Monday, April 07, 2014

Monday Morning Musings

Markets are off to a weak start following Friday's sharp selloff in stocks and weak overnight action in foreign markets. 

There was no economic news this morning, but bond yields are still moving lower on the weaker than expected jobs report from Friday.  The yield on the 10-year T-note is down another 2 bps to 2.70% and risking breaking back below its 50-days support.

In corporate news, Mallinckrodt (MNK) will acquire Questor Pharma (QCOR) for a 27% premium to Friday's closing stock price.

Asian markets traded lower overnight.  China was closed for a holiday, but the World Bank lowered its 2014 GDP forecast for China to 7.6% from 7.7% and maintained its 2015 forecast at 7.5%.

European markets are also lower across the board.  Pro-Russian supporters have seized government buildings in three cities in Eastern Ukraine and calling for an independence referendum.  The Russian MICEX stock index has been down as much as -3.5%.

Oil prices are down slightly near $100.88 and gold prices are also a bit weaker but holding at the $1300 level so far.

The volatility index only bounced back to the 14 level on Friday.  This morning it was moving higher slowly and is now finally above the 15 level, up 9% on the day.  For reference, in March the VIX climbed to the 18 level before topping.

Trading comment: In recent weeks we saw the Nasdaq break below its 50-day but the S&P 500 did not follow suit.  At the time we said you had to respect the price action, but now it looks like it was short-lived.  The Nasdaq and the Russell 2000 small-cap index both broke below their 50-day support levels on Friday.  The S&P 400 Midcap is close.  And considering Friday's high volume negative reversal, we think the odds have increased that the S&P follows suit this time.  The selling is concentrated in high growth names right now, and rotation into more defensive stocks has likely kept the broader indexes from falling as hard.  But if the selling continues it will likely reach the defensive names too and that is why we continue to tread defensively in the near-term.


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