. The S&P 500 is 10 points to 1843.42 and 7 points above its worst levels.

Treasury bonds continue to see strength and yields continue to trend lower amid the turmoil in global financial markets. Japan’s Nikkei dropped more than 5% overnight and the yield on a Japanese government bond has, for the first time ever, turned negative. That means an average Japanese saver is actually a net payer.

In the US, the yield on the benchmark ten-year is falling to 1.7% for the first time in more than a year. It finished 2015 at 2.3%. While no economic data of broad market importance is due until Retail Sales numbers Friday, trading might take on a wait-and-see feel, as focus in the bond pits turns to Janet Yellen’s testimony to Congress Wednesday.

On the commodities front, crude oil dropped below $30 Monday and is down another nickel to $29.64. Gold is off $5 to $1193 after gaining more than $30 the day before.

On Wall Street, Energy (XLE) is leading the market lower. Telecomm (IYZ) and Financials (XLF) are seeing a second day of relative weakness. However, Basic Materials (XLB), Industrials (XLI), and Utilities (XLU) are seeing modest gains.

CBOE Volatility Index (.VIX) saw morning spike to 28.31 and is up 1.16 to 27.16 amid light volumes in the options market. 3.8M calls and 4M puts traded through 11:00 Central Time. Projected volume for the day is 16.8M and well below the one-month average of nearly 19M.

SPDR 500 Trust (SPY) Feb 26th Weekly 180 puts are the most actives with more than 51.2K traded. VIX March 30 and 40 calls are the next most actives, driven by spread trading.

Microsoft (MSFT) Apr 52.5 calls, GE Mar 26 puts, and GM Mar 25 puts are among actively traded single stock options.

Looking forward, the fourth quarter earnings reporting season is winding down. While there have been a few bright spots here and there, 70% of the market value of the S&P 500 has now reported results and earnings are down 4.6% from a year ago, on 5.1% lower revenues, according to Zack’s.

Financials, at home and overseas, are under pressure as yields plummet and a number of small and mid cap energy names suffered sizable percentage losses Monday. For example, Energy Transfer Equity (ETE) was down 42%, Williams Companies (WMB) lost 34.8%, and Chesapeake (CHK) dropped 33.3%.

The ongoing slide in bond yields, lackluster earnings, and big losses in the energy sector are keeping anxiety levels, and volatility, elevated.

VIX, the market’s “fear gauge”, has closed above 20 during nearly every trading session in 2016 and is now at a significant technical level. The index is currently testing the 2016 closing high of 27.59 seen on January 20th, which proved to be an important turning point for both the S&P 500 and the volatility index.

The next catalyst will be Yellen’s talk before Congress tomorrow. The sharp drop in yields suggests that market participants don’t expect another rate hike any time soon and that she might offer a bit more dovish testimony. That, however, might be wishful thinking.

But first, the market must navigate through the remainder of Tuesday’s trading session. Today’s low of 1835 on the S&P 500 is the next support area followed by 1828. Beyond that, the January 20 intraday capitulation low of 1812 comes into play. Immediate upside resistance is likely at 1860, 1867 (August lows), and 1870-72 range.