5-3-16 – Where is the market going?

Stocks slumped at the open and remain deep in the red through midday Tuesday. The S&P 500 is down more than 20 points to 2061 and 6 points from session lows.

Energy (XLE) is the biggest loser as crude oil prices dipped nearly 3% to $43.60 per barrel. Basic Materials (XLB), Financials (XLF), and Telecomm (IYZ) are seeing relative weakness as well. All ten market sectors are under water.

Gold dropped $9 to $1297. Copper and silver are seeing losses as well.

Yet, Treasury bonds are scoring solid gains as equities falter amid anxiety about the global economy. Some of the angst stems from poor Construction Spending and ISM Manufacturing numbers out Monday morning. However, a second day of weak manufacturing data from China and 16-month lows for the dollar index are likely catalysts at well.

The yield on the benchmark ten-year Treasury is falling to less than 1.79% and now well below the levels near 1.94% seen just one week ago.

In the options market, CBOE Volatility Index (.VIX) is up 1.50 points to 16.18 and, as we can see from the chart below, has reversed the entire loss from Monday. Meanwhile, options volumes are also above the slow pace seen Monday. Roughly 3.3 million calls and 3.3 million puts traded through the first two hours. Projected volume for the day is 16 million and roughly 5% greater than average daily volume seen during the month of April.

Pfizer (PFE) Jun 30 calls are the most actives as shares gain 3% on earnings. 86K traded at that line. At the same time, defensive trading is being seen in XLF Aug 21 puts, VIX Jun 24 calls, and SPDR 500 Trust (SPY) May 13th Weekly 200.5 puts.

See Tradespoon’s Stock Forecast on CBOE Volatility Index (VIX) (Compare with our 4/28 Predictions)

Tradespoon’s Stock Forecast on CBOE Volatility Index (VIX) (Side by side with our 4/28 Predictions)

Indeed, the underlying tone Tuesday is decidedly more cautious compared to the sentiment on the first trading day of May. While global economic growth concerns seem to be the main driver (as suggested by falling metals, crude oil, equities, and bond yields), the “sell in May and go away” jibber jabber is likely motivating some of today’s negative action as well.

A longer-term concern has been the lackluster earnings results seen through the first quarter reporting period and expectations for further weakness in the second quarter. According to Zack’s, with three quarters of S&P 500 constituents having released results, total earnings are down 7.2% from a year earlier on 2.4% lower revenues. This marks the fourth quarter of earnings declines for the S&P 500, a trend that is expected to continue into the second quarter and then see only modest improvement in the third.

Therefore, given the growth challenges, it should not be entirely surprising to see the S&P 500 struggle when it challenges its 2015 record highs, as it did just a couple of weeks ago. Also expect resistance at 2065, 2075, 2081 and 2100. Support likely at 2055, 2050, and 2041.