Opening Bell: Futures Rebound After U.S. Stocks Hit Worst Month Since 2008

Key Events

European shares rebounded from a lower open this morning after Asian markets took their cue from yesterday's US selloff, which marked a sixth straight day of losses on Wednesday, pushing US equities into negative territory for the year to date and officially establishing a downtrend. Mixed earnings results failed to offset trade concerns while weak housing data exacerbated fears that economic growth has peaked, even amid the Fed's ongoing tightening path.

It is noteworthy that US futures on the S&P 500, Dow and NASDAQ 100 have been on the rise since yesterday’s market close, when Tesla (NASDAQ:TSLA) posted positive corporate results.

Safe haven assets such as gold and yields on 10-year Treasurys are paring losses.

The STOXX Europe 600 slipped lower alongside oil and gas companies but later managed to crawl back into positive territory.

Earlier, during the Asian session, Japan’s Nikkei plunged 3.72 percent to the lowest level since April, while the broader TOPIX tumbled 3.1 percent to the lowest in over 13 months. China’s Shanghai Composite managed to wipe out a 2.4 percent lower open and close flat.

Global Financial Affairs

Yesterday, the S&P 500 tumbled 3.09 percent, extending the October selloff to 8.8 percent, making this its worst monthly performance since February 2009, when it lost 11 percent. The overall rout amounts to 9.83 percent from the index's highest close on September 20 to yesterday’s closing price.

This places the benchmark 0.17 percent above an official correction—on the edge of an arbitrary but nevertheless consensus threshold. Communication Services (-4.76 percent) underperformed, weighed by an earnings miss from AT&T (NYSE:T). Technology (-4.48 percent) came in second, dragged down by Texas Instruments (NASDAQ:TXN). Boeing (NYSE:BA) on the other hand crushed earnings expectations and posted improved guidance; shares of the aerospace giant surged, up 1.31% at the close.

Overall, the SPX has now erased all this year's gains and is in negative territory, down 0.65 percent. While not fully satisfying the 10 percent requirement that would make it an official correction, the benchmark has completed a downtrend, with a series of falling peaks and troughs. It also broke its uptrend line since the last correction during February 2016 and dropped below its 200 DMA.

The Dow Jones Industrial Average plunged 600 points, shedding 2.41 percent of value and deepening the month’s selloff to 7.08 percent—the worst since February 2009, when it fell 11.7 percent, and an overall drop of 8.38 percent from the highest close it hit on October 3. The retreat wiped out the Dow's gains for the year, reversing into a 0.55 percent retreat.

While the mid-term trend has ended, the long-term trend remains intact. Overall, the industrial benchmark is still well above its uptrend line since the 2009 bottom and still within an ascending sequence of peaks and troughs. Even if it were to complete a long-term double top on the weekly chart, there's still enough room to achieve the implied pattern's target while remaining above the uptrend line.

The NASDAQ Composite underperformed, hitting a 4.43 percent slump and a 11.77 percent dip for the month so far—the worst monthly performance for the tech-heavy index since November 2008, when it lost 13 percent. The NASDAQ also dropped 12.35 percent from its record close on August 31, which puts it squarely into a correction.

The Russell 2000 slid 3.77 percent. It was the second worst performer after the NASDAQ. It's now also the worst performing index in October, down 13.53 percent for the month so far. With a 15.64 percent tumble from its highest close on August 31, the small cap stock index is now in deep correction territory and the underdog of the current equity selloff.

While up to now we've maintained a bullish equity outlook, based on upbeat economic data and earnings, a turnaround in sentiment seems to have finally taken hold of investors, and perhaps company executives as well. As previously noted, earnings are mostly extremely positive; it's forward guidance that has prompted panic among investors.

Companies have lowered their outlook, on worries over the future impact of trade tariffs and the rising costs that could stem from the Fed's path to higher interest rates. The question therefore is, have company executives turned pessimistic because of data, interpretation, or just outright sentiment?

It's impossible to know with absolute certainty what the driving factor behind softer guidance might be. It's also impossible to predict what will happen in markets. Is this the end of the equity bull or just a necessary and healthy correction for an overweight market within a still-expanding economy? Analysts are divided on that, with some saying the current rout has not shown signs of panic and is, therefore, a likely technical selloff, in which a series of broken support levels trigger algorithmic sales, while savvy investors will buy the dip.

After making a strong case for equity price growth on the fundamentals, we are now making a call for a market top on the technicals. While macro and fundamental data remain in expansion mode, as a leading indicator we must focus on the market. Even if the rout is sentiment-based, until a new uptrend is established, the preponderance of the evidence suggests stocks will continue to decline rather than rise.

Every US major has slipped below its uptrend line since the February 2016 correction bottom and its 200 DMA. However, this refers only to the mid-term outlook. While all indices dropped below their 50 week MA, they are still well above the long-term uptrend line and very comfortably in a long-term uptrend.

We have been warning for a while that the recent underperformance of small cap stocks typically signals a top, as investors get rid of those assets first. The NASDAQ is the second worst performer; investors may feel it's time to cash out after the tech index was the top performer over multiple time-frames, including year-to-date, 1 year and 5 year performance.

In FX markets, the dollar edged lower. The euro and core European bonds climbed ahead of an ECB meeting to discuss the outlook for the eurozone economy. The pound also gained ground, despite UK Prime Minister Theresa May's cabinet clashing over Brexit plans.

Oil slid as US crude inventories continued to rise. The recent severe drop in the price of oil could spur analysts to rethink their economic forecasts for 2019.

Up Ahead

• Amazon (NASDAQ:AMZN) reports third quarter earnings after market close today, with EPS forecasts of $3.08. The only thing that would surprise markets is if the e-commerce giant doesn't release another blockbuster quarterly report, crushing analyst expectations yet again.
• On Thursday, ECB policymakers could on confirm that asset purchases will end this year, reiterating their pledge to keep interest rates at record lows through summer 2019. President Mario Draghi will hold a press conference.
• US GDP data out on Friday is expected to show that growth slowed in the third quarter, yet remained near its best pace since mid-2015.

Market Moves

Stocks

• S&P 500 futures advanced 0.2 percent, the first advance in more in a week.
• The MSCI All-Country World Index dropped for the seventh straight session by 0.6 percent, to the lowest level in 14 months.

Currencies

• The Bloomberg Dollar Spot Index decreased 0.1 percent.
• The euro increased 0.2 percent to $1.141.
• The British pound advanced 0.2 percent to $1.2908.
• The MSCI Emerging Markets Currency Index slipped 0.3 percent to the lowest level in two weeks.

Bonds

• 10-year Treasury yields advanced one basis point to 3.11 percent
• Yields on 10-year German bonds fell one basis point to 0.39 percent, the lowest level in nearly seven weeks.
• Britain’s 10-year yield dropped one basis point to 1.449 percent, the lowest level in seven weeks.

Commodities

• The Bloomberg Commodity Index inched 0.2 percent lower to the lowest level in almost five weeks.
• West Texas Intermediate crude slipped 0.8 percent to $66.29 a barrel, the lowest level in more than two months.
• LME copper fell 0.8 percent to $6,127.00 per metric ton, the lowest level in five weeks on the biggest fall in a week.
• Gold climbed 0.1 percent to $1,235.06 an ounce, the highest level in more than 14 weeks. Two key events in the US could drive PM prices higher.