Photographer: Michael Nagle/Bloomberg
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Traders Are at the Mercy of the Strongest S&P 500 Cross-Currents in a Year

  • Gains and losses have alternated over the past three weeks
  • Trump, Fed sow anxiety, even as earnings buoy bull case

This is no longer a market that mixes relentless gains with the occasional sharp downdraft.

For the third week in a row, the S&P 500 Index reversed some or all of the prior week’s performance. This time it fell, albeit with 2018’s smallest decline, after climbing 3.5 percent in the previous five days. It was a pattern of alternating gains and losses that has emerged just one other time in the past year.

The seesawing is a lens on investor psychology, underlining incompatible narratives that are developing in the wake of the S&P 500’s first correction in two years. Bulls such as JPMorgan Chase & Co.’s Marko Kolanovic cite robust earnings growth as a reason to have faith in the recovery, while the White House looms as a threat. President Donald Trump provided much of the downward impetus this week, ousting his secretary of state and blocking a $117 billion technology deal as trade tensions simmer.

“The market keeps a careful eye on what is real and what is conjecture,” Chad Morganlander, a portfolio manager at Washington Crossing Advisors, said by phone. “Longer term, we’re facing a risk-off mentality due to political risk.”

Another example of investor whiplash: the popular trade of buying banks and selling utilities, underpinned by hopes for higher interest rates, is unraveling right before the Federal Reserve’s policy meeting next week. Or look at technology shares: the market darlings were the worst-performing industry group on both Tuesday and Friday.

Read more about stock investors unwinding their Fed trade here.

The back-and-forth in equities is a departure from the better part of the past year, when the S&P 500 rallied with almost no interruptions until February. And during last month’s selloff, the direction was painfully obvious.

Indecision isn’t limited to the S&P 500, which capped a four-day drop through Thursday before paring its weekly decline to 1.2 percent in Friday’s session. The Dow Jones Industrial Average slipped 1.5 percent on the week, after an opposite move of about 3 percent in each of the previous two weeks. The Nasdaq 100 Index was down 1.1 percent. And the Cboe Volatility Index rose 7.9 percent, after sinking 25 percent last week to close below 15 for the first time since the February jitters.

The about-face is most pronounced in sectors linked to interest rates. Utilities and real estate, stocks with high dividend payouts, were the only winners among S&P 500 industries this week after suffering the steepest losses in the first 10 weeks of the year.

ETF Positioning

Meanwhile, banks -- beneficiaries of higher borrowing costs -- tracked Treasury yields lower. While a blip on a long-term chart of their relative performance, it’s a headache to equity investors who have raised bearish bets against utilities this year while pouring $4.3 billion into exchange-traded funds that focus on financial shares.

“The headlines have been interest rates, inflation and then really Washington,” Jeff Carbone, co-founder and managing partner of North Carolina-based Cornerstone Wealth, said by phone. “We need to see some calm and some confidence coming out of Washington to deter market reactions on the negative side.”

Trump’s decision to impose tariffs on steel and aluminum imports hurt industrial stocks such as Boeing Co., without helping the plan’s supposed winners. In fact, the NYSE Arca Steel Index fell for a fourth week, its longest retreat since November, as Goldman Sachs Group Inc. analysts said a growing list of exemptions undercuts the benefit.

The administration’s tough stance on mega-cap takeovers is also causing fallout. Qualcomm Inc. dropped after Trump issued an executive order blocking Broadcom Ltd. from acquiring the chipmaker. Monsanto Co. paced declines among fertilizer producers as its planned takeover by Bayer AG is said to have not satisfied U.S. officials.

To Bruce Bittles, chief investment strategist at Robert W Baird & Co., the ups and downs in stocks should come as no surprise in a market where valuations have expanded to levels not seen since the dot-com era. With earnings season due to start next month, the S&P 500 is likely to go sideways until companies can convince investors that the profit rebound is on track, he said.

Analysts expect S&P 500 earnings to increase 17 percent during the January-March period, with growth picking up pace in at least the next two quarters, estimates compiled by Bloomberg show.

“We might have more consolidation,” said Bittles. “And once the valuations catch up to their earnings, this will be a foundation for a further run.”

— With assistance by Sarah Ponczek

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