By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- Flashing bearish signs in
investor stock sentiment are likely to continue this week over
political uncertainty in Ukraine and the resulting fallout owing to
Russia's role as Western Europe's biggest energy supplier.
U.S. stocks turned in their worst weekly losses since late
January with the Dow Jones Industrial Average (DJI) finishing the
week down 2.4%, and the S&P 500 index (SPX) falling 2% to give
up its short-lived gains for the year. The Nasdaq Composite Index
(RIXF) declined 2.1% for the week but is still up 1.7% for the
year.
Investors will be paying more attention to fallout from the
Crimea vote more than the upcoming Federal Open Market Committee
meeting or a number of housing data in the coming week, according
to market strategists.
"Bullets trump everything else," said Nicholas Colas, chief
market strategist at ConvergEx. "The game's not over on Sunday:
It's the first inning, not the end of the game."
On Sunday, citizens of Ukraine's ethnically Russian Crimea
region were set to vote on a measure to secede from Ukraine,
setting up a return of the Black Sea peninsula to Russia. On
Friday, U.S. Secretary of State John Kerry reiterated that the
referendum is illegal and that the U.S. would not recognize its
results.
Late Sunday, exit polls showed 93% of voters in Crimea chose to
secede from Ukraine and rejoin Russia, as widely expected,
according to the AFP. The White House immediately said the vote
violates Ukraine's constitution and was held under "threats of
violence and intimidation from a Russian military intervention that
violates international law."
Uncertainty as to how the Crimean crisis will play out prevented
the price of oil from falling even lower, Colas said. Without the
Ukraine factor, oil should have settled closer to $90 a barrel than
to $100 based on weak Chinese economic data last week.
Also telling was the U.S. government putting up 5 million
barrels of oil for sale from the Strategic Petroleum Reserve last
week, raising the question if the "test drawdown and sale" was
politically motivated in light of turmoil in Ukraine and Libya.
That move and a jump in supplies also served to drive down oil
prices.
Will stocks get derailed by a Russian bear?
While some strategists don't expect the referendum vote to have
too much of a long-lasting effect on U.S. equities, Russia is
likely to use oil and gas as leverage against Western resistance
and possible sanctions from the U.S. and European Union.
"This is an exercise in political power," Colas said. "If one
lever the Russians have is oil, they're going to pull that."
For its part, the CBOE Volatility Index (VIX) jumped 30% last
week to finish at 17.82, its highest weekly close since Jan. 31.,
and highest daily close since Feb. 5. Crude oil futures for April
settled up 0.7% at $98.89 on Friday, but had declined by 3.6% on
the week.
Colas remarked that volatility often comes from the "smart
money," and that means we're likely in for a choppy market with the
VIX closer to 20 than it has been in years. The VIX, which has been
well below the long-term average level for much of 2013, has widely
been expected to rise the deeper we get into 2014.
Other bearish signals are evident from a recent jump in put/call
ratios, according to Randy Frederick, managing director of active
trading and derivatives at Charles Schwab.
"There's a whole lot of concern over Ukraine: I'm quite
surprised that the market seems to be positioning to prepare for
the worst," Frederick said. "Put-call ratios have turned bearish,
the most bearish I've seen in quite a while."
Last week, puts (options betting the market will go down)
steadily rose against calls (options betting the market will go up)
and finally outnumbered them by Thursday for a put-call ratio of
1.04, the highest reading since Sept. 20, 2013, according to CBOE
data. A reading over 1.0 is considered a bearish signal.
On Friday, the total put-call ratio fell back to 0.79 by the
close, but the put-call ratio for exchange-traded products still
remained high at 1.59, according to CBOE.
Bearishness is also manifesting itself in the form of insider
selling with corporate officers and insiders showing levels of
pessimism not seen in 25 years.
First Yellen-led FOMC, housing data on tap
On Wednesday, the first Federal Open Market Committee led by Fed
Chairwoman Janet Yellen will wrap up its two-day meeting with a
closely watched statement.
Expect Yellen to start shifting the focus of monetary policy
from unemployment to keeping inflation low, Pimco's Bill Gross told
MarketWatch in a recent interview. On that note, February
consumer-price index data comes out on Tuesday.
Both ConvergEx's Colas and Schwab's Frederick aren't placing
much weight on the FOMC meeting this week. Frederick said no one
expects Yellen to diverge from the Fed's present course of action,
and that recent bad weather will likely contribute to soft data.
Colas said the tapering of Fed asset purchases is pretty well
established and that he's more interested as to what the central
bank's take on the economy will be six months from now.
Outside of the Empire state index on Monday and Philly Fed on
Thursday, much of the economic data this week will center on
housing with the March home builder's index on Monday, February
housing starts and building permits data on Tuesday, and February
existing home sales data on Thursday.
Much of that housing data is going to be suspect, however, given
that crummy weather is going to be a big factor, Frederick said. A
month from now, slow housing data will be much more of a concern he
said. Also, two homebuilders will be reporting earnings this week
with KB Home (KBH) on Wednesday and Lennar Corp. (LEN) on
Thursday.
Other quarterly earnings on tap include Adobe Systems Inc.
(ADBE) and Oracle Corp. (ORCL) on Tuesday; FedEx Corp.(FDX),
General Mills Inc.(GIS), and Jabil Circuit Inc. (JBL) on Wednesday;
ConAgra Foods Inc. (CAG) and Dow component Nike Inc. (NKE) on
Thursday; along with Tiffany & Co. (TIF) and Darden Restaurants
Inc. (DRI) on Friday.
More from MarketWatch:
In-the-know insiders are dumping stocks
What Sunday's Crimea vote means for markets
U.S. stocks lower on worries over Ukraine
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