Just the Facts: Internals Weak on Tariff News Amid High Trading Volumes

The stock market was positioned for a positive session for most of the morning but saw a sharp reversal in the afternoon following the White House’s confirmation that new tariffs on Canada, Mexico, and China will take effect on February 1.

The announcement that imports from Canada and Mexico will face a 25 percent tariff and China will be subject to a 10 percent tariff introduced a wave of uncertainty, leading to a risk-off sentiment.

This was not entirely unexpected, as reports of these potential tariff actions had circulated in the days prior. However, the confirmation heading into the weekend reduced risk appetite, triggering selling pressure and preventing any buy-the-dip momentum from taking hold.

Speculation about possible last-minute negotiations to water down the tariffs added some complexity, but the market ultimately closed near its session lows.

Market Performance

The major indices closed in negative territory:

- The Dow Jones Industrial Average fell 0.75 percent, closing at 44,544.

- The Nasdaq Composite dropped 0.28 percent, settling at 19,627.

- The S&P 500 lost 0.50 percent, closing at 6,040.

Market activity was elevated, with trading volume exceeding historical averages. The New York Stock Exchange (NYSE) recorded 1.29 billion shares traded, surpassing its average of 1.035 billion, while the Nasdaq saw 8.1 billion shares exchanged, above its average of 7.86 billion.

Market Breadth and Sector Performance

Market breadth skewed negative, reflecting widespread selling pressure:

- Decliners outpaced advancers on the NYSE by a ratio of approximately 2.6-to-1 (2,003 decliners vs. 773 advancers).

- The Nasdaq showed similar weakness, with 2,870 declining issues compared to 1,483 advancers.

- Despite the broad market downturn, new 52-week highs outpaced new lows, suggesting selective strength in certain pockets of the market. The NYSE recorded 96 new highs versus 29 new lows, while the Nasdaq registered 115 new highs compared to 94 new lows.

Sectors and Asset Class Performance

Relative Strength:

A few segments of the market held up relatively well, with some defensive plays and commodities showing resilience:

- Short-Term Futures (VXX) +3.35% – Volatility spiked amid increased uncertainty, leading to gains in instruments designed to track short-term market fluctuations.

- Platinum (PPLT) +1.44% – Precious metals benefited from safe-haven demand as investors hedged against market volatility.

- Peru (EPU) +1.1% – The Latin American market gained, possibly due to strong commodity exports offsetting trade concerns.

- U.S. Oil (USO) +0.4% – Crude oil prices held up as supply-demand imbalances continued to influence energy markets.

- USD Bullish (UUP) +0.39% – The U.S. dollar strengthened as investors sought safety in cash and dollar-backed assets.

- Israel (EIS) +0.37% – The Israeli market managed modest gains amid geopolitical uncertainty.

- U.S. Telecommunications (IYZ) +0.27% – Defensive sectors, including telecoms, saw some buying interest.

- U.S. Natural Gas (UNG) +0.25% – Natural gas prices stabilized following recent declines.

- ISE Cloud Computing (SKYY) +0.22% – Select tech-related industries, particularly cloud computing, showed relative resilience.

- Gold (GLD) +0.19% – Gold prices edged higher as investors rotated into safe-haven assets.

Relative Weakness:

On the flip side, several cyclical and international sectors faced substantial declines:

- Thailand (THD) -2.84% – Emerging markets in Southeast Asia faced headwinds amid growing concerns over global trade.

- Energy Select Sector SPDR (XLE) -2.73% – Energy stocks retreated as uncertainty over trade disruptions clouded demand expectations.

- U.S. Energy (IYE) -2.6% – Broader energy-related equities suffered as investors moved away from commodity-linked stocks.

- U.S. Home Construction (ITB) -2.54% – The homebuilding sector was hit hard as higher Treasury yields pressured affordability.

- S&P Oil & Gas Exploration & Production (XOP) -2.42% – Exploration and production companies experienced losses in response to potential tariff-related disruptions.

- Homebuilders (XHB) -2.27% – Housing sector stocks were broadly lower as concerns over rising borrowing costs resurfaced.

- Malaysia (EWM) -2.25% – Malaysia’s market weakened, likely due to global trade uncertainty impacting export-reliant economies.

- South Korea (EWY) -2.23% – Trade-sensitive South Korean equities sold off in reaction to tariff confirmation.

- China Large Cap (FXI) -2.12% – Chinese stocks struggled as the 10 percent tariff on China added to investor concerns over economic slowdown.

- Mexico (EWW) -2.09% – Mexican equities saw selling pressure after confirmation of the 25 percent tariff on imports from Mexico.

Key Takeaways and Market Outlook

1. Tariff Uncertainty is Weighing on Markets:

The afternoon sell-off highlighted the sensitivity of the market to trade-related headlines. While investors had already digested reports about potential tariffs, the official confirmation sparked additional caution, leading to a widespread pullback. Any indications of potential tariff adjustments or delays in the coming days could shift market sentiment.

2. Market Breadth Shows Broad-Based Weakness:

With declining stocks significantly outpacing advancing stocks, the sell-off was not contained to a specific sector but rather impacted most areas of the market. Even tech names, which initially showed resilience, saw some profit-taking as the session progressed.

3. Defensive Plays and Safe Havens Showed Strength:

Precious metals, cloud computing, and defensive stocks in telecom managed to hold up better than the broader market. The rise in short-term volatility measures suggests that investors are positioning for continued uncertainty in the near term.

4. Higher Treasury Yields Added Pressure:

The spike in bond yields further pressured equities, particularly interest-rate-sensitive sectors such as homebuilders and utilities. The 10-year yield closed at 4.57 percent, up six basis points, reflecting market expectations that inflation concerns and geopolitical risks will persist.

5. Global Markets Reacting to U.S. Trade Policy:

Emerging markets, particularly in Asia and Latin America, were hit hard by tariff-related fears. Countries with significant export exposure to the U.S. saw pronounced selling pressure, highlighting concerns about trade disruptions and economic ripple effects.

Looking Ahead

Market participants will be closely watching any developments related to trade negotiations over the weekend. If there are signals that tariffs could be postponed or revised, a relief rally could materialize on Monday. However, if the current tariff plan remains unchanged, volatility may persist in the near term as investors assess the broader economic impact.

Additionally, next week’s economic data, including updates on employment and manufacturing activity, will provide further insight into the strength of the U.S. economy. With inflation data remaining sticky and Federal Reserve policymakers emphasizing a cautious approach, markets may remain choppy as investors navigate a mix of economic uncertainty, trade risks, and earnings season developments.

For now, traders will likely remain cautious, keeping a close eye on geopolitical developments and potential policy shifts that could either exacerbate or alleviate current market pressures.