5-19-16 – Where is the market going?

Stocks slipped at the open and the decline is gathering some momentum into midday Thursday. The S&P 500 is down nearly 20 points to 2027.68 and near session lows.

Treasury bonds are holding gains as stocks falter and after suffering steep losses yesterday when the minutes from the latest Fed meeting were released Wednesday afternoon and seemed to raise market expectations for a rate increase at the June meeting. The yield on the benchmark ten-year has eased to 1.85% from three-week highs of 1.88% yesterday.

The dollar is building on yesterday’s gains, however, and gold dropped $23 to $1251.50. Crude oil lost $1 to $47.75.

On Wall Street, eight of ten market sectors are lower. Industrials (XLI), Energy (XLE), and Telecomm (IYZ) are the biggest losers. Consumer Staples (XLP) and Utilities (XLU) are seeing modest strength.

CBOE Volatility Index (.VIX) is up 1.26 to 17.21 and overall options volumes are running at their best levels so far this week. Roughly 3.1 million calls and 4.1 million puts traded through the first two hours. Projected volume for the day is 18.6 million contracts and 20% greater than the one-month daily average.

SPDR 500 Trust (SPY) expiring-tomorrow May 205 puts, 205 calls, 200 puts, and 204 puts are the most actively traded. Market Vectors Gold Mining (GDX) Jun 23 and Jun 24 puts are seeing notable activity as well.

Looking forward, the first quarter earnings reporting season is winding down now that most of the big retailers have released their results this week. Best Buy (BBY), Costco (COST) and Hewlett Packard (HPQ) are among a small handful of names that will report results with broader market significance next week.

On the economic front, one lone report on Existing Sales is due out tomorrow. Next week’s economic calendar is backend-loaded with data on Durable Goods and GDP coming later in the week.

See Tradespoon’s Stock Forecast on POWERSHS DB US DOLLAR INDEX-DOLL INDX BULL (UUP)

Tradespoon’s Stock Forecast on POWERSHS DB US DOLLAR INDEX-DOLL INDX BULL (UUP)

Choppy trading is likely to continue amid the lack of news flow in coming days, but the dollar will certainly be an important catalyst for the equities market. As we can see from the chart above, the Bullish Dollar Fund (UUP) is now breaking above its 50-day moving average after staging a solid rebound off early-May lows. The ETF tracks the performance of the buck against basket of other currencies and is heavily-weighted towards the euro/dollar currency pair.

The spike in UUP yesterday that sent shares beyond the 50-day moving average coincided with the release of the Fed minutes from the April meeting. The text seemed to shift expectations a bit, and now there seems to be a roughly 34% probability priced into the Fed Fund market of another rate increase at the June 15^th meeting, up from a mere 5% on Monday.

Dollar strength should not be overlooked as one reason for today’s weakness in the equities market. It seems to be weighing on the commodities trade and also raising some concerns about the outlook for the second half of 2016, which was expected to see an earnings recovery due, in part, to the weakening dollar.

Lastly, tomorrow is a monthly expiration for May contracts and that, in turn, might drive a bit more activity in the options pits ahead of the weekend.

The S&P 500 failed to hold the 2040 support level this and is now testing support/resistance at 2030. Next support is 2020, the 200-day moving average, and 2010. Resistance at 2045, 2051 and the 50-day moving average.