U.S. equities moved higher Thursday, posting impressive mid-day gains as former FBI Director James Comey’s testimony walked back the impression President Trump obstructed justice by pressuring him to drop an investigation into former National Security Advisor Michael Flynn. With that, the catalyst that slammed stocks on May 17 to their worst one-day loss in months has been put to bed.
But as trading continued, the Dow Jones Industrial Average fell nearly 130 points from its high into the red on headlines indicating a heightening of tensions between Qatar and Saudi Arabia and her allies.
In the end, the Dow Jones gained a fraction, the S&P 500 Index gained a fraction, the Nasdaq Composite gained 0.4% and the Russell 2000 gained 1.4%. Treasury bonds weakened, the dollar was stronger, gold lost 1.1% and oil fell 0.2%.
Breadth was positive, with 1.4 advancers for every decliner on the NYSE. Volume was 104% of the 30-day average. Financials led the way with a 1.1% gain on a backup in long-term yields, which boosted inet interest margin hopes. Utilities and consumer staples were the laggards, down 0.9% and 0.8% respectively.
Chinese internet giant Alibaba Group Holdings Ltd (NYSE:BABA) gained 13.3% after issuing fiscal 2018 revenue growth guidance of upwards of 49%, well above the consensus estimate. Yahoo! Inc. (NASDAQ:YHOO) gained 10.2% in sympathy due to its 15% stake in the company.
Nordstrom, Inc. (NYSE:JWN) gained 10.3% after announcing the exploration of going private. And graphics chip maker Nvidia Corporation (NASDAQ:NVDA) gained 4.2% after Citigroup analysts increased their price target to $180 from $145 on continued data center sales.
On the downside, it was more bad news for brick-and-mortar retailers as Urban Outfitters, Inc. (NYSE:URBN) fell 10.3% after reporting weaker-than-expected comp-store sales.
Turning to the economic front, the big news was an overnight decision by the European Central Bank to lower its inflation guidance (a dovish move) while also removing a reference to lower rates beyond the end of its existing QE bond buying program (a hawkish move). Overall, the announcement was considered slightly dovish with the emphasis on lower energy prices weighing on inflation.
So, there was no major market response to the news.
While Comey and the ECB disappointed expectations of a volatile Thursday, the Middle East delivered some excitement as tensions heat up in the wake of a decision by Saudi Arabia and a number of its allies to cut diplomatic and economic ties to Qatar amid allegations of support to terror and pro-Iran groups like Hamas.
With the country’s only land link, to Saudi Arabia, blockaded there are concerns over the country’s energy and food supplies. Turkey, a NATO member and Qatari ally, has granted parliamentary approval to the deployment of ground troops if needed.
In the wake of an Isis terror attack in Iran recently, one gets the impression the quasi-religious proxy war for influence in the region between Tehran and Riyadh is increasing in tempo and severity.
Oil is weakening in response as this will likely jeopardize compliance with the recently extended OPEC oil production cap agreement. A breakdown below the $45-a-barrel level will likely quickly be followed by a test of $40 — a break of which would set up a decline back to the early 2016 lows near $30.
The market continues in this odd stasis, with sentiment red-hot and breadth continuing to narrow as a normal and typical 10% correction last seen more than a year ago is long overdue.
Today’s “shooting star” technical pattern — signified by a large intraday gain that was reversed — could set up follow on selling over the next week.
Certainly, some distribution has been going on behind the scenes: According to Jason Goepfert at SentimenTrader, before today the S&P 500 had climbed for nine sessions eight of which featured more volume in declining issues than advancing ones. This, in his words, “has never happened before.”
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.