Market Insights: What Just Happened?

Macroeconomic and Market Developments:

• North American markets were mixed this week after a wild day of trading on Thursday and a volatile conclusion on Friday. In Canada, the S&P/TSX Composite Index was down 1.38%. In the U.S., the Dow Jones Industrial Average increased 1.15% and the S&P 500 Index declined 1.55%.
• The Canadian dollar was down this week, closing at 72.02 cents vs 72.79 cents last Friday.
• Oil prices declined this week. U.S. West Texas crude closed at US$85.76 vs US$92.76, and the Western Canadian Select price closed at US$56.24 vs US$67.70 last Friday.
• The gold price finished lower this week, closing at US$1,643 vs US$1,695 last week.
• Inflation was a big story again this week. The U.S. Consumer Price Index (CPI) rose 0.4% in September and was up 8.2% from a year ago. The Core CPI, excluding food and energy, accelerated 0.6% month-over-month and 6.6% over the past year. In addition, the Producer Price Index (PPI) rose 0.4% in September, coming in above the 0.2% gain expected. Producer prices are up 8.5% compared with a year ago. The Core PPI, excluding food and energy, rose 0.3% in September and 7.2% in the past year.
• General Motors (GM) announced that it is forming a new business unit to offer stationary battery packs, solar panels, electric vehicle chargers and other energy-management products for homes and businesses. The new unit, called GM Energy, aims to build on the battery and software expertise that GM has amassed in recent years to develop a new line of electric vehicles that will, in time, replace its internal-combustion offerings.
• Cameco (CCO) and Brookfield Renewable Partners (BEP.UN), together with its institutional partners, are forming a strategic partnership to acquire nuclear-power giant Westinghouse Electric Company for a total enterprise value of $7.875 billion. Brookfield Renewable and its partners will own a 51% interest in Westinghouse and Cameco will own 49%.
• Canadian retailer Aritzia (ATZ) reported above-anticipated results with earnings of $0.44/share vs $0.34/share expected, and adjusted EBITDA of $82.6 million vs $69.0 million expected, on revenue of $535.5 million vs $453.9 million expected,.
• On Friday, U.S. rival grocery chains Kroger and Albertsons announced plans to combine operations. Kroger has agreed to buy Albertsons for $34.10/share in a deal valued at $24.6 billion. Currently, Kroger is the second-largest grocer by market share in the United States and Albertsons is fourth. Together, Kroger and Albertsons would have roughly 16% market share and would be a closer second to Walmart’s ~21%, with Costco in the third position with roughly 7%.

Weekly Diversion:

Just like Dumb and Dumber.

Charts of the Week:

Market volatility continued into this week with what’s considered a very rare event. Yesterday was the fifth largest reversal from a 52-week low in history for the S&P 500. For the NASDAQ, it ranks as the fourth largest. At one point yesterday, the S&P 500 was down over 2% intraday to mark a 52-week low, but by the close it was up over 2%. The index gained 5.1% from the intraday low to the close. The market also happened to reclaim its June low in the process. The table below outlines the top ten reversals since 1962.

Source: SentimenTrader

What does it mean for equity markets going forward when you see large intraday reversals to the upside? Unfortunately, it doesn’t necessarily mean markets have hit their low. In most of these cases of large reversals, the market has gone on to retest or find a lower low. Courtesy of Bespoke Investment Group, here is a chart illustrating all the intraday reversals, since 1983, where markets were down over 2% intraday to close up over 2%. These occurrences are indicated by the red dots. In addition, the table shows what the forward returns were in those times. Of these 10 instances, there was only one that happened towards the beginning of the correction. However, today, we are already well into the current bear market, so this in our view would not be a good comparable. In all eight other occurrences, this happened not too far off a major low, notwithstanding some short-term weakness first. Looking at forward 1-year returns though, the average and median returns have been 14.6% and 19.4%. If you remove the time that happened prior to the correction, unlike the present, then the forward 1-year median return was over 20% with positive returns 100% of the time.

Source: Bespoke Investment Group

DISCLAIMER: Investing in equities is not guaranteed, values change frequently, and past performance is not necessarily an indicator of future performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges.

Sources: CNBC.com, Globe and Mail, Financial Post, Connected Wealth, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, Bespoke Investment Group, @SentimenTrader