Stock Market Today: The Merger That Cried Wolf

Stock Market

It was a very tough day in the stock market today. The S&P 500, Dow Jones Industrial Average, Nasdaq and Russell all fell more than 1% on the day as investors continue to worry about a plethora of issues.

Global Concerns Remain

As cool as it would seem to have a mortgage with a negative interest rate, it’s somewhat alarming with what’s going on globally. Interest rates continue to hover near zero, and now even the United States is cutting rates.

Everyone is afraid of another recession wreaking havoc on the global economy. Without being able to cut interest rates, investors are uncertain how global central banks plan to combat the eventual economic slowing. Of course, a trade war between the world’s two largest economies and concern over an escalating currency battle doesn’t do much to settle those fears.

Nor does it help when treasuries continue press higher — with the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) looking like a growth stock — and as yield spreads continue to shrink. Of course, this has dealt a blow to financials, as a shrinking spread crimps profitability for certain banking segments.

On Monday, there were even more dramatic headlines to sort through. The protests in Hong Kong continue to intensify, causing investor concern about what even more escalation could look like. Oh yeah, and Argentina’s stock market cratered 35% and its currency fell 25% after a surprise election result.

It also doesn’t help that analysts keep increasing the odds of a coming recession. Just today, investors are reading about Goldman Sachs decreasing GDP growth estimates and Bank of America increasing their odds of a recession.

To say Monday was full of drama would be an understatement — and there’s no telling if the selling is ready to let up.

Where Can We Go From Here?

The saving grace? The U.S. economy. There have been a few yellow flags lately, but until the labor market and real estate prices start to show signs of distress, investor and consumer sentiment may remain elevated. Of course, either one (or both) of those readings may take a dive if the stock market does too.

Investor sentiment took a real nasty turn at the start of the month once the markets started to decline in earnest. We’ve since seen a snap-back rally. Is it over so soon?

Last week, the S&P 500 traded down to its 200-day moving average in the overnight session of the futures market. Unfortunately, the index — as well as the SPDR S&P 500 ETF (NYSEARCA:SPY) or the PowerShares QQQ ETF (NASDAQ:QQQ) — didn’t trade down to the 200-day moving average during regular trading hours. If you recall, that made us suspicious of the stock market’s recent rally.

The index promptly rallied up to the 50-day moving average, retracing about 50% of the decline and paused there for two sessions. It was the perfect setup though, because it would either hurdle the 50-day or fail to hold the 100-day moving average.

On Monday, the S&P 500 lost the 100-day moving average. Two scenarios are now possible, with the first being that the SPX reclaims the 100-day moving average. The other option? We retest the 2,825 to 2,850 area. While no one likes to see the market in decline, it would be healthy to see a tag of the 200-day moving average at 2,793.

An overshoot to the 38.2% retracement at 2,767 is possible.

As tough as it is, try to keep it simple. The index needs to reclaim the 100-day, otherwise lower prices are in store.

Movers in the Stock Market Today

Even on the painful days, “Merger Monday” rings true. Well, sort of anyway. The only thing more dramatic than Monday’s headlines has been the ongoing merger efforts between CBS (NYSE:CBS) and Viacom (NASDAQ:VIA, NASDAQ:VIAB).

The talks have been going on for years — literally — with nothing but disappointment to show for it. Let’s call it, the merger that cried wolf. Reports over the weekend suggested that a deal as soon as Monday morning may come. However, confirmation never came along.

Apparently, it’s down to just figuring out the conversion price of the all-stock deal. But is there even a winner? Both A-class and B-class shares of Viacom were down almost 5% on the day, while CBS stock fell nearly 2%.

Roku (NASDAQ:ROKU) was a rare outperformer, with shares rallying over 7% on the day. The catalyst for Monday’s rally came from the analysts at Nomura, who raised their price target from $120 to $150. Aside from owning the Street-high target on Roku, they maintained the stock as their top mid-cap pick for 2019.

(Here’s how to trade Roku, by the way).

Finally, Nike (NYSE:NKE) fell 0.4% despite the company’s plan to launch a subscription service for children’s shoes. The hope is to collect a recurring revenue stream in exchange for parents being able to swap out shoes more quickly for their children. That has obvious benefits for Nike and its investors.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell was long ROKU.

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