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Yellen in SF, oil trade gets messy & biotechs hit a bump: What to watch

Michael Santoli
Michael Santoli

Here are three things to watch today as we close out the trading week...

Number 1:

“The sensibilities of the market remain fragile.”

That was the understated observation yesterday by Atlanta Fed President Dennis Lockhart, who reiterated that the economy seems sturdy enough to handle slightly higher interest rates.

This is a message that the financial markets only occasionally seem happy to hear. Every time domestic economic numbers look strong enough to make it an easy call for the Fed to move by September, the bond market lifts yields, the dollar rises and, in effect, the market does a bit of tightening for the Fed.

This will get sorted out, and by the time short-term rates are nudged above zero it will come as no surprise whatsoever to investors. But on the way there, those fragile sensibilities are sure to make things jumpy.

This is why most of the trading day will likely be a tense vigil for Fed Chair Janet Yellen’s speech in San Francisco, set to begin just before the closing bell.

Her talk is called “The New Normal for Monetary Policy,” right in the sweet spot of the raging debate in economic, currency and bond-trading circles.

Treasury yields (^TNX) lifted yesterday and the U.S. dollar firmed a bit as a decent unemployment-claims number kept the market alert for hawks perched in the treetops. Watch the dollar-index ETF, the PowerShares DB US Dollar Bullish ETF (UUP), for a real-time pulse of the market’s oscillating expectations for Yellen.

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Number 2:

The sudden bump higher in crude-oil prices (CLK15.NYM) in response to air strikes in Yemen and generally growing strike in the Middle East gave only the mildest lift yesterday to energy stocks.

This is partly because the sector had outperformed nicely the day before in a weak tape. But it also suggests that stock investors surveying this sector refuse to extrapolate a geopolitically driven price hike as a real recovery trend for oil.

The Market Vectors Oil Services ETF (OIH) is just about the rawest nerve in the stock market when it comes to responding to signals about crude oil prospects. It has lost a third of its value over six months, but zooming in more recently it has stabilized.

The oil-services trade remains a messy one. Everyone well knows the abundance of oil hunting for storage, the soft demand picture in the emerging world, the fragile finances of many leveraged North American producers, the steady stream of secondary stock offerings from cash-strapped energy companies and the headwind of a stronger dollar.

And yet the stocks are trying to find their footing. They’ve incorrectly front-run a sustainable recovery in crude prices before in recent months. At some point they’ll probably get it right.

Number 3:

Soon as you find a key to the market, they change the locks. That saying has been around Wall Street forever because it’s true.

Whenever some useful “tell” is discovered for interpreting what the market’s doing, we all seize on it and traders obsess over it until it quits working.

Today, one of those keys is the biotech sector. Flagged here a week ago as a crucial barometer of risk appetites and momentum, the group has had one of its typical slam-on-the-brakes-and-gun-it-in-reverse setbacks.

The iShares Nasdaq Biotech ETF (IBB) is down 7% since last Friday, a nasty comeuppance – but that’s still only cost it about one-sixth of the gains it had built up in the prior year as growth investors poured money into the idea that the industry was on the verge of hacking the code of human wellness and longevity.

The heavy selling eased up a bit yesterday. Today we have at least one analyst from Credit Suisse out defending the group against popular charges that it’s a bubble.

Trading volume in the IBB Thursday was more than five million shares, three times its daily average. Is this the kind of climactic action that marks a trading low in the stocks? Or does it reflect just a little too much premature hope by investors eager to grab for what they think is a shiny key to quick riches?